Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/mbiz/busi6t.asc

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/* Part 6 of 8. */
(2) Party to the Transaction-The Corporation

Transaction by what entity? In the usual case, the transaction in
question would be by X Co.  But assume that X Co. is the
controlling corporation of 5 Co. (i.e., it controls the vote for
directors of 5 Co.). D wishes to sell a building he owns to X Co.
and X Co. is willing to buy it.  As a business matter, it will
often make no difference to X Co. whether it takes the title
itself or places it with its subsidiary S Co. or another entity
that X Co. controls. The applicability of subchapter F cannot be
allowed to depend upon that formal distinction. The subchapter
therefore includes within its operative framework transactions by
a subsidiary or controlled entity of X Co. See the Note on Parent
Companies and Subsidiaries below.

(3) Party to the Transaction-The Director

Subdivision (1)(i) and subdivision (1)(ii) differ as to the
persons covered and as to the threshold of transactional
significance. Subdivision (1)(i), addressed to D and related
persons of D, includes as directors' conflicting interest
transactions all transactions that meet the substantive criteria
prescribed.  By contrast, subdivision (1)(ii), addressed to
transactions involving other designated persons, excludes from
its coverage transactions that are not sufficiently significant
to the corporation to warrant decision at the boardroom level.

As a generalization, the linkage between a director and a
"related person" is closer than that between the director and
those persons and entities specified in subdivision (1)(ii).
Correspondingly, the threshold of conflicting interest under
subdivision (1)(i) is lower than that set for subdivision
(1)(ii). Thus, all routine transactions of X Co. are excluded
from the definition of director's conflicting interest
transaction unless they fall within subdivision (1)(i).  If Y
Co., a computer company of which D is also an outside director,
sells office machinery to X Co., the transaction will not
normally give rise to a conflicting interest for D from the
perspective of either company since the transaction is a routine
matter that would not come before either board. If, however, the
transaction is of such significance to one of the two companies
that it would come before the board of that company, then D has a
conflicting interest in the transaction with respect to that
company.

Implicit in subdivision (1)(ii) is a recognition that X Co. and Y
Co., particularly if large enterprises, are likely to have
routine, perhaps frequent, business dealings with each other as
they buy and sell goods and services in the marketplace.  The
terms of these dealings are dictated by competitive market forces
and the transactions are conducted at personnel levels far below
the boardroom.  The fact that D has some relationship with Y Co.
is not in itself sufficient reason to open these smaller scale
impersonal business transactions to challenge if not passed

through the board in accordance with section 8.62 procedures.  It
would be doubly impractical to do so twice where X Co. and Y Co.
have a common director.

Subchapter F takes the practical position. The definition in
subdivision (1)(ii) excludes most such transactions both by its
"knowledge" requirement and by its higher threshold of economic
significance.  In almost all cases, any such transaction, if
challenged, would be easily defensible as being "fair." In
respect of day-to-day business dealings, the main practical risk
of impropriety would be that a director having a conflicting
interest might seek to exert inappropriate influence upon the
interior operations of the enterprise, might try to use his
status as a director to pressure lower level employees to divert
their business out of ordinary channels to his advantage.  But a
director's affirmative misconduct goes well beyond a claim that
he has a conflicting interest, and judicial action against such
improper behavior remains available. See also the Official
Comment to section 8.62(b) regarding common directors.

The absence of the significance threshold in subdivision (1)(i)
does not impose an inappropriate burden on directors and related
persons.  The commonplace and oftentimes recurring transaction
will involve purchase of the corporation's product line; it will
usually not be difficult for D to show that the transaction was
on commercial terms and was fair, or indeed, that he had no
knowledge of the transaction.  As a result, these transactions do
not invite harassing lawsuits against the director.  A purchase
by D of a product of X Co. at a usual "employee's discount,"
while technically assailable as a conflicting interest
transaction, would customarily be viewed as "fair" to the
corporation as a routine incident of the office of director.  For
other transactions between the corporation and the director or
those close to him, D can, and should, have the burden of
establishing the fairness of the transaction if it is not passed
upon by the arm's length review of qualified directors or the
holders of qualified shares.  If there are any reasons to believe
that the terms of the transaction might be questioned as unfair
to X Co., D is well advised to pass the transaction through the
safe harbor procedures for subchapter F.

Note on Parent Companies and Subsidiaries

If a subsidiary is wholly owned, there is no outside holder of
shares of the subsidiary to be injured with respect to
transactions between the two corporations.

Transactions between a parent corporation and a partially-owned
subsidiary may raise the possibility of abuse of power by a
majority shareholder to the disadvantage of a minority
shareholder. Subchapter F has no relevance as to how a court
should deal with that claim.

If there are not at least two outside directors of the
subsidiary, the subsidiary and the board of directors must
operate on the basis that any transaction between the subsidiary
and the parent that reaches the significance threshold in
subdivision (1 Xii) may, as a technical matter, be challengeable
by a minority shareholder of the subsidiary on grounds that it is
a director's conflicting interest transaction.  In that case, the
directors of the subsidiary will have to establish the fairness
of the transaction to the subsidiary.  In practice, however, the
case law has dealt with such claims under the rubric of the
duties of a majority shareholder and that is, in reality, the
better approach.  See the Official Comment to section 8.61(b).

