Q. Is it illegal or unethical for the board president of an association to work for the company that manages or provides community management services for his association? If it is okay, can the president then be involved in negotiations and the signing of a new contract with the management company? What if he causes the new contract to be negotiated and signed on his own?
A. According to Michael Schulman, attorney with Wolf, Rifkin, Shapiro, Schulman & Rabkin, LLP in Las Vegas, “Certain provisions of Nevada Revised Statutes (NRS) 116, the law governing common interest communities in Nevada, have three sections that are directly applicable to the facts set forth in the above referenced question. Additionally, general corporate law in the state of Nevada provides law which will also govern this particular situation. There is no simple answer to this question because it is technically not illegal or unethical for the president to work for the company that provides community management services to his association, but there are numerous provisions of the law that touch on this particular situation and could be read to preclude it.
“First, NRS 116.31034 subsection 9 provides, in pertinent part, the following: ‘Each person who is nominated as a candidate for membership on the executive board ... must: (a) Make a good faith effort to disclose any financial, business, professional, or personal relationship or interest that would result or would appear to a reasonable person to result in a potential conflict of interest for the candidate if the candidate were to be elected to serve as a member of the executive board…’
“Clearly, if a candidate for the association’s board of directors knew that the association is under contract to a company for which he worked, or that such company would bid for the contract, the candidate would have to disclose that relationship on his candidate’s statement, or he would be violating NRS 116.31034.
“NRS 116.31034 subsection 10 provides the following: ‘Except as otherwise provided in subsections 11 and 12, unless a person is appointed by the declarant: (a) A person may not be a candidate for or member of the executive board or an officer of an association if:... (2) The person stands to gain any personal profit or compensation of any kind from a matter before the executive board of the association; or (3) The person, the person’s spouse, or the person’s parent or child, by blood, marriage, or adoption, performs the duties of a community manager for that association;...’
“One would assume that if a person works for a company that is going to obtain the management contract from the association and such person also serves on the board, or as an officer, that person will gain some kind of profit or compensation based on his employment by the company. The language of the statute is not 100% clear, but most people would argue that in this particular situation, the person concerned would be barred from running for the board if the company he worked for managed the association.
“There is another provision in the law [NRS 116.31187] which provides that a member of the board cannot enter into a contract with the association for goods or services. Please note that neither of the sections referenced is sophisticated enough to include a prohibition against a company in which the president owns shares or an interest or a company for which the president works being similarly barred from entering into a contract with the association where the company would provide management services.
“Generally, corporate law provides that if a member of a board of directors has a conflict of interest with respect to a matter, including, but not limited to, the engagement of a certain company, either because he works for such company, he owns shares in such company, or he has family members or friends that work for such company, then the board member is supposed to disclose such conflict of interest and recuse himself from voting thereon. The language relating to such corporate conflicts of interest is in both NRS 116 and NRS 82. The interesting part is, it arguably specifically conflicts with the language of NRS 116.31034 (quoted above), which states a person who may stand to gain any personal profit, compensation from anything that comes before the board, may not be a board member. That conflict between the statutes has never been tested in court. Arguably, both sections can be read together and there are certain cases in which a board member may have a conflict of interest, but not have a financial interest in something coming before the board, and therefore, could remain on the board, but recuse himself from voting on the specific issue.
“The bottom line is, if any officer or board member has a conflict of interest in any matter that comes before the board, the board member needs to disclose the conflict and likely recuse himself and not vote on such matter.
“With respect to the final hypothetical of the board member negotiating a contract with a company he works for without any other members of the board being involved, that would be a breach of the ethical duties of the board member. …[I]f an association is going to negotiate a contract with a company for which one of its board members or officers works, then [again] the board member or officer should at least recuse himself and not participate in the vote. The Nevada law may even be interpreted someday to provide that the board member or officer has to resign from his position as a board member or officer if he stands to receive any financial gain from the actual contract. As stated above, that final issue has not been tested in the Nevada courts or in cases before the Commission for Common Interest Communities and Condominium Hotels.”