What You Need to Know About Handling Conflicts of Interest on Your Michigan Condo Board
A condominium association is governed by its board of directors. In Michigan, it is common that members of a board of directors are uncompensated volunteers. It is also common that co-owners elect board members who have a particular set of skills or knowledge relevant to running a condominium, whether that be knowledge of accounting, construction, or management. When a condominium association needs a contractor or other business to assist with condominium duties, a director may be inclined to suggest a contractor or business that they are familiar with. But what happens when the director has a financial interest in the selected contractor? Maybe the director is the owner or an employee of the business. Should the board of directors be able to hire the contractor? Or what about a situation where the director submits a modification request or is alleged to have violated the bylaws? These can be awkward situations for the board to address, yet the Michigan Nonprofit Corporation Act provides a level of guidance that can help the board navigate these situations.
Michigan Nonprofit Corporation Act
Nearly all Michigan condominium associations are nonprofit corporations, and as such, are subject to the Michigan Nonprofit Corporation Act. Section 545a of the Michigan Nonprofit Corporation Act, MCL 450.2545a, permits a condominium association to take an action in which a director has an interest, whether that be a financial interest in hiring a contractor, considering whether to approve a modification request, or determining whether the director violated the bylaws. MCL 450.2545a(1) states that the board’s decision regarding a situation involving a director’s interest will not necessarily be set aside or give rise to an award of damages in a lawsuit if one of three events occur:
(1) A transaction in which a director or officer is determined to have an interest shall not be enjoined, set aside, or give rise to an award of damages or other sanctions because of the interest, in a proceeding by a shareholder, a member, or a director of a corporation that is organized on a directorship basis or by or in the right of the corporation, if the person interested in the transaction establishes any of the following:
(a) The transaction was fair to the corporation at the time it was entered into.
(b) The material facts of the transaction and the director’s or officer’s interest were disclosed or known to the board or an executive committee of the board and the board or executive committee authorized, approved, or ratified the transaction.
(c) The material facts of the transaction and the director’s or officer’s interest were disclosed or known to the shareholders or members who are entitled to vote and they authorized, approved, or ratified the transaction.
Accordingly, under MCL 450.2545a(1), a condominium association is not prevented from taking action in which a director has an interest in as long as any one of the following are established: (1) the transaction was fair to the association when it was entered into; (2) the board of directors was aware of the material facts of the transaction and the director’s interest were disclosed to or known by the board of directors and the board authorized, approved, or ratified the transaction; or (3) the material facts of the transaction and the director’s interest were disclosed or known by the co-owners who are entitled to vote and the co-owner authorized, approved, or ratified the transaction.
MCL 450.2545a(2) and (3) address the threshold necessary for the vote of the directors or co-owners, respectively, to approve an action in which a director has an interest. Under MCL 450.2545a(2), an action is approved if a majority of the directors who did not have an interest in the action approved the transaction. Importantly, the presence of or vote by the interested director does not affect the validity of the vote. For a vote of the co-owners, MCL 450.2545a(3) states that the action is approved if a majority of the disinterested co-owners approves the action. For purposes of a co-owner vote, a majority of the votes held by disinterested co-owners is a quorum.
Even if an action is approved by a majority of the disinterested directors or co-owners, MCL 450.2545a(4) states that other claims relating to the action are not precluded and will be evaluated under principles applicable to a transaction in which the director does not have an interest. For example, a board’s approval of an action in which a director has an interest does not prevent a co-owner from bringing a claim that the action is a breach of the directors’ fiduciary duty(ies).
As mentioned in the introduction, directors often serve without compensation by default. Some association’s condominium documents state that directors may not be compensated, while other association’s condominium documents allow directors to be compensated. For associations whose directors are able to be compensated, typically the decision of whether to compensate directors is up to the co-owners. But in the event that the condominium documents allow the board to vote on their compensation, MCL 450.2545a(5) states that a board may approve their compensation with a vote of a majority of the directors, although the compensation must be reasonable and not exceed the amount permitted by the articles of incorporation or bylaws.
Code of Conduct
While the Michigan Nonprofit Corporation Act may allow a board to enter into a transaction in which a director has an interest, it may be worthwhile for a board to adopt a code of conduct that addresses instances where there is, or where there is perceived to be, a conflict of interest. By taking a proactive approach and adopting a code of conduct, a board of directors can avoid the appearance of a conflict of interest by having a set procedure that the board will follow. An effective code of conduct will address numerous circumstances that could call into question a director’s impartiality, including provisions consistent with MCL 450.2545a relating to a director notifying the remaining board members of any interest that the director has in an action (financial or personal) and recusing themselves from all discussion and voting on the matter. Further, a comprehensive code of conduct should prohibit directors and officers from receiving goods, services, or other items of value from vendors (other than small or nominal gifts) and prevent individual directors and officers from directing the work of an association-hired contractor for their own personal benefit without the approval of the board of directors.
Members of a condominium association’s board of directors are volunteers and as such, have day jobs. Some directors’ day jobs lend themselves to being useful to condominium associations, such as general contractors, landscapers, construction workers, accountants, and the list goes on. A situation may arise where a director proposes that the board of directors or co-owners approve a transaction in which the director has an interest by involving the director’s day job. Beyond these situations involving a financial benefit to a director’s business, directors are still co-owners of the association and are required to submit modification requests and may be subject to enforcement for a bylaw violation.
Although the term “conflict of interest” has a negative connotation, the Michigan Nonprofit Corporation Act sets the procedure where a board’s action involving an interested director can be approved. Condominium associations should be aware of how to comply with MCL 450.2545a, namely, ensure that the transaction is fair to the condominium association or hold a vote of the remaining directors or co-owners, as the case may be. Beyond following the procedure in MCL 450.2545a, condominium associations should consider adopting a code of conduct to proactively address actual or perceived conflicts of interest. Condominium associations who are concerned about navigating a potential conflict of interest or who wish to adopt a code of conduct should contact an experienced condominium association attorney for assistance.
Michael T. Pereira is an attorney with Hirzel Law, PLC, and focuses his practice on community association law and drafting, reviewing, and amending governing documents. Mr. Pereira received his Bachelor of Arts in Political Science from the University of Michigan and his Juris Doctor degree from the University of Detroit Mercy School of Law, where he graduated second in his class. After law school, Mr. Pereira worked as a research attorney and law clerk at the Michigan Court of Appeals before joining Hirzel Law, PLC. Mr. Pereira can be reached at (248) 478-1800 or email@example.com.