3. Related Person

Two subcategories of "related person" of the director are set out
in subdivision (3).  These subcategories are specified,
exclusive, and preemptive.

The first subcategory is made up of closely related family, or
near-family, individuals, trusts, and estates as specified in
clause (i).  The clause is exclusive insofar as family
relationships are concerned.  The references to a "spouse" are
intended to include a common law spouse or unrelated cohabitant.

The second subcategory is made up of persons specified in clause
(ii) to whom or which the director is linked in a fiduciary
capacity as, for example, in his status as a trustee or
administrator.  (Note that the definition of "person" in the
Model Act includes both individuals and entities.  See section
1.40(16).) From the perspective of x Co., D's fiduciary
relationships are always a sensitive concern. A conscientious
director may be able to control his own greed arising from a
conflicting personal interest. And he may resist the temptation
to assist his wife or child. But he can never escape his legal
obligation to act in the best interests of another person for
whom he is a trustee or other fiduciary.

4. Required Disclosure

Two separate elements make up the defined term "required
disclosure.  They are disclosure of the existence of the
conflicting interest and then disclosure of the material facts
known to D about the subject of the transaction.

Subdivision (4) calls for disclosure of all facts known to D
about the subject of the transaction that an ordinarily prudent
person would reasonably believe to be material to a judgment by
the person acting for the corporation as to whether to proceed or
not to proceed with the transaction. If a director knows that the
land the corporation is buying from him is sinking into an
abandoned coal mine, he must disclose not only that he is the
owner and that he has an interest in the transaction but also
that the land is subsiding; as a director of x Co. he may not
invoke caveat emptor.  But in the same circumstances the director
is not under an obligation to reveal the price he paid for the
property ten years ago, or that he inherited it, since that
information is not material to the corporation's business
judgment as to whether or not to proceed with the transaction.
Further, while material facts that pertain to the subject of the
transaction must be disclosed, a director is not required to
reveal personal or subjective information that bears upon his
negotiating position (such as, for example, his urgent need for
cash, or the lowest price he would be willing to accept). This is
true despite the fact that such information would obviously be
relevant to the corporation's decision-making in the sense that,
if known to the corporation, it could equip the corporation to
hold out for terms more favorable to it.

Underlying the definition of the twin components of "required
disclosure" is the critically important provision contained in
subdivision (1) that a basic precondition for the existence of a
"conflicting interest" is that the director know of the
transaction and also that he know of the existence of his
conflicting interest.

5. Time of Commitment

The time of the commitment by the corporation (or its subsidiary
or other controlled entity) to the transaction is defined in
operational terms geared to change of economic position.

8.61 Judicial Action

(a) A transaction effected or proposed to be effected by a
corporation (or by a subsidiary of the corporation or any other
entity in which the corporation has a controlling interest) that
is not a director's conflicting interest transaction may not be
enjoined, set aside, or give rise to an award of damages or other
sanctions, in a proceeding by a shareholder or by or in the right
of the corporation, because a director of the corporation, or any
person with whom or which he has a personal, economic, or other
association, has an interest in the transaction.

(b) A director's conflicting interest transaction may not be
enjoined, set aside, or give rise to an award of damages or other
sanctions, in a proceeding by a shareholder or by or in the right
of the corporation, because the director, or any person with whom
or which he has a personal economic, or other association, has an
interest in the transaction, if:

(1) directors' action respecting the transaction was at any time
taken in compliance with section 8.62;

(2) shareholders' action respecting the transaction was at any
time taken in compliance with section 8.63;

(3) the transaction, judged according to the circumstances at the
time of commitment, is established to have been fair to the
corporation.

/* A rather flexible definition. */

Official Comment

Section 8.61 is the operational section of subchapter F as it
prescribes the judicial consequences of the other sections.

Speaking generally:

(i) If the procedure set forth in section 8.62 or in section 8.63
is complied with, or if the transaction is fair to the
corporation, then a director's conflicting interest transaction
is immune from attack on any ground of a personal interest or
conflict of interest of the director.  However, the narrow scope
of subchapter F must again be strongly emphasized; if the
transaction is vulnerable to attack on some other ground,
subchapter F does not make it less so for having been passed
through the procedures of subchapter F.

(ii) If a transaction is not a director's conflicting interest
transaction as defined in section 8.60, then the transaction may
not be enjoined, rescinded, or made the basis of other sanction
on the ground of a conflict of interest of a director, whether or
not it went through the procedures of subchapter E In that sense,
subchapter F is specifically intended to be both comprehensive
and exclusive.

(iii) If a transaction that is a director's conflicting interest
transaction was not at any time the subject of action taken in
compliance with section 8.62 or section 8.63, and it is attacked
on grounds of a director's conflicting interest and is not shown
to be fair to the corporation, then the court may grant such
remedial action as it considers appropriate under the applicable
law of the jurisdiction. If the attack is on other grounds,
subchapter F has no relevance to the issue(s) before the court.

