Q&A: Conflict of Interest?

Q. Is it illegal for a member on the HOA board to also hold a position on the board of directors of the property management company that the HOA hires and oversees?

          —Concerned About Impropriety

A. “There is nothing illegal about a member of the governing board of a community association holding a position on the board of directors of the property management company hired by that community,” says attorney Martin Cabalar of Becker & Poliakoff in Morristown.  “In fact, the New Jersey Non-Profit Corporations Act, N.J.S.A. 15A:1-1, et seq., specifically provides that a contract or other transaction by a non-profit corporation (such as a community association) with another business entity (such as a management company) is not void solely because one or more of the trustees or directors of the non-profit corporation also has an interest in the contracted business entity. See N.J.S.A. 15A:6-8 (a). 

“While not illegal, contracting with an entity that a member of the board has an interest in is not typically recommended because of the procedures that need to be put into place to protect any potential conflicts of interest. For example, to be a valid contract, the Non-Profit Corporations Act requires that: (1) the contract or other transaction must be fair and reasonable at the time it is approved; (2) the interest of the board member must be disclosed or known to the board; and (3) a majority of the disinterested trustees must vote to approve such contracts or transactions. See N.J.S.A. 15A:6-8 (a) (1) and (2). Even where there is no conflict of interest, and despite the fact that all of these procedures are easily implemented, many communities will steer clear due to the appearance of impropriety that may exist in the eyes of their residents. Thus, while not required by the Non-Profit Corporations Act, I would further recommend that the interested trustee recuse him or herself from all discussions and any decisions concerning their interest in the management company.

“Put simply, to avoid any conflict of interest or appearance of impropriety, the governing board of a community association should seek the advice of legal counsel before contracting or transacting business with any person or entity that a member of the governing board has a personal or financial interest in. The association’s legal counsel is best suited to advise and assist the governing board with implementation of appropriate procedures should the board determine to contract or transact business with a person or entity that a member of the board has a personal or financial interest in.”  

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