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Second, if a transaction is approved in advance by the vote of the board of directors or a committee of the board the transaction will not violate section 8.31 if:

(a) the material facts of the transaction and the director's interest in the transaction were disclosed or known to the board or committee. Although not required, good practice would result in a written record of the facts disclosed or known to the directors. Even if there are no such records and no disclosure was made, this information requirement can be met if the directors at the time they approved the transaction knew the material facts of the transaction and the director's interest in the transaction; and

(b) the directors approving the transaction reasonably believed the transaction was fair to the corporation. It is not necessary to prove that the transaction was in fact fair to the corporation, just that the directors believed it was fair and had a reasonable basis upon which to form this opinion. See discussion of Reasonable Belief, Good Faith, and Reliance in Official Comment to Section 8.30. Even if the directors were wrong in believing that it was fair, the transaction will not violate section 8.31 so long as the directors approved it in conformity with section 8.31; and

(c) the transaction was approved before it was consummated.

Third and fourth, court or attorney general approval of the transaction may be obtained before or after the transaction was consummated. The Model Act does not specify the method of obtaining attorney general approval. This matter is left to the individual states. Nor does the Model Act specify the grounds upon which a court should approve a transaction. Presumably, however, a court will evaluate the fairness of the transaction after consideration of all relevant facts. If court or attorney general approval is obtained, the transaction cannot be challenged on the ground that it violates section 8.31.

b. Mutual Benefit Corporations

There are three ways in which a conflict of interest transaction may meet the requirements of section 8.31 for a mutual benefit corporation.

First, a transaction that is fair at the time it is entered into meets the requirements of section 8.31. Second and third, the board of directors or members may approve the transaction either before or after it is consummated. If it is approved by the board or members in conformity with section 8.31, the person seeking to uphold the transaction does not have to prove it was fair. In each case the directors or members must

3. Vote and Quorum

Subsection (e) sets a special quorum and vote requirement when the board votes on a conflict of interest transaction. A quorum is present and a transaction is approved by the board when a majority of the directors on the board who have no direct or indirect interest in the transaction vote to authorize the transaction. The articles or bylaws may impose a higher quorum or vote requirement. See sections 7.22 and 7.23. In no event may one director approve a conflict of interest transaction.

An interested director may be present when the vote is taken. In some instances good practice requires the director's presence at a meeting to answer questions about the transaction. While it might be desirable to request an interested director to leave prior to the vote, the Model Act does not require the director or officer to leave during the discussion or the vote. In fact the interested director may vote on the transaction if the transaction is otherwise approved as provided in subsection (b) or (c).

4. Materiality

Section 8.31 applies to transactions between a nonprofit corporation and an entity in which the director of the nonprofit corporation has a "material" interest.

Not every transaction in which a director has an interest will involve a material interest. Some transactions will involve an immaterial interest. An interest is material if there is a substantial likelihood that a reasonable person would consider it important in deciding what action to take. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). The richer the director and the smaller the transaction the less likely it is that the transaction will be material.

Section 8.31(c) requires disclosure or knowledge of the "material" facts of a conflict of interest transaction prior to approval of the transaction by the directors or members. A fact is material if there is a substantial likelihood that a reasonable person would consider it important in deciding how to vote. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).

5. Additional Requirements

Nonprofit corporations may prohibit or impose additional requirements for approval of transactions involving interested directors or officers. A supermajority vote, board and not just committee approval, and other

6. Remedies

Section 8.31 does not specify remedies for a violation of section 8.31. However the underlying philosophy of sections 8.30 and 8.31 is contrary to the strict trust concept that interested directors can never obtain a profit when dealing with their corporation.

A court should enter an order that provides an equitable and fair remedy to the corporation taking into account any benefits the corporation received. A court should determine whether the breach of section 8.31 was technical or substantive, whether there was an attempt to deal openly and fairly with the corporation and to act in good faith in furthering the corporation's best inter- ests. In particularly egregious cases involving fraudulent and malicious conduct, a court may grant exemplary damages.