1. Section 8.61(a)

Section 8.61(a) is a key component in the design of subchapter F.
It draws a bright-line circle, declaring that the definitions of
section 8.60 wholly occupy and preempt the field of directors'
conflicting interest transactions. Of course, outside this circle
there is a penumbra of director interests, desires, goals,
loyalties, and prejudices that may, in a particular context, run
at odds with the best interests of the corporation, but section
8.61(a) forbids a court to ground remedial action on any of them.
If a plaintiff charges that a director had a conflict of interest
with respect to a transaction of the corporation because the
other party was his cousin, the answer of the court should be:
"No. A cousin, as such and without more, is not included in
section 8.60(3) as a related person-and under section 8.61(a), I
have no authority to reach out farther." If a plaintiff contends
that the director had a conflict of interest in a corporate
transaction because the other party is president of the golf club
the director wants desperately to join, the court should respond:
"No. The only director's conflicting interest on the basis of
which I can set aside a corporate transaction or impose other
sanctions is a financial interest as defined in section 8.60."

2. Section 8.61(b)

Section 8.61(b) is the heart of subchapter F the fundamental
section that provides for the safe harbor.

Clause (1) of subsection (b) provides that if a director has a
conflicting interest respecting a transaction, neither the
transaction nor the director is legally vulnerable if the
procedures of section 8.62 have been properly followed.
Subsection (b)(1) is, however, subject to a critically important
predicate condition.

The condition -an obvious one- is that the board's action must
comply with the care, best interests and good faith criteria
prescribed in section 8.30(a) for all directors' actions.  If the
directors who voted for the conflicting interest transaction were
qualified directors under subchapter F, but approved the
transaction merely as an accommodation to the director with the
conflicting interest, going through the motions of board action
without complying with the requirements of section 8.30(a), the
action of the board would not be given effect for purposes of
section 8.61(b)(1).

Board action on a director's conflicting interest transaction
provides a context in which the function of the "best interests
of the corporation" language in section 8.30(a) is brought into
clear focus.  Consider, for example, a situation in which it is
established that the board of a manufacturing corporation
approved a cash loan to a director where the duration, security
and interest terms of the loan were at prevailing commercial
rates, but (i) the loan was not made in the course of the
corporation's ordinary business and (ii) the loan required a
commitment of limited working capital that would otherwise have
been used in furtherance of the corporation's business
activities.  Such a loan transaction would not be afforded
safe-harbor protection by section 8.62(b)(1) since the board did
not comply with the requirement in section 8.30(a) that the
board's action be, in its reasonable judgment, in the best
interests of the corporation-that is, that the action will, as
the board judges the circumstances at hand, yield favorable
results (or reduce detrimental results) as judged from the
perspective of furthering the corporation's business activities.

If a determination is made that the terms of a director's
conflicting interest transaction, judged according to the
circumstances at the time of commitment, were manifestly
unfavorable to the corporation, that determination would be
relevant to an allegation that the directors' action was not
taken in good faith and therefore did not comply with section
8.30(a).

Note on Fair Transactions

(1) Terms of the Transaction.  If the issue in a transaction is
the "fairness" of a price, "fair" is not to be taken to imply
that there is a single "fair" price, all others being "unfair."
It has long been settled that a "fair" price is any price in that
broad range which an unrelated party might have been willing to
pay or willing to accept, as the case may be, for the property,
following a normal arm's-length business negotiation, in the
light of the knowledge that would have been reasonably acquired
in the course of such negotiations, any result within that range
being "fair." The same statement applies not only to price but to
any other key term of the deal.

Although the "fair" criterion applied by the court is a range
rather than a point. the width of that range is only a segment of
the full spectrum of the directors' discretion associated with
the exercise of business judgment under section 8.30(a).  That is
to say, the scope of decisional discretion that a court would
have allowed to the directors if they had acted and had complied
with section 8.30(a) is wider than the range of "fairness"
contemplated for judicial determination where section 8.61(b)(3)
is the governing provision.

(2) Benefit to the Corporation.  In considering the "fairness" of
the transaction, the court will in addition be required to
consider not only the market fairness of the terms of the deal,
but also, as the board would have been required to do, whether
the transaction was one that was reasonably likely to yield
favorable results (or reduce detrimental results) from the
perspective of furthering the corporation's business activities.
Thus, if a manufacturing company that is short of working capital
allocates some of its scarce funds to purchase a sailing yacht
owned by one of its directors, it will not be easy to persuade
the court that the transaction is "fair" in the sense that it was
reasonably made to further the business interests of the
corporation; the fact that the price paid for the yacht was
stipulated to be a "fair" market price will not be enough alone
to uphold the transaction. See also the discussion above
regarding section 8.30(a).

(3) Process of Decision.  In some circumstances, the behavior of
the director having the conflicting interest can itself affect
the finding and content of "fairness," The most obvious
illustration of unfair dealing arises out of the director's
failure to disclose fully his interest or hidden defects known to
him regarding the transaction.  Another illustration could be the
exertion of improper pressure by the director upon the other
directors. When the facts of such unfair dealing become known,
the court should offer the corporation its option as to whether
to rescind the transaction on grounds of "unfairness" even if it
appears that the terms were "fair" by market standards and the
corporation profited from it.  If the corporation decides not to
rescind the transaction because of business advantages accruing
to the corporation from it, the court may still find in the
director's misconduct a basis for judicially imposed sanction
against the director personally. Thus, the course of dealing -or
process- is a key component to a "fairness" determination under
subsection (b)(3).

