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socrateaser
socrateaser, Lawyer
Category: Legal
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Experience:  Retired (mostly)
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how the Delaware law deals with conflict of interest of a share

Resolved Question:

how the Delaware law deals with conflict of interest of a share holder and board member and senior officer of a company which has significant dispute regarding his rights as employee. who should deal with it? the CEO or the Board of directors?
Submitted: 1 year ago.
Category: Legal
Expert:  socrateaser replied 1 year ago.
Hello,

Where does the employee perform his labor (nation)?

Does the officer own any stock in the corporation?

If yes, then what percentage does the officer own?

Thanks in advance.
Customer: replied 1 year ago.

physically in Israel but is part of the senior executive management of the headquarter in USA . He fly over the world.


yes, he is the largest privet shareholder (around 7%)


 

Expert:  socrateaser replied 1 year ago.
Ordinarily, employment rights are controlled by the law of the jurisdiction in which the employee performs his or her labor. That would mean that Israel labor law controls, to the extent that any preexisting written employment contract provision between the employee and corporation, does not resolve a question completely.

However, where an employee/officer is also a majority shareholder of a corporation, this changes the calculus completely. Any employment dispute could be resolved at the board of directors level, by placing the issue on the board meeting agenda and asking for a vote of the board to support the officer's position. And, if that were to fail, then the majority shareholder could attempt to obtain votes under the corporate bylaws to call a special election of the shareholders and put the question to the entire shareholder population. Ultimately, if the majority shareholder were to prevail at any of these levels, then that would end the dispute in his favor.

Hope this helps.
Customer: replied 1 year ago.

Thanks for your answer.


 


sorry, but it is not exactly addressing my question.


 


Does it means that only the Board of directors should be involve in the dispute and not the CEO? is it mandatory according the law?


 


to my understanding if the director/shareholder/senior officer of the company has a dispute with the company he is already in a conflict of interest and might be accused for fiduciary by the company (or other shareholders) because he is creating cost or damage to the company.


what the law says about it?

Expert:  socrateaser replied 1 year ago.
Does it means that only the Board of directors should be involve in the dispute and not the CEO? is it mandatory according the law?

A: The CEO is authorized to manage the day-to-day operations of a corporation. However, where corporate officers are concerned, only the board can hire and fire. Based upon your stated allegations, the CEO is not the final word in an employment dispute -- the board of directors is the ultimate authority.

to my understanding if the director/shareholder/senior officer of the company has a dispute with the company he is already in a conflict of interest and might be accused for fiduciary by the company (or other shareholders) because he is creating cost or damage to the company. what the law says about it?

 

A: "When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain.... The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts." Nixon v. Blackwell, 626 A.2d 1366 (DE 6/22/1993).

 

There is no automatic conflict of interest. There is, however, a requirement that an employee who is also a director show that his/her position in a dispute with the corporation is fair, both as to negotiation, and price. A court would be required to examine these factors before resolving a dispute -- were the matter actually submitted to a court for review.

 

Hope this helps.

Customer: replied 1 year ago.

many thanks again and sorry again....:(


 


if the company insist to deal with the dispute and claim that the director potentially is going to sue the company, they are potentially creating immediate conflict of interest and potential claim of fiduciary. the director then is exposed to law sue.


it seems that the law is quiet silent and put the duty of care and duty of loyalty on the "shoulder" of the director. I mean that regarding this specific issue there is no specific code or law. the CEO can act fast and push the director to a corner with two options: give up for its rights or resign from the board and try to resolve the dispute.


it looks very hard situation which I'm surprise that the law doesn't specifically says something about it.


 


again,


 


thanks


 


Avi

Expert:  socrateaser replied 1 year ago.
As a lawyer, I see the law as something to be used as the means to an end, rather than as an obstacle to resolving problems.

A majority shareholder is in a position to try to influence the board of directors to remove the CEO, if he doesn't agree with the majority shareholder's position. Based upon the allegations you have provided, I don't see that the CEO is in the position of power. Admittedly, I don't have all of the facts -- but, the reality of Delaware corporations law is that it is extremely flexible, and Delaware courts are extremely well informed about corporations law.

