Nicolas is the director of Bit Industries, a drill manufacturer. He is also a major shareholder of Deep Green Corp, a leading landscaping tools manufacturer. Bit undergoes a financial crunch and finds it difficult to raise money

Question

Nicolas signs up Bit as a supplier of drills to Deep Green Corp Having obtained a new client, Bit manages to avoid financial distress. However, Nicolas has not informed anyone of what he has done. Can this transaction be voided? If yes, on what grounds can it be voided?

Answer 1

When a corporation cannot take advantage of an opportunity because of financial constraints, a director or officer must do his or her best to secure financing of the opportunity by the corporation, although neither need go so far as to lend the corporation money. In general, taking personal advantage of the opportunity when financing is clearly unavailable is allowed. In this scenario, Nicolas secures financing for Bit Industries as it could not raise money on its own. A potentially troublesome situation occurs when an officer or a director, or a corporation in which the officer or director has an interest, enters into a transaction with the corporation. This problem, known as a conflict of interest, is specifically addressed by the Revised Model Business Corporations Act (RMBCA). The act provides that a transaction will not be voided because of a conflict of interest when any one of the following is true: 1. The material facts of the transaction and the director's interest were disclosed or known to the board of directors or a committee thereof, and the board authorized, approved, or ratified the transaction; 2. the material facts of the transaction and the director's interest were known or disclosed to the shareholders entitled to vote, and they approved, authorized, or ratified the transaction; or 3 . the transaction was fair to the corporation. In this scenario, though Nicolas has not informed the shareholders or the board of directors of Bit Industries of the business deal, the transaction has been fair to the corporation. On these grounds, the transaction cannot be voided.