8.62 Directors' Action

(a) Directors action respecting a transaction is effective for
purposes of section 8.61(b((1) if the transaction received the
affirmative vote of a majority (but no fewer than two) of those
qualified directors on the board of directors or on a duly
empowered committee of the board who voted on the transaction
after either required disclosure to them (to the extent the
information was not known by them) or compliance with subsection
(b); provided that action by a committee is so effective only if
(1 all its members are qualified directors, and (2) its members
are either all the qualified directors on the board or are
appointed by the affirmative vote of a majority of the qualified
directors on the board.

(b)If a director has a conflicting interest respecting a
transaction, but neither he nor a related person of the director
specified in section 8.60(3)(i) is a party to the transaction,
and if the director has a duty under law or professional canon,
or a duty of confidentiality to another person, respecting
information relating to the transaction such that the director
may not make the disclosure described in section 8.60(4)(ii),
then disclosure is sufficient for purposes of subsection (a) if
the director (1) discloses to the directors voting on the
transaction the existence and nature of his conflicting interest
and informs them of the character and limitations imposed by that
duty before their vote on the transaction, and (2) plays no part,
directly or indirectly, in their deliberations or vote.

(c) A majority (but no fewer than two) of all the qualified
directors on the board of directors, or on the committee,
constitutes a quorum for purposes of action that complies with
this section.  Directors' action that otherwise complies with
this section is not affected by the presence or vote of a
director who is not a qualified director.

(d) For purposes of this section, "qualified director" means,
with respect to a director's conflicting interest transaction,
any director who does not have either (1) a conflicting interest
respecting the transaction, or (2) a familial, financial,
professional, or employment relationship with a second director
who does have a conflicting interest respecting the transaction,
which relationship would, in the circumstances, reasonably be
expected to exert an influence on the first director's judgment
when voting on the transaction.

/* Therefore if sufficient directors who are independent are
included in the vote, the transaction is accpeted. */

Official Comment

Section 8.62 provides the procedure for action of the board of
directors under subchapter F. In the normal course, this section,
taken together with section 8.61(t), will be the key provision
for dealing with directors' conflicting interest transactions.

All discussion of section 8.62 must be conducted in light of the
overarching provisions of section 8.30(a) prescribing the
criteria for decisions by directors.  Board action that does not
comply with the requirements of section 8.30(a) will not, of
course, be given effect under section 8.62.  See the Official
Comment to section 8.61(b).

1. Section 8.62(a)

A transaction in which a director has a conflicting interest is
approved under section 8.62 if and only if it is approved by
qualified directors, as defined in subsection 8.62(d).  Action by
the board of directors as a whole is effective if approved by the
affirmative vote of a majority (but not less than two) of the
qualified directors on the board.  Action may also be taken by a
duly authorized committee of the board but, to be effective, all
members of the committee must be qualified directors and the
committee must either contain all of the qualified directors on
the board or must have been appointed by the affirmative vote of
a majority of the qualified directors on the board. The effect of
the limitation on committee action is to make it impossible to
handpick as committee members a favorably inclined minority from
among the qualified directors.

Except to the limited extent provided in subsection (b), approval
by the board or committee must be preceded by required
disclosure.

Action complying with subsection 8.62(a) may be taken by the
board of directors at any time, before or after the transaction,
and may deal with a single transaction or a specified category of
similar transactions.

2. Section 8.62(b)

Subsection (b) is a new provision designed to deal, in a
practical way, with situations in which a director who has a
conflicting interest is not able to comply fully with the
disclosure requirement of subsection (a) because of an extrinsic
duty of confidentiality.  The director may, for example, be
prohibited from making full disclosure because of restrictions of
law that happen to apply to the transaction (e.g., grand jury
seal or national security statute) or professional canon (e.g.,
lawyers' or doctors' client privilege). The most frequent use of
subsection (b), however, will undoubtedly be in connection with
common directors who find themselves in a position of dual
fiduciary obligations that clash. If D is also a director of Y
Co., D may have acquired privileged confidential information from
one or both sources relevant to a transaction between X Co. and Y
Co. that he cannot reveal to one without violating his fiduciary
duty to the other. In such circumstance, subsection (b) makes it
possible for such a matter to be brought to the board for
consideration under subsection (a) and thus enable X Co. to
secure the protection afforded by subchapter F for the
transaction despite the fact that D cannot make the full
disclosure usually required.

To comply with subsection (b), D must disclose that he has a
conflicting interest, inform the directors who vote on the
transaction of the nature of his duty of confidentiality (e.g.,
inform them that it arises out of an attorney-client privilege or
his duty as a director of Y Co. that prevents him from making the
disclosure called for by clause (ii) of section 8.60(4)), and
then play no personal part in the board's deliberations.  The
point of subsection (b) is simply to make clear that the
provisions of subchapter F may be employed with regard to a
transaction in circumstances where an interested director cannot,
because of enforced fiduciary silence, make disclosure of the
facts known to him.  Of course, if D invokes subsection (b) and
then remains silent before leaving the boardroom, the remaining
directors may decline to act on the transaction if troubled by a
concern that D knows (or may know) something they do not.  On the
other hand, if D is subject to an extrinsic duty of
confidentiality but has no knowledge of facts that should be
disclosed, he would normally so state and disregard subsection
(b), and (having disclosed the existence and nature of his
conflicting interest) thereby comply with section 8.60(4). .

