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HOA Conflicts of Interest

Directors owe a duty of loyalty to the Association, meaning they must act in the Association’s best interest.  Doing so requires spotting and properly handling conflicts of interest.  But what, exactly, is a conflict of interest?  Does a director have a conflict of interest if the Board is accepting bids for a new pool facility and the director plays golf with one of the bidding contractors?  What if the contractor is the director’s cousin?  What if the Board member is a 10% owner in the contractor’s business?  Board members frequently face similar quandaries, and HOA Boards often struggle with how to identify and resolve conflicts of interest.  Stated simply, a conflict of interest arises when a director’s financial interests may be affected by the Board’s decision.  The director with the golf buddy is not conflicted out of the vote, and neither is the director whose cousin has submitted a bid.  The director with the ownership interest in the contractor’s company does, somewhat obviously, have a conflict of interest in voting on which contractor to hire.  A more detailed explanation follows.

Under N.C.G.S. 55A-8-31, there are two types of conflicts of interest: direct and indirect.  A direct conflict of interest is not defined in the statute, but occurs when the director may lose or gain money as an immediate result of the Board’s action.  An indirect conflict occurs when another entity in which a director has a “material financial interest” is a party to the transaction, or when another entity of which he is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the Board.  For example, a director may own a thirty percent interest in a painting company the Association considers hiring, or the director might be vice president of a company to whom the Association might sell land.

Overcoming Conflicts of Interest

Many potential conflicts of interest can be overcome by disclosing the material facts of the conflict to the Board.  A transaction is not voidable merely because of the conflict of interest if the board knew or the director disclosed to the board the material facts of the transaction and the director’s interest and the board authorized, approved, or ratified the transaction.  Likewise, if members vote on the transaction, they can overcome the director’s conflict if the material facts and the director’s interest were disclosed or known to the members entitled to vote and they authorized, approved, or ratified the transaction.  Finally, a transaction is not voidable solely because of a director’s interest if the transaction was fair to the Association.  In summary, there are three situations in which a director’s conflict of interest is not fatal to a transaction: (1) the board was made aware of the material facts of the transaction and the director’s interest and authorized, approved, or ratified the transaction; (2) the members were made aware of the material facts and the director’s interest and authorized, approved, or ratified the transaction; and (3) the transaction was fair to the Association. 

The Board can authorize, approve, or ratify the conflict of interest transaction with an affirmative vote of a majority of the disinterested directors (those who have no direct or indirect interest in the transaction).  In this case, a quorum will be considered present if a majority of the disinterested directors vote to authorize, approve, or ratify the transaction.  The presence of, or a vote cast by, a director with a direct or indirect interest in the transaction does not affect the validity of any action taken pursuant to that vote if the transaction is otherwise authorized, approved, or ratified in this manner.

HOA Board Member Actions

A Board member who has a direct or indirect conflict of interest should recuse himself from the discussion and vote on the transaction.  The North Carolina General Statutes do not provide a system for forcing an interested Board Member from recusing himself from a vote in which he has a conflict.  If a Board Member refuses to recuse himself from a vote in which he has a direct conflict of interest, it is advisable to remove him from the Board of Directors.  North Carolina law allows the Association to impose additional requirements on conflict of interest transactions, either through its Articles of Incorporation or Bylaws or by a resolution of the Board.  If the Home Owners Association does not already have a conflict of interest policy, the directors would be wise to cause the Association to adopt one.  

 

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