Conflicts of Interest for Directors—Do You Know What They Are?
By: Elina B. Gilbert, Esq.
The term “conflict of interest” is used often and quite loosely in the HOA industry. But did you know “conflict of interest” actually has a legal definition? More particularly, the definition is set forth in the Revised Nonprofit Corporations Act (“Nonprofit Act”), which definition is specifically referenced in and adopted by CCIOA.
Pursuant to Section 310.5 of CCIOA, which applies to pre and post-CCIOA communities, the Nonprofit Act provisions addressing conflicts of interest for directors apply to all common interest communities in Colorado. The pertinent provisions of the Nonprofit Act lie in Title 7, Article 128, Section 501, which defines a conflicting interest transaction as any one of the following situations:
- A contract, transaction, or other financial relationship between a nonprofit corporation and a director of the nonprofit corporation;
- A contract, transaction, or other financial relationship between the nonprofit corporation and a party related to the director; or
- A contract, transaction, or other financial relationship between the nonprofit corporation and an entity in which a director of the nonprofit corporation is a director or officer or has a financial interest.
To the extent the transaction in question does not fall within any of the above descriptions, it is not a conflict of interest as far as the statutes are concerned—although it may still seem fishy, suspicious, and generally not recommended from a political viewpoint.
If you’ve identified a transaction to fit under one of the above descriptions and confirmed the transaction is truly a conflict of interest, the Nonprofit Act specifies the transaction is still lawful as long as one of the below options was utilized:
- Material facts concerning the director’s conflict were disclosed to the board and the board in good faith approved the transaction by a majority of disinterested directors;
- Material facts concerning the director’s conflict were disclosed to the members and the members authorized the transaction; or
- The transaction was/is fair to the association.
Based on the above, if any of the above provisions apply to the conflicting transaction, it will not be void, voidable, or give rise to any legal claim for damages or sanctions against the interested director, board, or association.
Notwithstanding the above, all common interest communities in Colorado are required to have conflict of interest policies (one of the nine required good governance policies), which may provide more detail and specifics with respect to conflicting board transactions in your particular community. Have you reviewed yours recently? If not, it is a good idea to do so and figure out if your community added additional requirements or clarifications to the conflict of interest laws specified above.
If you have questions or want to know more about conflicts of interest involving directors, please contact a HindmanSanchez attorney at 303.432.9999.