Subsection (b) is not available to D if the transaction is
directly between the corporation and D or his related person- if,
that is, the director or a related person is a party to the
transaction.  If D or a related person is a party to the
transaction, D's only options are required disclosure on an
unqualified basis, abandonment of the transaction, or acceptance
of the risk of establishing fairness in a court proceeding if the
transaction is challenged.

Whenever D proceeds as provided in subsection 8.62(b), the board
should recognize that he may well have information that in usual
circumstances he would be required to reveal to the
board-information that may well indicate that the transaction is
a favorable or unfavorable one for X Co. .

4. Section 8.62(d)

Obviously, a director's conflicting interest transaction and D
cannot be provided safe harbor protection by fellow directors who
themselves have conflicting interests; only "qualified directors"
can provide such safe harbor protection pursuant to subsection
(a).  "Qualified director" is defined in subsection (d).  The
definition is broad.  It excludes not only any director who has a
conflicting interest respecting the matter, but also going
significantly beyond the persons specified in the subcategories
of section 8.60(1)(ii) for purposes of the "conflicting interest"
definition any director whose familial or financial relationship
with D or whose employment or professional relationship with D
would be likely to influence the director's vote on the
transaction.


The determination of whether there is a financial, employment or
professional relationship should be based on the practicalities
of the situation rather than formalistic circumstances. For
example, a director employed by a corporation controlled by D
should be regarded as having an employment relationship with D.

8.63    Shareholders' Action

(a) Shareholders' action respecting a transaction is effective
for purposes of section 8.61(b)(2) if a majority of the votes
entitled to be cast by the holders of all qualified shares were
cast in favor of the transaction after (1) notice to shareholders
describing the director's conflicting interest transaction, (2)
provision of the information referred to in subsection (d), and
(3) required disclosure to the shareholders who voted on the
transaction (to the extent the information was not known by
them).

(b) For purposes of this section, "qualified shares" means any
shares entitled to vote with respect to the director's
conflicting interest transaction except shares that, to the
knowledge, before the vote, of the secretary (or other officer or
agent of the corporation authorized to tabulate votes), are
beneficially owned (or the voting of which is controlled) by a
director who has a conflicting interest respecting the
transaction or by a related person of the director, or both.

(c) A majority of the votes entitled to be cast by the holders of
all qualified shares constitutes a quorum for purposes of action
that complies with this section. Subject to the provisions of
subsections (d) and (e), shareholders' action that otherwise
complies with this section is not affected by the presence of
holders, or the voting, of shares that are not qualified shares.

/* A provisions which is similar to that for directors. */

(d) For purposes of compliance with subsection (a), a director
who has a conflicting interest respecting the transaction shall,
before the shareholders' vote, inform the secretary (or other
office or agent of the corporation authorized to tabulate votes)
of the number, and the identity of persons holding or controlling
the vote, of all shares that the director knows are beneficially
owned (or the voting of which is controlled) by the director or
by a related person of the director, or both.

(e) If a shareholders' vote does not comply with subsection (a)
solely because of a failure of a director to comply with
subsection (d), and if the director establishes that his failure
did not determine and was not intended by him to influence the
outcome of the vote, the court may, with or without further
proceedings respecting section 8.61(b)(3), take such action
respecting the transaction and the director, and give such
effect, if any, to the shareholders' vote, as it considers
appropriate in the circumstances.

Official Comment

1. Section 8.63(a) .

Note that section 8.63 does not contain a provision comparable to
section 8.62(b).  Thus, the safe harbor protection of subchapter
F cannot be made available through shareholder action under
section 8.63 in a case where D remains silent because of an
extrinsic duty of confidentiality. This is advertent. While it is
/* Adverent is the opposite of inadvertent. It pays to imporve
your word power. */


believed that the section 8.62(b) procedure is workable in the
collegial setting of the boardroom, one must have reservations
whether the same is true vis-a-vis the shareholder body.
especially in larger corporations where there is heavy reliance
upon the proxy mechanic.  In most situations no opportunity
exists for shareholders to quiz D about his duty and to discuss
the implications of acting without the benefit of D's knowledge
concerning the transaction.  In a case involving a closely-held
corporation where section 8.63 procedures are followed, but with
D acting as provided in section 8.62(b), a court could, of
course, attach significance to a favorable shareholder vote in
evaluating the fairness of the transaction to the corporation.

2. Section 8.63(b)

The category of persons whose shares are excluded from the vote
count under subsection (b) is not the same as the category of
persons specified in section 8.60(1)(ii) for purposes of defining
D's "conflicting interest" and-importantly-is not the same as the
category of persons excluded for purposes of the definition of
non-qualified directors under section 8.62(d).  The distinctions
among these three categories are deliberate and carefully drawn.

The definition of "qualified shares" excludes shares owned by D
or a related person as defined in section 8.60(3).  If D is an
employee or director of Y Co., Y Co. is not prevented by that
fact from exercising its usual voting rights as to any shares it
may hold in X Co. D's linkage to a related person is close.  But
the net of section 8.60(1)(ii) specifying other persons and
entities for purposes of the "conflicting interest" definition is
cast so wide that D will never be able to know whether, nor have
a reason to try to monitor whether, some person within those
subcategories holds X Co. shares. Typically, moreover, D will
have no control over those persons and how they vote their x Co.
shares. There is, in reality. no reason to strip those persons of
their voting rights as shareholders, for in the usual commercial
situation they will vote in accordance with their own interests,
which may well not coincide with the personal interest of D.

