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One of the essential issues regarding credit union conversions to mutual savings banks is the matter of fairness. Few would likely object to any credit union action where the members were fully informed of the consequences and consented to the action with eyes wide open. So how do we know if members received a fair shake or not in a conversion transaction? One way is to look for direction from the arbiter of most disputes. the courts. There is a concept of evenhandedness found in case law. This doctrine is called the Entire Fairness Test. The Entire Fairness Test was employed in the 1983 Delaware court case Weinberger v. UOP, Inc. In Weinberger, the court advocated an Entire Fairness Test in situations that involve a fundamental transaction. A fundamental transaction is an event that potentially changes an organization’s structure Fundamental transactions including mergers, sale of significant business assets, voluntary dissolutions and amendments to the articles of incorporation. An incident that converts a credit union to another kind of financial institution is no doubt a fundamental transaction. The Entire Fairness Test applies a two-part analysis. First, is the requirement that the transaction be fairly dealt: secondly, the test calls for a fair price. Fair dealing requires a director to consider how the transaction was constructed. Factors that affect fair dealing in a conversion transaction may include questions of how the deal was timed, how the subject of conversion was first raised, who negotiated the matter, how fellow directors were informed of material facts and how approvals were obtained from the board. Fair dealing requires directors to act free of fraud and misrepresentation. A board member should disclose all information that is relevant to the transaction. Information is relevant if a reasonable member would consider such data important when deciding whether to support a conversion of the credit union. Here, the reasonable person standard is defined as that of an ordinary, prudent person under the circumstances. The second prong to the Entire Fairness Test is the examination of fair price. This can appear to be an awkward concept for credit unions. After all, there is no marketable commodity for which members are offered a price. But there is a price for which members stand to lose in a conversion transaction. Members’ share values are aggregated into the net worth of the credit union. However this share value is traded, sold or distributed, members have a stake in its outcome. The Entire Fairness Test stems from the fiduciary duties imposed on the directors and officers of a credit union. Credit union directors owe a duty of loyalty to the membership. The duty of loyalty is breached when a director acts in his or her self-interest. A duty of loyalty violation is often referred to as a conflict of interest. If during the discussion of a credit union conversion, the director’s interest is drawn to personal gain, the director has lost sight of the primary interest of the membership. By definition a director with personal interest has become an interested director in the transaction. Interested directors must announce their interest and remove themselves from the decision process. Directors also owe a duty of care to the membership. The duty of care encompasses the way a director goes about performing his or her duties. A director must act in good faith and in a manner the director reasonably believes to be in the best interests of the credit union. Further, a director must act with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. The duty of care includes a duty to be properly informed on matters where a director is expected to act. It would be unacceptable, for instance, for a director to vote on a conversion issue if ample opportunity was not given to prepare and research the topic. When looking at a credit union vote to convert to a mutual savings bank, one should ask about the fairness of the process. The failure to play fair can result in director liability and a compensable injury, for which members deserve a remedy.

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