This is a duty of loyalty issue. When there is a board decision and a conflict of interest arises (like in this circumstance) a court would look at whether the transaction was fair to the company and shareholders to determine if there has been a breach of fiduciary duties. Generally, a board needs to make sure that the deal was both procedurally fair (voted on and approved by disinterested board members, special committees, etc...) and substantively fair (fair dealing, fair price). There is a ton of case law that fills in all the cracks as to what procedurally fair and substantively fair actually mean but that's a high level overview.

The single most important thing in conflicts of interest is up front disclosure. If you let everyone know what's going on, there is rarely an issue. (This is what ultimately brought down the CEO of LendingClub [0])

One challenge is we never see the instances where boards shoot down pet M&A projects, because those discussions happen behind closed doors without a merger announcement.

[0] http://www.wsj.com/articles/lendingclub-ceo-resigns-over-sal...

Usually, you would have the transaction approved (or rejected) by the disinterested members of the board (i.e. the directors with no conflicts of interest).

Yup, something similar happened with the Tesla/SolarCity acquisition: "Mr. Musk said Monday he wasn’t involved in the decision making about the valuation of the purchase." [1]

[1] http://www.wsj.com/articles/tesla-and-solarcity-agree-to-2-6...

Suppose the conflicted interest on the board has majority share - would they still sit out on the vote?

Yes, what they're looking for is a majority (or 2/3 or whatever threshold is called for in the bylaws) of the disinterested directors.

If there are no disinterested directors, or it's something like 5 out of 6 directors are conflicted and the 1 director isn't comfortable going it alone, then the company might ask for approval of a majority of the non-conflicted shareholders. This isn't strictly required I think, but it's considered the safe thing to do.

Not sitting out opens you up to lawsuits. But, a lot of sketchy crap goes on.

How does it work when Person A,B & C equally owns Company X which has cash reserves of 10m and liabilities of 10m

Person A & B also own Company Y.

Company X buys out Company Y for 5m which later leads to bankruptcy of Company X with creditors left holding the can.

How is conflict of interest treated here? What if Person C also has equal shares in Company Y. Is Company X debarred from buying Company Y. Can creditors sue Company X directors ?

This case may be relevant https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.

Henry Ford, in his 3rd attempt at starting a car company, began what we know as Ford Motor today. His previous two ventures had failed; the first was run by the Leland team and renamed Cadillac; the second dissolved; the third made cars using Dodge Brothers engines, transmissions and differentials. According to "Wheels for the World" by Brinkley, the 3rd company of Ford's had run up quite a debt to the Dodge Brothers while getting the Model T going. Henry cut them in as shareholders in order to pay off his parts bill. Once it was a sales hit, Henry Ford resented giving the Dodge Brothers such a high percentage of the profits and did not want to purchase the drivetrain from them anymore. He started manufacturing his own drivetrains to cut them out of the picture.

So there is a lot of case history built upon Dodge V Ford, and the actual story is a fascinating thing to compare to modern day Silicon Valley.

My main takeaway from reading "Wheels for the World" by Brinkley was the similarity between the tech boom and the auto boom in the early 1900s. Many startups, a few succeed, and then consolidation as the industry matures - Microsoft acquires LinkedIn, Facebook buys WhatsApp, etc.

https://www.amazon.com/Wheels-World-Company-Century-Progress...

When Oracle bought NetSuite there was a special committee put together to handle all the negotiations exactly because of Larry Ellison's personal investment into NetSuite.

that increase in value is peanuts compared to Benioff's net worth of 4.2 billion https://www.google.com/?ion=1&espv=2#q=benioff%20net%20worth

Irrelevant. On a personal level, he didn't get to his current net worth by not seeking out lucrative deals. It's also irrelevant from the legal perspective (see Martha Stewart).

Martha Stewart went to jail for lying about something. Also, don't confuse strict liability torts with those that require negligence or intent to harm. But certainly if a strict liability statute _is_ violated, you're right that it doesn't matter if it was "just a little bit".

Good point and observation. In this particular case, it is moot since Benioff is above doing any side-deals to put more money into his kitty. I would certainly suspect a VC on a public company board and the company buying the start-up VC invested in. Lots of examples like that.

How is it moot? on the Salesforce side Salesforce is giving Benioff personally a huge exit with shareholder money.

On the Quip side he will recuse himself from the final decision, but of course he had insider info, and can offer a lot of reasons board, management might not want to look for a higher.

Seems like a nice exit, but seems foolish to pretend conflicts don't exist. In fact, like someone said "no conflict, no interest."

Oh! Sorry for the confusion. Conflicts do exist. I am was speaking purely from the point of view of Benioff pulling of something questionable with the express intention of putting in more money in his kitty or do good for his investments opportunistically. I was saying Benioff is beyond that. Legally speaking, he will have to tread this carefully, and show that he didn't shirk his fiduciary duty as a board member and CEO while making this deal.

> In this particular case, it is moot since Benioff is above doing any side-deals to put more money into his kitty.

What makes you say this?