Corporate Interested-Director Transaction Requirements in Arizona
At a glance
| Governing law, entity, transaction, and covered-person scope | A.R.S. §§ 10-860 to -863; transaction effected/proposed by corporation, subsidiary, or other corporation-controlled entity respecting which corporation director has conflicting interest. Ordinary route names directors, not officers (§§ 10-860(1)-(2), 10-861) |
|---|---|
| Interest, relationship, control, and materiality definitions | Known-at-commitment conflict includes director/related-person party status or beneficial financial/close link financially significant enough reasonably to influence judgment; board-significant transaction also reaches director's other entity/control/common-control or general-partner/principal/employer ties. Related-person family/home/trust/estate/fiduciary list (§ 10-860(1)-(3), (5)) |
| Required disclosure, facts, timing, knowledge, and recipients | Director discloses existence/nature plus all known subject-matter facts ordinarily prudent person would reasonably believe material. Board route allows knowledge; confidentiality-duty branch permits modified disclosure before vote plus no deliberation/vote. Shareholder route adds transaction notice, required disclosure/knowledge, and pre-vote share-identification to secretary/tabulator (§§ 10-860(4), 10-862(A)-(B), 10-863(A), (C)) |
| Disinterested or qualified board/committee composition, quorum, vote, and good faith | Majority, but ≥2, qualified directors who vote after disclosure/knowledge; same majority/≥2 is special quorum. Committee must be all qualified and either all board-qualified directors or majority-appointed by them. Nonqualified presence/vote does not affect compliant action; no separate good-faith condition stated (§ 10-862) |
| Disinterested shareholder notice, voting group, quorum, consent, and threshold | Majority of all votes entitled from qualified shares and same voting-power quorum after notice/disclosure. Excludes shares known before vote to be beneficially owned/vote-controlled by conflicted director/related person. Identification-only failure permits court discretion if director proves no outcome determination or intended influence (§ 10-863) |
| Fairness alternative, relevant time, burden, and statutory standard | Transaction established fair to corporation under circumstances at commitment time: consummation, or contractual point when unilateral withdrawal entails significant loss/liability/damage. Remedy seeker first proves by clear and convincing evidence that none of § 10-861(B)'s routes applies; no fairness factor list or separate who-proves-fair allocation (§§ 10-860(5), 10-861(B)-(C)) |
| Interested-person presence, participation, vote, abstention, and written consent | Nonqualified director presence/vote does not affect compliant board action; modified confidentiality route requires conflicted director play no direct/indirect part in deliberation/vote. Ordinary no-meeting board action requires all directors' consents; general shareholder consent has meeting-vote effect but must still satisfy qualified-share procedure (§§ 10-704, 10-821, 10-862(B)-(C), 10-863) |
| Controlling stockholders, officers, compensation, and special transaction routes | No ordinary officer, controlling-stockholder, going-private, or public-company conflict branch in article. Board generally fixes director compensation unless articles/bylaws provide otherwise. No separate business-opportunity route in §§ 10-860 to -863 (§ 10-811) |
| Statutory effect, remedies, records, fiduciary, and public-company boundaries | Non-conflict transaction cannot face injunction/set-aside/damages/other sanctions merely for director/associate interest; conflict transaction gets same limited effect upon route, subject to claimant's clear-and-convincing threshold. Tabulator failure permits tailored court action; permanent meeting/consent/committee records required. Authorization, governing documents, fiduciary, securities, and other grounds remain (§§ 10-861, 10-863(D), 10-1601(A), (D)) |
Requirements one by one
The conflict trigger is defined at the time of commitment
A.R.S. § 10-860 covers an effected or proposed transaction by the corporation, a subsidiary or another entity in which the corporation has a controlling interest. A director has a conflicting interest when the director knows at commitment time of listed party status, a beneficial financial interest or a financially significant close link reasonably expected to influence judgment.
For a transaction brought or normally significant enough to be brought before the board, the definition also reaches listed ties through another entity, control or common control, or a general partner, principal or employer. The related-person definition separately covers specified family, household, trust, estate and fiduciary relationships.
Commitment time is consummation or, for a contract, the point when unilateral withdrawal would entail significant loss, liability or other damage. That time controls both the knowledge inquiry and the fairness measurement.
Required disclosure includes the conflict and material subject-matter facts
Required disclosure comes from the conflicted director. It includes the conflict's existence and nature and every known subject-matter fact that an ordinarily prudent person would reasonably believe material to deciding whether to proceed.
The qualified-director route accepts disclosure to the extent the facts are not already known. A narrow modified route applies when neither the director nor a specified related person is a party and a legal, professional or other confidentiality duty prevents full subject-matter disclosure. The director must describe the conflict and the duty's character and limits before the vote and play no direct or indirect part in deliberation or voting.
Qualified-director approval has a two-person floor
A.R.S. § 10-862 requires the affirmative vote of a majority, but at least two, of the qualified directors who vote after disclosure or qualifying modified disclosure. A committee must be entirely qualified and contain either all qualified board directors or members appointed by their majority.
