In a small company, deals with insiders are not the exception — they are how business gets done. The corporation leases its building from the founder's LLC, borrows bridge money from a director, licenses software from a company where a board member holds equity, or sets the salary of an officer who is also a director. None of that is illegal. But every one of those transactions can be attacked later by an unhappy shareholder or a trustee, and whether it survives can depend heavily on the process used at the time. California's rulebook is Corporations Code § 310, and it rewards companies that follow it deliberately.
What counts as an interested-director transaction
Section 310 covers contracts and transactions between a corporation and one or more of its directors, and between the corporation and another corporation, firm, or association in which a director has a material financial interest. It can apply to "common directorship" deals between two corporations that share a director if that director also has a material financial interest. The interest need not be a signature on both sides: a director who owns a meaningful stake in the counterparty, or whose family member does, is interested for practical purposes. The recurring examples — real estate leases with founder-owned entities, insider loans, service agreements with a director's other business, and compensation for director-officers — are exactly the transactions diligence teams and plaintiffs examine first.
The three paths to a protected transaction
An interested-director transaction is not automatically void. Under § 310(a), it will not be void or voidable merely because of the interest, or because the interested director participated, if any one of three conditions is satisfied:
- Informed shareholder approval. The material facts of the transaction and the director's interest are fully disclosed or known, and the transaction is approved by the shareholders in good faith — with the shares owned by the interested director not entitled to vote. This is the strongest path: it does not require a separate showing of fairness.
- Informed, disinterested board approval plus fairness. The material facts are fully disclosed or known to the board, the board (or a committee) authorizes the transaction in good faith by a vote sufficient without counting the interested director's vote, and the transaction is just and reasonable as to the corporation at the time it is authorized.
- Proving fairness after the fact. If neither approval happened, the person asserting the transaction's validity bears the burden of proving it was just and reasonable at the time it was authorized, approved, or ratified. This path exists, but litigating fairness years later with the burden on the insider is precisely the position good process avoids.
A few mechanics worth knowing: interested directors may be counted in determining a quorum, so a conflicted board can still act; and mere common directorship, without a material financial interest, does not by itself trigger § 310. Compliance with § 310 addresses voidability — it does not immunize a deal that is substantively abusive, because fiduciary duties still apply. Process and fairness travel together.
Running a clean approval, step by step
- Disclose in writing, before the vote. A memo or consent recital describing the transaction, the director's interest, and the material terms. Disclosure must occur before the approval or ratification vote.
- Have the interested director step back. Answer questions, then abstain from the vote — and record the abstention in the minutes.
- Build the fairness record. Market comparables for the lease rate, term-sheet quotes for the loan, a compensation survey for the salary. The file made at the time is what proves "just and reasonable" later.
- Prefer shareholder ratification for the big ones. Where the cap table makes it feasible, disinterested shareholder approval gives the deal its strongest footing.
- Paper the deal like an arm's-length contract. A signed agreement with real terms — not an oral arrangement reconstructed later — plus the approving resolution filed in the minute book.
Why the effort pays
Three audiences will judge these transactions. Shareholder plaintiffs, for whom an unapproved insider deal is the centerpiece of a fiduciary-duty complaint and often the leverage in business litigation. Acquirers and investors, whose diligence lists ask for every related-party transaction and whose lawyers reprice or recondition deals with messy ones. And bankruptcy trustees, who scrutinize insider transactions with hindsight and statutory clawback tools. A § 310-compliant file can help convert each of those conversations from a fight into a document production. Building the routine — conflict disclosures, abstentions, fairness backup, annual review of related-party deals — is standard corporate governance hygiene, and it is far cheaper than defending a voidable transaction.
Talk to a California business attorney
If your company has insider transactions on the books that were never formally approved, or one coming up that should be done right, we can run the § 310 process with you. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