Courts may wish to distinguish between transactions that only involve an interested director and transactions in which an interested director or officer has an indirect material interest. In the latter case it may be unfair to invalidate a transaction between a nonprofit corporation and a third party or to order the third party to pay damages. The nature of the remedy is left to the discretion of the courts.
SOUTH CAROLINA REPORTERS' COMMENTS

Formerly applicable statutory law relating to director conflicts of interest was found at Section 33-8-310 of the South Carolina Business Corporation Act. Present law works several changes, described below.

Section 33-8-310 refers to officers in its title. Its provisions, however, make no reference to officers. Similarly, this section makes no reference to officers. Rules of conflicts of interest of officers are found in the common law of agency.

Prior statutory law addressed only whether a conflict-of-interest transaction was voidable "by the corporation". The present statute omits the reference to the corporation, and provides instead that a conflict-of-interest transaction complying with the section "is not voidable" (without limitation as to by whom) "or the basis for imposing liability upon the director".

Under prior statutory law, conflict-of-interest transactions were not wrongful if (i) approved by the board while in possession of all material facts, (ii) approved by the shareholders while in possession of all material facts or (iii) regardless of (i) or (ii), fair to the corporation. Under subsection (a) of the present section, a conflict-of-interest transaction is not wrongful so long as it was "fair at the time it was entered into", or is

Except as described above, the present statute preserves the tests of the formerly applicable statute virtually unchanged as to mutual benefit corporations. As to religious and public benefit corporations, the alternative tests to fairness are quite different. They are found at subsections (b)(1) and (2).

The Model Act proposed that transactions in which directors of public interest or religious corporations were interested could be approved only in advance. This has been changed to permit ratification by the board.

Subsections (d), (e) and (f), which are definitional and administrative, are substantially similar to the analogous provisions of the formerly applicable statute, and therefore represent no significant change, with one exception: Subsection (d) omits the qualifying words, "and the transaction is or should be considered by the board of directors of the corporation." These words substantially narrow the scope of prior law. Their omission from subsection (d) indicates that every conflict-of-interest transaction falls within the section.

Subsection (g) explicitly permits corporations to do something probably permissible by implication under prior law -- adopt conflict-of-interest requirements more stringent than those of the statute.

Section 33-31-832. Loans or guarantees for directors and officers.

(a) A public benefit or religious corporation may not directly or indirectly lend money to or guarantee the obligation of a director or officer of the corporation.

(b) A mutual benefit corporation may not directly or indirectly lend money to or guarantee the obligation of a director of the corporation unless:

(1) the loan or guarantee is approved by a majority of all classes of members, except the votes of the affected director, if a member, and any votes controlled directly or indirectly by the affected director shall not be counted; or

(2) the corporation's board of directors determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees or either of them; and

(3) the approving action taken pursuant to (1) or (2) is authorized by the corporation's articles or bylaws.

Section 8.32 prohibits all loans to and guaranties for officers and directors. As potential abuse in this area is great and statutorily distinguishing between appropriate and inappropriate loans is difficult, the Model Act continues the policy of the prior Model Act by prohibiting loans and guaranties. Advances of money from petty cash and for travel and other corporate purposes are not loans within the meaning of section 8.32 and consequently are not prohibited.
SOUTH CAROLINA REPORTERS' COMMENTS

The formerly applicable statute, Section 33-8-320 of the South Carolina Business Corporation Act, permitted loans to officers and directors when approved under certain circumstances by the board or the membership. As to religious and public purpose corporations, the present section constitutes a flat prohibition, representing a distinct change from prior law. As to mutual benefit corporations, the prior law has been retained to the extent permitted by a corporation's articles or bylaws. This constitutes a change from the recommendation of the Model Act. Actions taken pursuant to this section are subject to the standard of Section 33-31-830.

As mentioned in the Official Comment, this section is not intended to make unlawful such practices as travel loans or split-dollar life insurance policies.

This section applies only to transactions taking place on or after the effective date of this statute.

There was strong backing on the committee for omitting religious corporations from the prohibition of subsection (1). Religious corporations were retained within the prohibition largely on the basis of their essential nonfinancial nature. Permitting religious corporations to serve, in effect, as lending institutions appeared to the majority of the committee to be inconsistent with the many privileges accorded to such organizations. Again, attention is drawn to the Official Comment to this section, and to Section 33-31-180.

Section 33-31-833. Liability for unlawful distributions.

