The board of directors for every community association has a fiduciary duty to the entire membership. This duty includes both the duty of care and the duty of loyalty. As part of the duty of loyalty to the association, directors have an obligation to disclose any transaction which presents a conflict of interest. Under Georgia law, a director has a conflict of interest if the director or a “related person” to the director: (1) is a party to a transaction with the association; (2) has a beneficial financial interest in the transaction with the association; or (3) is so closely linked to the transaction and it is of such financial significance to the director or a related person that it would reasonably be expected to exert an influence on the director’s judgment and/or vote.
“Related person” in this context will include the director’s spouse, parent, sibling, child or grandchild, or any person living with the director. For example, if a board is considering hiring a landscaping company owned by the husband of the board president, this is a conflict of interest.
Just because a conflict of interest exists, however, does not mean that the transaction cannot take place at all. In order to properly navigate a conflict of interest transaction, the director with the conflict of interest must disclose the conflict to the other board members, and then the transaction must be approved by a majority (but not less than two), qualified directors. A “qualified director” is one who does not have a conflict of interest and who does not have a familial, financial, professional or employment relationship with the conflicted director.
Unless he or she cannot disclose the nature of the conflict for any reason, the director with the conflict of interest can participate in the discussion. The transaction would not be approved, however, unless and until it is approved by a majority of the qualified directors. In most cases, it is easier for the remaining board members to ask the conflicted director to recuse himself/herself from the discussion and the vote.
The existence of a conflict does not always automatically translate into an improper transaction. So long as the conflict is disclosed and handled correctly under the law, such transactions can occur.