To illustrate the operation of subsection (b), consider a case in
which D is also a director of Y Co., and to his knowledge: thirty
percent of Y Co.'s stock is owned by X Co.; D, his wife, a trust
of which D is the trustee, and a corporation he controls,
together own ten percent of X Co.'s stock but not stock of Y Co.;
and x Co. and Y Co. wish to enter into a transaction that is of
major significance to both.

From the perspective of X Co., D has a conflicting interest since
he is a director of Y Co.  If X Co. submits the transaction to a
vote of its shareholders under section 8.63, the shares held by D
his wife, the trust of which he is the trustee, and the
corporation he controls are not qualified shares and may not be
counted in the vote.

From the perspective of Y Co., D has a conflicting interest since
he is a director of X Co. If NT Co. submits the transaction to a
vote of its shareholders under section 8.63, the thirty percent
of Y Co. shares held by X Co. are qualified shares and may be
counted for purposes of section 8.63.  The same would be equally
true if X Co. were the majority shareholder of Y Co., but as
emphasized elsewhere, the vote under section 8.63 has no effect
whatever of exonerating or protecting x Co. if X Co. fails to
meet any legal obligation that, as the majority shareholder of Y
Co., it may owe to the minority shareholders of Y Co.

3. Section 8.63(c) .

The fact that certain shares are not qualified and are not
countable for purposes of subsection (a) says nothing as to
whether they are properly countable for other purposes such as,
for example, a statutory requirement that a certain fraction of
the total vote or a special majority vote be obtained.

4. Section 8.63(d)

In most circumstances, the secretary of X Co. will have no way to
know whether certain of X Co.'s outstanding shares should be
excluded from the teller's count because of the identity of the
owners or of those persons who control the voting of the shares.
Subsection (a) together with subsection (d) therefore impose on a
director who has a conflicting interest respecting the
transaction, as a prerequisite to safe harbor protection by
shareholder vote, the obligation to inform the secretary, or
other officer or agent authorized to tabulate votes, of the
number and holders of shares known by him to be owned by him or
by a related person of his. Thus, a director who has a
conflicting interest respecting the transaction, because he
stands to make a commission from it, is obligated to report
shares owned or the vote of which is controlled by him and by all
related persons of his; a director who has a conflicting interest
respecting the transaction because his brother stands to make a
commission from it has the same reporting obligation. The
tabulator may also, of course, have other independent knowledge
of shares that are owned or controlled by a related person of the
director.


If the tabulator of votes knows that particular shares should be
excluded but fails to exclude them from the count and their
inclusion in the vote does not affect its outcome, subsection (c)
governs and the shareholders' vote stands.  If the improper
inclusion determines the outcome, the shareholders' vote fails to
comply with subsection (a).  If the tabulator does not know that
certain shares are owned or controlled by the director who has
the conflicting interest or a related person of his, the shares
are "qualified" pursuant to the definition in subsection (b), and
the vote cannot be attacked on that ground for failure to comply
with subsection (a); but see subsection (e).

5. Section 8.63(e)

If D did not provide the information required under subsection
(d), on the face of it shareholders' action is not in compliance
with subsection (a) and D has no safe harbor under subsection
(a). In the absence of such safe harbor D can be put to the
challenge of establishing the fairness of the transaction under
section 8.61(b)(3).

That result is the proper one where D's failure to inform was
determinative of the vote or, worse, was part of a deliberate
effort on D's part to influence the outcome of the vote. But if
D's omission was essentially an act of negligence, if the number
of unreported shares was not determinative of the outcome of the
vote, and if the omission was not motivated by D's effort to
influence the integrity of the voting process, the court should
be free to fashion an appropriate response to the situation in
the light of all the considerations at the time of trial.  The
court should not be automatically forced by the mechanics of the
subchapter to a lengthy and retrospective trial on "fairness."
Subsection (e) grants the court that discretion in those
circumstances and permits it to accord such effect, if any, to
the shareholders' vote, or grant such relief respecting the
transaction or D, as the court may find appropriate.

Chapter 10

AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAW

Subchapter A

Amendment of Articles of Incorporation

10.01    Authority to Amend

(a) A corporation may amend its articles of incorporation at any
time to add or change a provision that is required or permitted
in the articles of incorporation or to delete a provision not
required in the articles of incorporation. Whether a provision is
required or permitted in the articles of incorporation is
determined as of the effective date of the amendment.


(b) A shareholder of the corporation does not have a vested
property right resulting from any provision in the articles of
incorporation, including provisions relating to management,
control, capital structure, dividend entitlement, or purpose or
duration of the corporation.

