What's Justice And Reasonableness Got To Do, Got To Do With It?
Section 310 of the California Corporations Code concerns two different types of contracts or transactions. The first concerns a contract or other transaction between the corporation and one or more of its directors, or between the corporation and any corporation, firm or association in which one or more of its directors has a material financial interest (an "Interested Director Transaction"). The second concerns a contract or transaction between the corporation and any corporation or association of which one or more of the corporation's directors are directors ) (an "Interlocking Director Transaction"). The statute makes it clear that these are two distinct categories, each with its own set of rules. First, the statute provides that a mere common directorship does not constitute a material financial interest. Second, the statute states that the provisions of the statute applicable to an Interlocking Director Transaction do not apply to Interested Director Transactions.
Under Section 310(a), an Interested Director Transaction is not void or voidable because a director or directors or the other corporation, firm or association are parties or because an interested director or directors are present at the meeting of the board or a committee thereof which authorizes, approves or ratifies the contract or transaction, if one of three conditions are met:
The material facts as to the transaction and as to such director’s interest are fully disclosed or known to the shareholders and such contract or transaction is approved by the shareholders (Section 153) in good faith, with the shares owned by the interested director or directors not being entitled to vote thereon, or
The material facts as to the transaction and as to such director’s interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified, or
As to contracts or transactions not approved as provided in paragraph (1) or (2) of this subdivision, the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified.
Notably, the contract or transaction need be "just and reasonable" as to the corporation only under the second or third conditions are met. The difference between the two conditions is that if the requisite approval of the board or committee is obtained, the person attacking the validity of the contract or transaction has the burden of proving that it is not just and reasonable as to the corporation.