We previously published an overview regarding South Carolina homeowners association (HOA) director conflicts of interest and how HOA boards might handle transactions that present a conflict of interest for one or more directors. In that article, we discussed the procedure set forth in the South Carolina Nonprofit Corporation Act (the “Act”) by which the “uninterested” directors may still approve such a transaction, but this article will address another way in which certain conflict of interest transactions may be approved: a vote of the membership.
Please note that the previous article should be read prior to the present article for a more thorough understanding. Also, this article contemplates those South Carolina HOAs that are mutual benefit nonprofit corporations, which are the overwhelming majority of South Carolina HOAs.[1]
An HOA may want to submit a director conflict of interest transaction to a vote of the membership for various reasons.
Perhaps there are not enough uninterested directors to meet quorum or approve the transaction, or perhaps the board just feels a membership vote promotes transparency and trust under potentially controversial circumstances. Pursuant to the Act, a transaction in which a director of a mutual benefit corporation may be approved by the members when the material facts of the transaction and the director’s interest are disclosed or known to the members, and the members authorize, approve, or ratify the transaction.[2] In other words, the members would need to either be informed of, or know about the conflict, and approve it with this knowledge. Of course, it is important to not assume that a conflict is “known,” but rather affirmatively and clearly disclose the conflict at issue to the members. It would be advisable to document these notifications thoroughly, to include recording in any applicable meeting minutes in case an action is later challenged.
As to the procedure for the vote of the members, the Act provides specific guidance.
Per the Act, a majority of the voting power, whether or not present, that are entitled to be counted in a vote on the transaction under the Act constitutes a quorum for the vote.[3] Votes that are not entitled to be counted in a vote on such a transaction would be (1) those of a director who has direct or indirect interest in the transaction, and/or (2) those of an entity in which such a director has a material interest or in which such a director is a general partner.[4] For the transaction to be approved, a majority of the eligible votes entitled to be counted would have to be in favor of approval.[5]
An HOA’s governing documents may assign additional responsibilities or limitations as to what the HOA can do regarding conflicts of interest.
The governing documents may even include a higher threshold for membership approval. Therefore, it is important for the HOA board to be familiar with their governing documents and ensure that they comply with their community-specific provisions. It is also prudent to consult with the HOA’s legal counsel with questions regarding the conflicts of interest as they can advise based on their knowledge of the law together with the specific documents and circumstances of your community.
This article is not intended to be an exhaustive discussion of applicable law regarding director conflicts of interest, nor any guarantee of the outcome of any litigation regarding the same. Our attorneys at McCabe, Trotter & Beverly, P.C. are experienced and well-equipped to answer questions you may have regarding this topic. Please contact us at 803–724–5000 for further information.
Dean Hayes
McCabe, Trotter & Beverly, P.C. blogs and other content are for educational and informational purposes only. This is not legal advice and does not create an attorney/client relationship between McCabe, Trotter & Beverly, P.C. and readers. Readers should consult an attorney to understand how this information relates to their personal situation and circumstances. You should not use McCabe, Trotter & Beverly, P.C. blogs or content as a substitute for legal advice from a licensed attorney.
[1] The Official Comment to S.C. Code § 33-31-831 provides that member approval is not available to public benefit corporations.
[2] S.C. Code Ann. § 33-31-831(c)(2).
[3] S.C. Code Ann. § 33-31-831(f).
[4] S.C. Code Ann. §§ 33-31-831(d)(1); (f).
[5] S.C. Code Ann. § 33-31-831(f).