Request By:
John David Caudill, Esq.
P.O. Box 607
Cadiz, Kentucky 42211
Opinion
Opinion By: Robert F. Stephens, Esq., Attorney General; Mark F. Armstrong, Esq., Assistant Attorney General
We are in receipt of your letter in which you ask our opinion of whether the provisions of KRS 271A.205 may be applied to a board of directors of a corporation incorporated under KRS Chapter 273, the Kentucky Non-Profit Corporation Act. KRS 271A.205 provides that a contract in which a director has a personal interest is not void or voidable solely because of his interest when any one of three conditions are met, see KRS 271A.205(1)(a), (b), and (c). There was no similar statute prior to the adoption of KRS Chapter 271A, see Symposium on the New Kentucky Business Corporation Act, 61 Ky.L.J. 91. 141 (1972-73).
Your first question is whether KRS 271A.205 may be applied to a non-profit corporation under KRS Chapter 273. In OAG 74-556, a copy of which is enclosed, we were of the opinion that the provisions of KRS Chapter 271A do not apply to non-profit corporations organized under KRS Chapter 273. We have taken the opportunity of reviewing our prior opinion and have found the discussion and reasoning therein to remain persuasive. Accordingly, we are of the opinion that the privisions of KRS 271A.205 do not apply to the board of directors of a non-profit corporation under KRS Chapter 273 in the execution of contracts
Your second question is if KRS 271A.205 is inapplicable to non-profit corporations, whether these corporations have the common-law option of avoiding contracts entered on behalf of the corporation by directors who have a personal interest therein. As a general rule, a corporation may avoid a contract on the ground of director interest coupled with unfairness, see Ham, Symposium on the Kentucky Business Corporation Act, 61 Ky.L.J. 91, 80-81 (1972-73); H. Oleck, Non-Profit Corporations, Organizations and Associations § 207, at 486 (3d ed. 1974). We do not pass upon the extent of this common-law right, see, however, 16 Hornstein, Corporate Law and Practice § 439.
Summary: We are of the opinion that KRS 271A.205 does not apply to the directors of non-profit corporations under KRS Chapter 273. We are also of the opinion that the common-law remedy of avoiding contracts may be available to non-profit corporations when its directors are guilty of self-dealing in the execution of the contract. We offer no opinion on the extent or applicability of this common-law right of avoidance either generally or in a specific situation. Our opinion is limited to and extends no further than the expression of it in this Summary.