How Does a Director Find a Safe Harbor?

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How Does a Director Find a Safe Harbor?

Corporate transactions sometimes present potential conflicts of interest for one or more of the directors. But directors can rely on safe harbors, which may protect them from allegations of impropriety or inappropriate conduct related to the transaction. These rules are set forth in A.R.S. § 10-860, et seq.

First, a director could seek an affirmative vote regarding the transaction by a majority of disinterested directors with whom he or she shares no familial, professional, or financial relationship. This stamp of approval by disinterested parties can go a long way toward insulating a director against accusations of a conflict of interest.

Another potential safe harbor is a disinterested committee representing the board of directors voting to approve the transaction. Of course, approval of the transaction would be subject to full disclosure by the director to the committee of all aspects of the potential conflict and facts concerning the transaction. A director might obtain a similar safe harbor through a vote of the shareholders following full disclosure of the inherently conflicting nature of the transaction.

A third possible safe harbor would be for the director to make full disclosure of the potential conflict and then simply recuse himself or herself from any votes or decisions regarding the transaction. In this way, the director would play no part in the board approving or disapproving the participation of the corporation in the transaction.

All of these possible safe harbors for a director faced with a transaction in which he or she has a potential conflict depend heavily on transparency and full disclosure of all facts that an ordinary prudent person would deem to be reasonably material in making a decision about a transaction.

At Williams Mestaz, L.L.P., we dedicate our efforts to protecting your rights and interests with respect to business disputes. We will gather the facts surrounding your case, present your options, and work with you to develop the best strategy for your case. Contact Williams Mestaz, L.L.P. at 602-256-9400.

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