Colorado § 7-108-501 - Conflicting interest transaction - definition.

§ 7-108-501. Conflicting interest transaction - definition.

(1) (a) As used in this section, "conflicting interest transaction" means, with respect to a director of the corporation, any of the following:

(I) A loan or other assistance by a corporation to a director of the corporation or to an entity in which the director is a director or officer or has a financial interest that is known to, and material to, the director;

(II) A guaranty by a corporation of an obligation of the director or of an obligation of an entity in which the director is a director or officer or has a financial interest that is known to, and material to, the director;

(III) A contract or transaction between the corporation and the director or between the corporation and an entity in which the director is a director or officer or has a financial interest that is known to, and material to, the director; or

(IV) The director's taking a corporate opportunity, except to the extent permitted pursuant to a provision of the articles of incorporation adopted under section 7-102-102 (2)(e).

(b) "Conflicting interest transaction" does not include any transaction between:

(I) A corporation and another entity if the other entity owns, directly or indirectly, all of the outstanding shares of the corporation; or

(II) The corporation and another entity if the corporation owns, directly or indirectly, all of the outstanding shares or other equity interests of the other entity.

(2) A conflicting interest transaction is not void or voidable, shall not be enjoined or set aside, and does not give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the corporation, solely because it is a conflicting interest transaction or because the director is present at or participates in the meeting of the corporation's board of directors or of the committee of the board of directors that authorizes, approves, or ratifies the conflicting interest transaction or because the director's vote is counted for that purpose if:

(a) The material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes, approves, or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or

(b) The material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the shareholders entitled to vote on the conflicting interest transaction, and:

(I) The conflicting interest transaction is specifically authorized, approved, or ratified by a vote of the disinterested shareholders in which the votes cast in favor of authorizing, approving, or ratifying the conflicting interest transaction exceed the votes cast in opposition; or

(II) If the articles of incorporation provide for voting on the matter by the disinterested shareholders in two or more voting groups, the conflicting interest transaction is specifically authorized, approved, or ratified by a vote of each voting group in which the votes cast within the voting group in favor of authorizing, approving, or ratifying the conflicting interest transaction exceed the votes cast within the voting group in opposition; or

(c) The conflicting interest transaction is fair as to the corporation.

(3) A director's taking advantage, directly or indirectly, of a corporate opportunity shall not be enjoined or set aside and does not give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the corporation, because the director took such advantage, if:

(a) The material facts as to the director's relationship or interest and as to the corporate opportunity are disclosed to or are known to the board of directors or the committee, and the board of directors or committee authorizes, approves, or ratifies the taking of the corporate opportunity by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or

(b) The material facts as to the director's relationship or interest and as to the corporate opportunity are disclosed to or are known to the shareholders entitled to vote on the corporate opportunity, and either:

(I) The taking of the corporate opportunity is specifically authorized, approved, or ratified by a vote of the disinterested shareholders in which the votes cast in favor of authorizing, approving, or ratifying the taking of the corporate opportunity exceed the votes cast in opposition; or

(II) If the articles of incorporation provide for voting on the matter by the disinterested shareholders in two or more voting groups, the taking of the corporate opportunity is specifically authorized, approved, or ratified by a vote of each such voting group in which the votes cast within the voting group in favor of authorizing, approving, or ratifying the taking of the corporate opportunity exceed the votes cast within the voting group in opposition.

(4) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee that authorizes, approves, or ratifies a conflicting interest transaction or the taking of a corporate opportunity.

(5) Unless otherwise provided in the articles of incorporation, a majority of the votes of disinterested shareholders entitled to be cast on the matter of authorizing, approving, or ratifying a conflicting interest transaction pursuant to subsection (2)(b) of this section or a taking of a corporate opportunity pursuant to subsection (3)(b) of this section constitutes a quorum of that voting group for action on that matter, but a quorum must not consist of fewer than one-third of the votes of disinterested shareholders entitled to be cast on the matter by the voting group.

Source: L. 93: Entire article added, p. 788, § 1, effective July 1, 1994. L. 96: (1) and (2)(c) amended, p. 1319, § 24, effective June 1. L. 2003: (4) amended, p. 2527, § 1, effective August 6. L. 2004: (4)(a) amended, p. 1500, § 263, effective July 1. L. 2019: Entire section amended, (SB 19-086), ch. 166, p. 1933, § 36, effective July 1, 2020. L. 2020: (1)(a)(IV) amended, (HB 20-1402), ch. 216, p. 1041, § 8, effective June 30.

ANNOTATION

Law reviews. For article, "Conflict of Interest Transactions: Fiduciary Duties of Corporate Directors Who Are Also Controlling Shareholders", see 57 Den. L.J. 609 (1980). For article, "The Dual Role of Corporate Counsel Serving on the Board of Directors", see 13 Colo. Law. 792 (1984). For article, "The 1985 Proposed Revisions to the Colorado Corporation Code", see 14 Colo. Law. 34 (1985). For article, "Corporate Director Liability", see 65 Den. U. L. Rev. 59 (1988). For article, "2019 Colorado Business Law Updates: Revising the Colorado Business Corporation Act and the Colorado Corporations and Associations Act", see 48 Colo. Law. 26 (Nov. 2019). For article, "The Business Judgment Rule and Common Interest Communities", see 53 Colo. Law. 34 (June 2024).

Annotator's note. Since § 7-108-501 is similar to § 7-5-114.5 as it existed prior to the 1993 recodification of the "Colorado Business Corporation Act", articles 101 to 117 of title 7, cases construing that provision and its predecessors have been included in the annotations to this section.

The test for whether a transaction is fair is whether under all the circumstances it carries the earmarks of an arm's length bargain. Kim v. Grover C. Coors Trust, 179 P.3d 86 (Colo. App. 2007).

Applied in O'Malley v. Casey, 42 Colo. App. 85, 589 P.2d 1388 (1979).

ARTICLE 109

Indemnification

7-109-101. Definitions.

7-109-102. Authority to indemnify directors.

7-109-103. Mandatory indemnification of directors.

7-109-104. Advance of expenses to directors.

7-109-105. Court-ordered indemnification - advance of expenses.

7-109-106. Determination and authorization of indemnification of directors.

7-109-107. Indemnification of officers, employees, fiduciaries, and agents.

7-109-108. Insurance.

7-109-109. Variation by corporate action.

7-109-110. Notice to shareholders of indemnification of director.

7-109-111. Exclusivity.