10.02    Amendment by Board of Directors

Unless the articles of incorporation provide otherwise, a
corporation's board of directors may adopt one or more amendments
to the corporation's articles of incorporation without
shareholder action:

(1) to extend the duration of the corporation if it was
incorporated at a time when limited duration was required by law;

(2) to delete the names and addresses of the initial directors;

(3) to delete the name and address of the initial registered
agent or registered office, if a statement of change is on file
with the secretary of state;

(4) to change each issued and unissued authorized share of an
outstanding class into a greater number of whole shares if the
corporation has only shares of that class outstanding;

(5) to change the corporate name by substituting the word
"corporation," "incorporated," "company," "limited," or the
abbreviation "corp." "inc." "co.," or "ltd.," for a similar word
or abbreviation in the name, or by adding, deleting, or changing
a geographical attribution for the name; or

(6) to make any other change expressly permitted by this Act to
be made without shareholder action.

10.03 Amendment by Board of Directors and Shareholders

(a) A corporation's board of directors may propose one or more
amendments to the articles of incorporation for submission to the
shareholders.

(b) For the amendment to be adopted:

(1) the board of directors must recommend the amendment to the
shareholders unless the board of directors determines that
because of conflict of interest or other special circumstances it
should make no recommendation and communicates the basis
for its determination to the shareholders with the amendment; and

(2) the shareholders entitled to vote on the amendment must
approve the amendment as provided in subsection (e).


(c) The board of directors may condition its submission of the
proposed amendment on any basis.

(d) The corporation shall notify each shareholder, whether or not
entitled to vote, of the proposed shareholders' meeting in
accordance with section 7.05. The notice of meeting must also
state that the purpose, or one of the purposes, of the meeting is
to consider the proposed amendment and contain or be accompanied
by a copy or summary of the amendment.

(e) Unless this Act, the articles of incorporation, or the board
of directors (acting pursuant to subsection (c)) require a
greater vote or a vote by voting groups, the amendment to be
adopted must be approved by:

(1) a majority of the votes entitled to be cast on the amendment
by any voting group with respect to which the amendment would
create dissenters' rights; and

(2) the votes required by sections 7.25 and 7.26 by every other
voting group entitled to vote on the amendment.

10.04 Voting on Amendments by Voting Groups

(a) The holders of the outstanding shares of a class are entitled
to vote as a separate voting group (if shareholder voting is
otherwise required by this Act) on a proposed amendment if the
amendment would:

(1) increase or decrease the aggregate number of authorized
shares of the class;

(2) effect an exchange or reclassification of all or part of the
shares of the class into shares of another class;

(3) effect an exchange or reclassification, or create the right
of exchange, of all or part of the shares of another class into
shares of the class;

(4) change the designation, rights, preferences, or limitations
of all or part of the shares of the class;

(5) change the shares of all or part of the class into a
different number of shares of the same class;

(6) create a new class of shares having rights or preferences
with respect to distributions or to dissolution that are prior,
superior, or substantially equal to the shares of the class;

(7) increase the rights, preferences, or number of authorized
shares of any class that, after giving effect to the amendment,
have rights or preferences with respect to distributions or to
dissolution that are prior, superior, or substantially equal to
the shares of the class;

(8) limit or deny an existing preemptive right of all or part of
the shares of the class; or

(9) cancel or otherwise affect rights to distributions or
dividends that have accumulated but not yet been declared on all
or part of the shares of the class.

(b) If a proposed amendment would affect a series of a class of
shares in one or more of the ways described in subsection (a),
the shares of that series are entitled to vote as a separate
voting group on the proposed amendment.

(c) If a proposed amendment that entitles two or more series of
shares to vote as separate voting groups under this section would
affect those two or more series in the same or a substantially
similar way, the shares of all the series so affected must vote
together as a single voting group on the proposed amendment.

(d) A class or series of shares is entitled to the voting rights
granted by this section although the articles of incorporation
provide that the shares are nonvoting shares.

10.05 Amendment Before Issuance of Shares

If a corporation has not yet issued shares, its incorporators or
board of directors may adopt one or more amendments to the
corporation's articles of incorporation.

10.06 Articles of Amendment

A corporation amending its articles of incorporation shall
deliver to the secretary of state for filing articles of
amendment setting forth:

(1) the name of the corporation;

(2) the text of each amendment adopted;

(3) if an amendment provides for an exchange, reclassification,
or cancellation of issued shares, provisions for implementing the
amendment if not contained in the amendment itself;

(4) the date of each amendment's adoption;

(5) if an amendment was adopted by the incorporators or board of
directors without shareholder action, a statement to that effect
and that shareholder action was not required;

(6) if an amendment was approved by the shareholders:

(i)  the designation, number of outstanding shares, number of
votes entitled to be cast by each voting group entitled to vote
separately on the amendment, and number of votes of each voting
group indisputably represented at the meeting;

(ii) either the total number of votes cast for and against the
amendment by each voting group entitled to vote separately on the
amendment or the total number of undisputed votes cast for the
amendment by each voting group and a statement that the number
cast for the amendment by each voting group was sufficient for
approval by that voting group.

10.09 Effect of Amendment

An amendment to articles of incorporation does not affect a cause
of action existing against or in favor of the corporation, a
proceeding to which the corporation is a party, or the existing
rights of persons other than shareholders of the corporation.  An
amendment changing a corporation's name does not abate a
proceeding brought by or against the corporation in its former
name.

