How a Director’s Conflict of Interest Must Be Handled Under the Hawaii Nonprofit Corporations Act

Under the Hawaii Nonprofit Corporation Act (“Act”) a “conflict of interest transaction” is a transaction with the corporation in which a director has a direct or indirect interest. A director has an indirect interest in a transaction if:

  • Another entity in which the director has a material interest or in which the director is a general partner is a party to the transaction; or
  • Another entity of which the director is a director, officer, or trustee is a party to the transaction.

Just because a “conflict of interest transaction” exists does not mean the transaction is voidable or is the basis for imposing liability on the director.

The Act provides that if the transaction “was fair at the time it was entered into” the “conflict of interest transaction” will not be voidable. However, that standard is ambiguous and difficult to prove.

Another Way to Prevent Conflict of Interest Problems

The second method to prevent the “conflict of interest transaction” from being voidable or having a director liable is to obtain the approval of the remaining Board of Directors. To do so the material facts of the transaction and the director’s interest must have been disclosed or known to the board of directors or a committee of the board and the transaction was authorized, approved, or ratified by the board or committee of the board.

The approval must be from the affirmative vote of a majority of the directors either on the board or on the committee, who have no direct or indirect interest in the transaction. If a majority of the directors on the board who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking this action.

All of the above must be complied with. The Act does allow the articles of incorporation, bylaws, or conflict of interest policy to impose additional requirements on handling “conflict of interest transactions.” If your nonprofit has such additional requirements they must be complied with.

As you can see director conflicts can get messy and need to be documented.

Contact us and, as your Hawaii attorneys, we can guide you through this process safely.

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