New York Law (NYLE) Practice Exam

Can a contract approved by a board of directors be voided if one member is also a director of the other company involved?

1. Yes, due to conflict of interest

2. No, as long as the contract was fair

3. Only if the common directorship was unknown to others

4. Yes, because the presence created a quorum issue

The correct answer is: No, as long as the contract was fair

The correct answer indicates that a contract approved by a board of directors cannot be voided solely on the basis of one member being a director of another party involved, provided the contract was fair. This principle is rooted in the idea that boards have a fiduciary duty to act in the best interests of the corporation, and if the contract reflects fairness and is in the corporation's best interest, it can still be valid even if there is a common director. In assessing whether a contract is valid, the fairness of the contract takes precedence over any potential conflict of interest created by the common directorship. Many corporations establish policies and procedures designed to handle situations where conflicts of interest may arise, including disclosures and abstention from voting, which can mitigate concerns over fairness. The other options imply conditions that are not typically sufficient alone to void a contract. For example, simply having a conflict of interest does not automatically invalidate an agreement; rather, it is the need for a balanced examination of fairness that prevails. Additionally, the existence of a quorum typically refers to the minimum number of board members that must be present for the board to conduct business, which is separate from the issue of a director's possible conflict. Hence, the emphasis on fairness encapsulates the core concept of