I doubt that a Delaware court is going to find a breach of fiduciary or loyalty where none exists, merely to support one officer's position over another. If I were the majority shareholder, I would simply tell the CEO that if he intends to start a war, that I will do whatever is necessary to get him removed, or alternatively, bring the matter to the court and demonstrate that the disputed transaction is fair to the corporation.

You must, of course, make your own decision as to how to proceed. But, I do not see this circumstance as favoring the CEO -- though admittedly, I'm not entirely informed about the entire circumstance.

Hope this helps.
Customer: replied 1 year ago.

Dir Sir,


many thanks,


sorry for dragging one one simple question.


somehow the facts of matter mixed along the conversation. here is it again:


the director/shareholder and senior officer has economical dispute with the privet Delaware company regarding his employment agreement. the director holds about 7% of the company.


in that case who is the authority that must interact with the director for example termination of its employment at the company, the CEO or the Board?


the company can claim the the director for fiduciary since he claims against the company (for example that because of the dispute he will sue the company) and ask the director not to participate at board because of conflict of interest.


this leads to a situation that in any dispute case regarding employment relationship of a director/shareholder can be exposed to illegal action since he harm the company (which mean not acting to the best interest of the company - fiduciary).


this must be common issue and I'm surprise the Delaware law is not saying how in general disputes which involves a personal employee interest of a director with the company.


I'm sorry again for pushing the same question but I need to understand this matter.


 


thanks again


 


 

Expert:  socrateaser replied 1 year ago.
sorry for dragging one one simple question. somehow the facts of matter mixed along the conversation. here is it again:

the director/shareholder and senior officer has economical dispute with the privet Delaware company regarding his employment agreement. the director holds about 7% of the company.


in that case who is the authority that must interact with the director for example termination of its employment at the company, the CEO or the Board?

 

A: Officers of a corporation serve at the pleasure of the board of directors. It is up to the board to deal with an employment issue concerning a corporate officer, unless the CEO can deal with the issue to the officer's satisfaction.

 

the company can claim the the director for fiduciary since he claims against the company (for example that because of the dispute he will sue the company) and ask the director not to participate at board because of conflict of interest.

this leads to a situation that in any dispute case regarding employment relationship of a director/shareholder can be exposed to illegal action since he harm the company (which mean not acting to the best interest of the company - fiduciary).

 

A: I must respectfully XXXXX XXXXX your analysis and conclusion here. Under the same argument that the officer/director cannot be involved in the board's resolution of the dispute, the entire board and the CEO could also be disqualified -- they are all involved in the dispute, and so they are all conflicted. This would lead to the absurd result that no one would be able to make a decision. The board cannot force the officer/director out of participation.


this must be common issue and I'm surprise the Delaware law is not saying how in general disputes which involves a personal employee interest of a director with the company.

 

A: Delaware Code Title 8 Section 144 provides as follows:


(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director's or officer's votes are counted for such purpose, if:

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

(2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders.

(b) 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 which authorizes the contract or transaction.

As can be seen from the above, the officer/director cannot be excluded from the board of directors meeting, as long as the director's interest in the transaction is disclosed; and the terms of the transaction are fair to the corporation. This section of law accords with the Nixon case law that I previously cited, which calls for the court to carefully scrutinize the fairness of any transaction in which there is a possibility of breach of fiduciary or loyalty.

I realize that you are looking for some absolutely on point law that explains your rights precisely. However, Delaware corporations law is written so as to permit corporations to operate flexibly, and for the Delaware courts to be able to rule on cases based upon their unique facts. Trying to impose a strict set of rules into this circumstance will not succeed -- because no strict set of rules exists. If it did, then most of the corporations which have chosen Delaware as their place of incorporation would leave the state for a jurisdiction where the laws are flexible.

Fortunately, that jurisdiction is still Delaware.

The botXXXXX XXXXXne is that the director/officer can bring this dispute to the board, and he can vote on the outcome, as long as the facts in dispute are fully disclosed to the board, and any decision made is fair to the corporation.

Hope this helps.
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Experience: Retired (mostly)
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