Subchapter B

Amendment of Bylaws

10.20 Amendment by Board of Directors or Shareholders

(a) A corporation's board of directors may amend or repeal the
corporation's bylaws unless:

(1) the articles of incorporation or this Act reserve this power
exclusively to the shareholders in whole or part; or

(2) the shareholders in amending or repealing a particular bylaw
provide expressly that the board of directors may not amend or
repeal that bylaw.

(b) A corporation's shareholders may amend or repeal the
corporation's bylaws even though the bylaws may also be amended
or repealed by its board of directors.


10.21    Bylaw Increasing Quorum or Voting Requirement for
Shareholders

(a) If authorized by the articles of incorporation, the
shareholders may adopt or amend a bylaw that fixes a greater
quorum or voting requirement for shareholders (or voting groups
of shareholders) than is required by this Act.  The adoption or
amendment of a bylaw that adds, changes, or deletes a greater
quorum or voting requirement for shareholders must meet the same
quorum requirement and be adopted by the same vote and voting
groups required to take action under the quorum and voting
requirement then in effect or proposed to be adopted, whichever
is greater.

(b) A bylaw that fixes a greater quorum or voting requirement for
shareholders under subsection (a) may not be adopted, amended, or
repealed by the board of directors.

10.22 Bylaw Increasing Quorum or Voting Requirement for Directors

(a) A bylaw that fixes a greater quorum or voting requirement for
the board of directors may be amended or repealed:

(1) if originally adopted by the shareholders, only by the
shareholders;

(2) if originally adopted by the board of directors, either by
the shareholders or by the board of directors.

(b) A bylaw adopted or amended by the shareholders that fixes a
greater quorum or voting requirement for the board of directors
may provide that it may be amended or repealed only by a
specified vote of either the shareholders or the board of
directors.

(c) Action by the board of directors under subsection (a)(2) to
adopt or amend a bylaw that changes the quorum or voting
requirement for the board of directors must meet the same quorum
requirement and be adopted by the same vote required to take
action under the quorum and voting requirement then in effect or
proposed to be adopted, whichever is greater.

Chapter 11

MERGER AND SHARE EXCHANGE

11.01    Merger

(a) One or more corporations may merge into another corporation
if the board of directors of each corporation adopts and its
shareholders (if required by section 11.03) approve a plan of
merger.

(b) The plan of merger must set forth:

(1) the name of each corporation planning to merge and the name
of the surviving corporation into which each other corporation
plans to merge;

(2) the terms and conditions of the merger; and

(3) the manner and basis of converting the shares of each
corporation into shares, obligations, or other securities of the
surviving or any other corporation or into cash or other property
in whole or part.

(c) The plan of merger may set forth:

(1) amendments to the articles of incorporation of the surviving
corporation; and

(2) other provisions relating to the merger.

Official Comment

2. Equivalent Nonstatutory Transactions

A transaction may have the same economic effect as a statutory
merger even though it is cast in the form of a nonstatutory
transaction.  For example, assets of the disappearing
corporations may be sold for consideration in the form of shares
of the surviving corporation, followed by the distribution of
those shares by the disappearing corporations to their
shareholders and their subsequent dissolution. Transactions have
sometimes been structured in nonstatutory form for tax reasons or
in an effort to avoid some of the consequences of a statutory
merger, particularly appraisal rights to dissenting shareholders.
Faced with these transactions, a few courts have developed or
accepted the "de facto merger" concept which, to some uncertain
extent, grants to dissenting shareholders the rights they would
have had if the transaction had been structured as a statutory
merger.  See Folk, "De Facto Mergers in Delaware: Hariton v. Arco
Electronics, Inc.," 49 Va.L.Rev.  1261 (1963).  These problems
should not occur under the Model Act since the procedural
requirements for authorization and consequences of various types
of transactions are largely standardized. For example,
dissenters' rights are granted not only in mergers but also in
share exchanges, in sales of all or substantially all the
corporate assets, and in amendments to articles of incorporation
that significantly affect rights of shareholders.

11.02 Share Exchange

(a) A corporation may acquire all of the outstanding shares of
one or more classes or series of another corporation if the board
of directors of each corporation adopts and its shareholders (if
required by section 11.03) approve the exchange.

(b) The plan of exchange must set forth:

(1) the name of the corporation whose shares will be acquired and
the name of the acquiring corporation;

(2) the terms and conditions of the exchange;

(3) the manner and basis of exchanging the shares to be acquired
for shares, obligations, or other securities of the acquiring or
any other corporation or for cash or other property in whole or
part.

(c) The plan of exchange may set forth other provisions relating
to the exchange.

(d) This section does not limit the power of a corporation to
acquire all or part of the shares of one or more classes or
series of another corporation through a voluntary exchange or
otherwise.

11.03 Action on Plan

(a) After adopting a plan of merger or share exchange, the board
of directors of each corporation party to the merger, and the
board of directors of the corporation whose shares will be
acquired in the share exchange, shall submit the plan of merger
(except as provided in subsection (g)) or share exchange for
approval by its share holders.

(b) For a plan of merger or share exchange to be approved:

(1) the board of directors must recommend the plan of merger or
share exchange to the shareholders, unless the board of directors
determines that because of conflict of interest or other special
circumstances it should make no recommendation and communicates
the basis for its determination to the shareholders with the
plan; and

(2) the shareholders entitled to vote must approve the plan.

(c) The board of directors may condition its submission of the
proposed merger or share exchange on any basis.