The special quorum is also a majority but at least two of all qualified directors on the board or committee. A nonqualified director's presence or vote does not affect otherwise compliant action, but that vote is not part of the qualified majority.
A qualified director lacks both a conflicting interest and a listed relationship to a second conflicted director that could reasonably be expected to influence the first director's vote. The section does not add a separate good-faith condition to that defined approval formula.
Qualified-share approval uses all eligible voting power
A.R.S. § 10-863 requires a majority of the votes entitled to be cast by all qualified shares, rather than merely a majority of votes cast. The same qualified-share voting-power majority forms the special quorum.
Qualified shares exclude shares that the secretary or other authorized tabulator knows before the vote are beneficially owned or vote-controlled by the conflicted director or a related person. Before the vote, the director must identify the number and holders or vote controllers of all such known shares.
When the vote fails only because of that identification duty, the court has discretion to give the vote an appropriate effect if the director establishes that the failure neither determined nor was intended to influence the outcome. That is not an automatic cure.
Notice, disclosure and the qualified-share count are cumulative
The shareholder route requires notice describing the transaction, the director's share-identification information and required disclosure to voting shareholders to the extent they do not already know the information. Subject to the identification and court-discretion provisions, nonqualified-share holders and votes do not affect otherwise compliant action.
A.R.S. § 10-704 gives a properly delivered shareholder consent meeting-vote effect. The default permits holders with the meeting minimum to act, but a corporation formed before August 6, 2016 defaults to unanimity unless its articles or bylaws adopt the later threshold. The conflict-specific qualified- share, notice and disclosure requirements still apply, and nonconsenting shareholders receive the general post-action notice within thirty days.
Fairness and the remedy claimant's threshold are separate
The third route applies when the transaction is established as fair to the corporation under the circumstances at commitment time. Section 10-861 gives no factor list or express allocation of who must establish fairness.
It does separately require any person seeking injunction, set-aside, damages or other sanctions first to prove by clear and convincing evidence that none of the subsection B routes applies. That claimant threshold should not be restated as a statutory conclusion that a particular transaction was fair.
Ordinary board consent still requires every director
A.R.S. § 10-821 makes ordinary no-meeting board action dependent on all directors through written or electronic consents included in the minutes or records. The last director's signature ordinarily sets effectiveness, and any director may revoke by signed delivery to the president or secretary before then.
The conflict article creates no special consent route letting an interested director omit a required signature. At a meeting, the different § 10-862 rule permits nonqualified presence or voting without defeating an otherwise compliant qualified vote.
Compensation is separate from the conflict article
A.R.S. § 10-811 generally lets the board fix director compensation unless the articles or bylaws provide otherwise. Sections 10-860 through 10-863 do not extend the ordinary conflict transaction to officers or create a separate controlling-stockholder, going-private, business-opportunity or public-company procedure.
The statutory effect is interest-specific
A.R.S. § 10-861 provides that a non-conflict transaction cannot be enjoined, set aside or support damages or sanctions merely because a director or associate has an interest. A defined conflict transaction receives the same limited interest-based effect after compliant director action, shareholder action or the fairness route.
The section does not declare universal authorization, validity, fairness, enforceability or immunity from another legal ground. A.R.S. § 10-1601 requires permanent meeting, consent and delegated-committee records; those records do not alone establish the conflict definition, disclosure, qualification, vote count or fairness.
What trips people up
Arizona uses two different majorities. The board route is a majority of qualified directors who vote, with an absolute two-director floor. The shareholder route is a majority of all votes entitled to be cast by qualified shares, an outstanding eligible-voting-power denominator rather than a votes- cast denominator.
The clear-and-convincing rule is also procedural. It requires the person seeking specified relief or sanctions to establish first that the statutory protection does not apply; it does not itself determine interest, qualification, disclosure, fairness or entitlement to relief on another ground.
Common questions
May one qualified director approve the transaction?
No. Section 10-862 requires both the approval majority and the special quorum to include at least two qualified directors.
Do shares controlled by the conflicted director count?
Not as qualified shares when the secretary or tabulator knows before the vote that the conflicted director or a related person beneficially owns or controls their vote. Section 10-863 has a narrow discretionary court route for a qualifying identification-only failure.
Does a compliant route make the transaction valid for every purpose?
No. Section 10-861 limits specified remedies or sanctions because of the director's or associate's interest. It does not decide independent authorization, governing-document compliance, fiduciary duties, securities law or relief based on another ground.
Statutes and sources
- A.R.S. §§ 10-860 through 10-863 — definitions, judicial effect and proof threshold, qualified-director action, and qualified-share action. Official Arizona Legislature sources: § 10-860, § 10-861, § 10-862, and § 10-863, accessed September 4, 2026.
- A.R.S. §§ 10-704 and 10-821 — shareholder and director action without a meeting. Official shareholder-consent section and official director-consent section, accessed September 4, 2026.
- A.R.S. § 10-811 — director compensation. Official current section, accessed September 4, 2026.
- A.R.S. § 10-1601 — permanent corporate action records. Official current section, accessed September 4, 2026.
Source links
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