(a) Unless a director complies with the applicable standards for conduct described in Section 33-31-830, a director who votes for or assents to a distribution made in violation of this chapter or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating this chapter.

(1) from every other director who voted for or assented to the distribution without complying with the applicable standards of conduct described in Section 33-31-830; and

(2) from each person who received an unlawful distribution for the amount of the distribution whether or not the person receiving the distribution knew it was made in violation of this chapter.
OFFICIAL COMMENT

Section 13.01 prohibits distributions except those authorized by section 13.02. See section 1.40(10). Section 8.33(a) provides that a director who votes for or assents to a prohibited distribution is not liable for such action if the director complies with the standards of conduct set forth in section 8.30. Of course, a director who receives a distribution prohibited by section 13.01 is obligated to return the distribution to the corporation.

A director who breaches his or her duties under section 8.30 in voting for or assenting to a prohibited distribution is liable to the corporation for the amount of the improper distribution.

Section 8.33(b) allows a director who is liable for an unlawful distribution to receive contribution from the directors, if any, who voted for or assented to the distribution without complying with section 8.30 and from each person who received the unlawful distribution. These persons may include members, directors, officers and controlling persons of the corporation. See section 13.01. The exact amount each will have to contribute is left to the equitable powers of the courts.
SOUTH CAROLINA REPORTERS' COMMENTS

Previously applicable statutory law was found at Section 33-8-330 of the South Carolina Business Corporation Act. As does the present statute, Section 33-8-330 makes clear that directors are not personally liable for an unlawful distribution unless there is established, in addition to the unlawfulness of the distribution, the director's failure to comply with the standards of Section 33-31-300.

This section applies to distributions which are in violation of the articles of incorporation, as well as those which are in violation of law. This is a change from the proposal of the Model Act, intended to provide uniformity with the analogous provision of the South Carolina Business Corporation Act.

(a) All directors, trustees, or members of the governing bodies of not-for-profit cooperatives, corporations, associations, and organizations described in subsection (b) are immune from suit arising from the conduct of the affairs of these cooperatives, corporations, associations, or organizations. This immunity from suit is removed when the conduct amounts to wilful, wanton, or gross negligence. Nothing in this section may be construed to grant immunity to the not-for-profit cooperatives, corporations, associations, or organizations.

(b) Subsection (a) applies to the following:

(1) electric cooperatives organized under Chapter 49, Title 33;

(2) not-for-profit corporations, associations, and organizations, as recognized in and exempted from taxation under Federal Income Tax Code Section 501(c)(3), (c)(6), or (c)(12).
OFFICIAL COMMENT

None
SOUTH CAROLINA REPORTERS' COMMENTS

This provision relating to immunity from liability was formerly contained in Section 33-31-180 and has been renumbered as Section 33-31-834 to come within the scheme of this revised act.

Section 33-31-840. Required officers.

(a) Unless otherwise provided in the articles or bylaws, a corporation shall have a president, a secretary, a treasurer, and such other officers as are appointed by the board.

(b) The bylaws or the board shall delegate to one of the officers responsibility for preparing minutes of the directors' and members' meetings and for authenticating records of the corporation.

(c) The same individual may simultaneously hold more than one office in a corporation.
OFFICIAL COMMENT

Unless otherwise provided in the articles or bylaws, a corporation shall have a president, secretary, treasurer and such other officers as are appointed by the board. The bylaws may do away with the traditional titles for officers and provide a series of unique titles for those who serve as corporate officers. The board shall appoint all corporate officers. Even if an individual is not designated as "secretary" of the corporation, section 8.40(b) requires the bylaws or the board to delegate to an officer responsibility for preparing minutes of the directors' and members' meetings and for authenticating corporate records. The Model Act treats

In many instances nonprofit corporations are run by and day-to-day responsibility is vested in an employee who is an officer of the corporation, whether called executive director, administrator, chief administrator or by some other name. The president, if any, is a volunteer who is given the title of president in recognition of the significant contributions he or she has made or is making to the organization. The president is not involved in the day-to-day activities of the organization, and may or may not be the most significant member of its board of directors. Under these circumstances the title of "president" may be misleading. The term is certainly not analogous to the president of a business corporation.

