Avoiding Conflicts of Interest by Association Boards
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Under Florida law, condominium association (“CA”) board of directors members and homeowners’ association (“HOA”) board of directors members owe fiduciary duties to their associations and the unit or home owners they serve. This generally means that directors must place the interests of the association above their own self-interest and take actions they reasonably believe will benefit the association and owners. When a board member becomes entangled in a conflict of interest, his or her ability to place the association’s interests first becomes compromised, which can harm the association’s reputation, cause regulatory issues, and even harm the interests of board members themselves in certain situations.
What Are Conflicts of Interest?
The first step in developing protocols for effectively managing potential conflicts of interest by association board members is understanding how to identify them. There are two main types of conflicts of interest: (1) interested director transactions, and (2) conflicts involving the corporate opportunity doctrine.
Interested Director Transitions
Interested director transactions arise when a board member has some personal or financial interest in a particular contract or transaction that conflicts with the interests of the association and/or its owners. When this occurs, the director must disclose the conflict to the board. For community associations, these conflicts usually involve board members referring service providers, such as landscaping or pool cleaning companies, to the association when the board member has some interest in the company. The following are some additional examples of conflicts of interest:
- Board member sells association a parcel of land abutting the condominium property
- Association votes to approve director’s architectural plans for an addition to his home
- Board member loans money to the association
Corporate Opportunity Doctrine
The second main type of conflicts of interest is where a board member seeks to personally pursue a business opportunity that may be beneficial to the association without first allowing the association to pursue the opportunity, in violation of the so-called “Corporate Opportunity Doctrine.” This doctrine limits the ability of board members to individually pursue new business opportunities in which the association has an interest without first presenting the opportunity to the association.
For associations, this type of corporate opportunity conflict of interest usually arises when a board member purchases property that the association was also interested in purchasing. A board member has a duty to disclose the opportunity to the board, and failure to make such a disclosure ultimately may require the board member themselves to convey the benefit of the opportunity to the association.
How to Handle Potential Conflicts
Once practices for identifying possible conflicts of interest are developed, an association board should then develop protocols for dealing with potential conflicts of interest.
If an association desires to enter into a contract or other transaction with any of its board members or with a business entity in which a board member has a financial interest, the board must first take certain actions. For CA, those actions are described within Section 718.3026(3)(a)-(d), Florida Statutes. For HOAs, the corresponding statute is Section 720.3033(2)(a)-(d), Florida Statutes. Associations are also corporations under Florida law—most often non-profit corporations—so the disclosure requirements and procedures found within the Florida Not for Profit Corporation Act also apply.
The Florida Statutes set forth the following steps an association must follow when a contract or transaction involves a conflict of interest:
- The board member must disclose the conflict of interest.
- The board must then include the transaction on the meeting agenda, attach all related documents to the meeting agenda, and post the transaction on the association’s website.
- At the meeting, the board may allow the interested director to make a presentation to the board, but the board must require him to leave before voting on the transaction.
- Approval of the transaction requires a two-thirds vote of the board members present.
- If the board votes against the transaction, the interested director must notify the board in writing that he will not pursue the transaction.
- If the board approves the transaction, they must disclose the transaction to the members of the association at the next regular or special meeting of the members. If a majority of the members present at the meeting vote against the transaction, the association must cancel the transaction.
A board should make it a practice to follow these steps whenever a potential conflict of interest is identified and to be sure its members are aware of the protocol. It is also important that an accurate record of complying with these disclosure and voting measures is captured in the written minutes of any such meeting and maintained with the association’s official records.
So long as the required disclosures are made to the appropriate parties, no contract between an association and an interested board member, or a business entity in which a board member has a financial interest, is void or voidable simply because such interest exists or because the director is present at the meeting where the contract or transaction is approved or because the interested director’s vote was counted for the approval (if the director was permitted to cast a vote). Fla. Stat. § 617.0832(1).
Steps Your Board Can Take Now
The consequences of failing to identify and properly manage conflicts of interest are significant; community associations should devote the time and resources necessary to educate board members and develop protocols for managing possible conflicts before they arise. This may include partnering with legal counsel to develop a Conflict of Interest Policy that board members are required to review and sign before taking office. Associations may also circulate forms among board members each year requiring them to identify any possible conflicts of interest that may arise while they are in office. Finally, associations should consider hiring a professional to give educational presentations to board members on an annual basis. All such steps can help associations, their managers, and their directors identify and manage conflicts of interest prophylactically to avoid problems in the future.