§ 2.04 DUTY OF LOYALTY
[1] Definition of the Duty of Loyalty
Since 1990, the duty of loyalty has been defined by the WBCA, which requires that officers and directors act in a manner that they "reasonably believe[] to be in the best interests of the corporation." RCW 23B.08.300(1)(c); RCW 23B.08.420(1)(c). Under the common law, courts traditionally held that corporate officers and directors "occupy a fiduciary relation to a private corporation and the shareholders thereof akin to that of a trustee, and owe undivided loyalty, and a standard of behavior above that of the workaday world." State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co., 64 Wn.2d 375, 381, 391 P.2d 979 (1964). Courts similarly held that "[d]irectors and officers stand in a fiduciary relation to the corporation they serve and are not permitted to retain any personal profit or advantage gleaned 'on the side.' " Interlake Porsche & Audi, Inc. v. Bucholz, 45 Wn. App. 502, 508, 728 P.2d 597 (1986) (citing Leppaluoto v. Eggleston, 57 Wn.2d 393, 402, 357 P.2d 725 (1960)), review denied, 107 Wn.2d 1022 (1987). As noted in § 2.02, the 1990 amendments to the WBCA affirmatively excluded any reference to the term "fiduciary" from the statutory duty of loyalty because "that term could be confused with the unique attributes and obligations of a fiduciary imposed by the law of trusts, some of which are not appropriate for directors of a corporation." SOURCEBOOK § 8.30 at 8.300-2. To date, however, Washington courts have largely continued to rely on pre-1990 case law in interpreting a director or officer's duty of loyalty to the corporation.
[2] Conflicts of Interest/Interested Transactions
The duty of loyalty is most often implicated when a director has a unique personal or conflicting interest in a corporate transaction. The WBCA provides a statutory framework for determining the validity of all transactions with the corporation in which a director has an interest. See RCW 23B.08.700(1); see also RCW 23B.08.710(1)-(2). Although the WBCA has governed director's conflicting interest transactions since 1990, there have been very few published opinions interpreting this provision or interested transactions in general under Washington law since that time. See Quinn v. Anvil Corp., 620 F.3d 1005, 1011 (9th Cir. 2010) (holding that board vote was procedurally proper under director conflict-of-interest statute where plaintiff alleged that only three of the seven voting directors were conflicted). At least one court has applied pre-1990 common law in analyzing a transaction that would appear to fall within the scope of RCW 23B.08.700-.730. See Saviano v. Westport Amusements, Inc., 144 Wn. App. 72, 79-80, 180 P.3d 874 (2008) (analyzing director's loan to corporation under common law as opposed to statutory provisions governing conflicting interest transactions).
[a] Directors' Conflicts of Interest
Under the common law, courts traditionally held that any transaction involving corporate property in which a director had an interest was voidable at the option of the corporation. Hayes Oyster Co., 64 Wn.2d at 381. While this mechanical rule has been abandoned, the imprecision and uncertainty as to when directors may safely enter into such transactions motivated the legislature to create a set of bright-line rules in its 1990 amendments to the WBCA that introduced more certainty and predictability to such transactions. See SOURCEBOOK §§ 8.70-.73 at 08.700-3 ("[T]he existing case law . . . [wa]s in a state of unhealthy uncertainty, reflecting differing judicial attitudes toward and varying levels of comprehension concerning the subject. Equal uncertainty surrounds the working of the procedural machinery for dealing with transactions that involve a director's conflicting interest.").
By way of definition, RCW 23B.08.700(2) provides that a "[d]irector's conflicting interest transaction" is "a transaction effected or proposed to be effected by the corporation, or by a subsidiary of the corporation or any other entity in which the corporation has a controlling interest, respecting which a director of the corporation has a conflicting interest." Absent such a conflict, the WBCA sets forth a bright-line rule that insulates transactions from shareholder challenges:
A transaction effected or proposed to be effected by a corporation, or by a subsidiary of the corporation or any other entity in which the corporation has a controlling interest, that is not a director's conflicting interest transaction may not be enjoined, set aside, or give rise to an award of damages or other sanctions, in a proceeding by a shareholder or by or in the right of the corporation, because a director of the corporation, or any person with whom or which the director has a personal, economic, or other association, has an interest in the transaction.
RCW 23B.08.710(1) (emphasis added).
For practical purposes, a director's interest in a completed or proposed transaction to be entered into by the corporation, a subsidiary of the corporation, or another company in which the corporation has a controlling interest, is a "conflicting interest transaction" if the director knows at the time of commitment that the director or a related person:
a. . . . is a party to the transaction or has a beneficial financial interest in or so closely linked to the transaction and of such financial significance to the director or a related person that the interest would reasonably be expected to exert an influence on the director's judgment if the director were called upon to vote on the transaction;
or
b. The transaction is brought, or is of such character and significance to the corporation that it would in the normal course be brought, before the board of directors of the corporation for action, and the director knows at the time of commitment that any of the following persons is either a party to the transaction or has a beneficial financial interest in the transaction or is so closely linked to the transaction and of such financial significance to the person that the interest would reasonably be expected to exert an influence on the director's judgment if the director were to vote on the transaction:
(ii) a person that controls one or more of the entities specified in (b)(i) of this subsection or an entity that is controlled by, or is under common control with, one or more of the entities specified in (b)(i) of this subsection; or
(iii) an individual who is a general partner, principal, or employer of the director.
RCW 23B.08.700(1)(a) & (b).
" 'Time of commitment' respecting a transaction means the time when the transaction becomes effective or, if made pursuant to contract, the time when the corporation, or its subsidiary or the entity in which it has a controlling interest, becomes contractually obligated so that its unilateral withdrawal from the transaction would entail significant loss, liability, or other damage." RCW 23B.08.700(5).
" 'Related person' of an individual means (a)(i) the spouse, or a parent or sibling thereof, of the individual, or a child, grandchild, sibling, parent, or spouse of any thereof, of the individual, or a natural person having the same home as the individual, or a trust or estate of which a person specified in this subsection (3)(a) is a substantial beneficiary; or (ii) a trust, estate, incompetent, conservatee, or minor of which the individual is a fiduciary . . . ." RCW 23B.08.700(3)(a).It is important to note that the WBCA's conflicting interest framework is limited to "transactions." For the purposes of conflicting interest analysis, a "transaction" generally connotes negotiations or consensual bilateral activity between the corporation and another party. A "transaction" is not simply unilateral action by the corporation or by the director, but rather the striking of a "deal." SOURCEBOOK §§ 8.70-.73 at 08.700-5. So, for example, the conflicting interest provisions do not apply to directors who...
