Identify every material relationship
A director may propose that the corporation buy services from a business the director owns or manages. The commercial terms and the conflict process both need attention. Begin with the parties, financial interests, family or business relationships and the benefit the director expects. A statement that the price is competitive does not replace disclosure of the relationship, while disclosure alone does not establish that every approval requirement has been met.
Delaware General Corporation Law section 144 contains rules for interested director or officer transactions and distinct provisions for controlling-stockholder transactions. The current statutory framework should be checked rather than relying on an outdated generic conflict policy. Identify which category applies and which approval or fairness route is being evaluated.
Compare the actual economics
Suppose the director’s affiliate offers a two-year service contract at $12,000 monthly. The total stated commitment is $288,000. An unrelated supplier proposes $11,000 monthly plus a $20,000 setup charge, totaling $284,000 over the same period. The affiliate’s headline monthly price is $1,000 higher, but the two-year difference after the assumed setup fee is $4,000.
That comparison is useful but incomplete. Scope, termination rights, service quality, transition cost and credit risk can matter. The board should receive the full comparison and the director’s relationship information. The example does not prove fairness or establish a statutory safe harbor. It shows how to avoid approving an affiliate transaction from a monthly-price comparison that omits a material part of the commitment.
Choose the applicable approval route
Identify disinterested decision makers and any committee requirements under the applicable statutory category. Preserve the material facts provided to them. A director’s absence from the room is not a complete conflict process if the remaining decision makers lack necessary information or authority. Conversely, a person should not be labeled disinterested solely because the company’s ordinary roster uses that description for unrelated purposes.
If stockholder approval is the chosen route, identify the relevant disinterested holders and the required informed, uncoerced voting process under the applicable rule. Do not use a controlling owner’s ordinary majority vote as a substitute for an approval designed to exclude interested votes. The transaction packet should explain which route the company actually followed rather than listing every possible route without documenting any one of them.
Keep negotiation and execution within the authority granted
Record who negotiated the terms, who could reject the proposal and what alternatives were considered. If a committee is authorized to negotiate, provide the authority expressly and preserve its work. A committee formed after the commercial terms are effectively final may present different facts from one empowered at the outset. The record should describe the actual sequence honestly.
Compare the signed contract with the approved terms. If the affiliate later adds a material fee or changes renewal rights, determine whether further approval is needed. Keep the director’s ordinary compensation and the affiliate’s service invoices separate in accounting. A conflict approval does not establish deductibility, arm’s-length tax pricing or proper payroll classification; those analyses require their own support.
Monitor performance after approval
Require evidence that the affiliate delivered the contracted services and review renewal decisions under the same documented relationship. Track payments against the approved contract so that additional charges do not bypass the original decision. If the director’s ownership or control changes, update the conflict information. A one-time disclosure form should not remain the only record for a multiyear arrangement.
This article does not determine director independence, classify a controlling stockholder or establish that a particular transaction is protected under section 144. The current law, facts and completed process control. The useful decision is to identify the conflict category and follow a supported approval route before signing, with a complete economic comparison and a record of who had authority to negotiate and reject the deal. Include the approved relationship and renewal date in the purchasing register, so a new employee cannot renew the affiliate contract automatically without recognizing that the original approval depended on disclosed interests and a particular documented decision approval process. Preserve the original supplier comparisons and disclosed relationship statement with the signed contract.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.