Imagine your community needs to hire a company to maintain the landscaping, but has very limited funds. Suppose the board treasurer owns a landscaping company and is more than happy to do everyone a favor and give the association a substantially reduced rate for his services. Can the board legally accept the treasurer’s offer? Is it a conflict of interest? Can the treasurer vote on his own contract? Should the board accept the offer?
 
Colorado law provides that a person who serves as a board member for a non-profit corporation, such as a homeowner association, has a duty to act prudently in good faith and in the association’s best interest. There are times, however, when a board member may act to benefit both the association and himself. To prevent board members from abusing their position, but still allowing non-profits to take advantage of good business deals their board members may be able to offer, Colorado statutes allow a board member to do business with the association but require conditions to be met to ensure that the association is treated fairly.
 
In order to act within the statue, the board must first determine whether there is a conflict of interest. Colorado’s non-profit statutes define a “conflicting interest transaction” as a contract, transaction or other financial relationship between the nonprofit corporation and (a) a board member, (b) a party related to a board member, or (c) an entity or company in which the board member has a financial interest. In our example, the board is considering a contract between the association and the treasurer’s landscaping company. Under the statute, the contract would be a “conflicting interest transaction.” The board member need not own the landscaping company for this to be a conflicting interest transaction. The board member may own only a small share of the landscaping company or may merely work for the landscaping company but stand to receive a commission if the company is hired.
 
If the board determines that a board member has a conflict of interest, the association may still enter into the contract if:
 
1.         The details of the financial relationship between the association and the conflicted board member are disclosed to the board and a majority of the disinterested board members vote in good faith to accept the contract. The conflicted board member may vote, but there must be a majority without his vote.
 
OR
 
2.         The details of the financial relationship between the association and the conflicted board member are disclosed to the owners and the owners vote to approve the contract.
 
OR
 
3.         The contract is fair to the association.
 
The board in our example may accept the treasurer’s offer by satisfying any one of the above criteria. Before choosing which of the three criteria to use, the board should give consideration to the appearance of its decision and the political consequences.
 
To avoid controversy, the board may wish to be more transparent and disclose all the details and carefully document the disclosure in the minutes. If the transaction is later questioned, the board can refer owners back to the minutes and demonstrate that the conflict was fully disclosed, and that the board acted properly. Allowing the owners to vote on the conflicted transaction may be an even better way to avoid a question of impropriety, but gaining owner approval may be too time consuming and expensive to be practical. One possible alternative is for the board to disclose the details to the owners and then approve the contract by a vote of a majority of the disinterested board members at a board meeting.
 
The third criteria is only ultimately known after the fact by the decision of a court. Therefore, while the board can make a decision that a conflict of interest contract is “fair” that decision may be overturned by a court.
 
Regardless of which method the board chooses to resolve conflicts of interest, it is always best to have a written policy in place before a conflict arises. When drafting the policy, the board will want to consider the following:

•     Are board member conflicts of interest allowed?
•     If allowed, how will the conflict of interest be resolved? Will the board have any discretion to choose between the options legally available?
•     If the board is voting to approve the contract, will the conflicted board member abstain from voting or will his vote simply not count toward the majority?
•     When the board is discussing whether the contract should be adopted after the conflict has been disclosed, will the conflicted board member participate in the discussion? Will he be available to answer questions about the conflict or the contract? Will he leave the meeting during the discussion and vote?