In many nonprofit organizations substantial authority rests in an executive director, a full-time officer who runs the day-to-day activities of the corporation and makes basic decisions relating to corporate activities. In such instances the bylaws or a resolution of the board should specify the power and authority of the executive director consistent with the requirement that the affairs of the corporation be managed under the director of the board.
SOUTH CAROLINA REPORTERS' COMMENTS

Unlike previously applicable statutory law, found at Section 33-8-400 of the South carolina Business Corporation Act, this section requires each corporation to have traditional officers. Otherwise, there is no significant change from prior law.

Section 33-31-841. Duties and authority of officers.

Each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties and authority prescribed in a resolution of the board or by direction of an officer authorized by the board to prescribe the duties and authority of other officers.
OFFICIAL COMMENT

Section 8.41 deals with the authority (sometimes called "actual authority") of corporate officers. It provides that these officers shall have the authority set forth in the bylaws, in the resolutions of the board, or that which is delegated to them by an officer authorized to do so by the board.

In addition, certain officers may have limited authority as a result of a particular office they hold. For example, the executive director of a nonprofit organization may have considerable authority as a result of being executive director. Cases dealing with the inherent authority of the

Officers may also have the power to bind the corporation. See Section 8 of the Restatement of the Law of Agency, Second. Also see section 8.45.
SOUTH CAROLINA REPORTERS' COMMENTS

This section makes no change from previously applicable statutory law, found at Section 33-8-410 of the South Carolina Business Corporation Act.

Organizations which at the time of adoption of this section prescribed officers' duties in some document other than the bylaws (or the equivalent, regardless of name; see the definition of bylaws at Section 33-31-140(4)) should restate those duties in a manner consistent with this section.

Section 33-31-842. Standards of conduct for officers.

(a) An officer with discretionary authority shall discharge his duties under that authority:
(1) in good faith;

(2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

(3) in a manner the officer reasonably believes to be in the best interests of the corporation, and its members, if any.

(b) In discharging his duties, an officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:

(1) one or more officers or employees of the corporation who the officer reasonably believes to be reliable and competent in the matters presented;

(2) legal counsel, public accountants, or other persons as to matters the officer reasonably believes are within the person's professional or expert competence; or

(3) in the case of religious corporations, religious authorities and ministers, priests, rabbis, or other persons whose position or duties in the religious organization the officer believes justify reliance and confidence and who the officer believes to be reliable and competent in the matters presented.

(c) An officer is not acting in good faith if the officer has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) unwarranted.

(e) An action against an officer asserting the officer's failure to act in compliance with this section and consequent liability must be commenced before the sooner of (i) three years after the failure complained of or (ii) two years after the harm complained of is, or reasonably should have been, discovered. This limitations period does not apply if the failure to act in compliance with this section has been fraudulently concealed.
OFFICIAL COMMENT

Section 8.42 provides that nondirector officers with discretionary authority have the same general duty of care and loyalty as that of directors set forth in section 8.30. In nonprofit corporations, particularly public benefit or religious corporations where the board of directors is usually composed of volunteers, full-time paid officers have important and significant duties and responsibilities. Nondirector officers with more limited discretionary authority may be judged by a narrower standard, though every corporate officer or agent owes duties of fidelity, honesty, good faith, and fair dealing to the corporation. Official Comment to Model Business Corporation Act Section 8.42.

Section 8.42 allows nondirector officers to rely on certain information, opinions, reports and statements when they do not have knowledge concerning the matter that would make that reliance unwarranted. In the absence of actual knowledge that records presented by the secretary are not truthful or accurate, third persons may rely on the truthfulness and accuracy of such records.

Officers, particularly those who are paid, have a responsibility to actively carry out their duties and obtain information relevant to their position. This information may require the officers to make further inquiries and prevent them from relying on reports that could be relied upon by directors.

In general, the Official Comment to Section 8.30 is applicable to nondirector officers.
SOUTH CAROLINA REPORTERS' COMMENTS

With the exception of new subsection (b)(3), this section represents no substantive change from previously applicable statutory law, found at Section 33-8-420 of the South Carolina Business Corporation Act. With respect to the statute of limitations of subsection (e), see the South Carolina Reporters' Comment to Section 33-31-830.

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