X is a director owning 20% of ABC and 40% of RST. The contract between the two corporations is:

• A. Valid
• B. Voidable
• C. Unenforceable
• D. Void

Answer: (A)

Related-party transactions between two corporations are allowed as long as proper governance steps are followed. The fact that a director of one company owns significant shares in both companies creates a potential conflict of interest, but it does not automatically nullify a contract between the two entities. What keeps such a contract valid is that the transaction was properly authorized, disclosed, and (where required) approved by disinterested directors or independent shareholders, and that the terms are fair and supported by consideration.

So, if the boards of both ABC and RST gave their approval, the director disclosed his interest and abstained from voting on the decision, and the contract terms are fair, there is no automatic reason for the agreement to be void or voidable or unenforceable. The encounter here hinges on governance and procedure, not on the mere existence of a cross-ownership by a director.

In other words, the contract is valid because related-party concerns are managed through proper authorization and fairness; without evidence of improper conduct, illegality, or lack of consideration, the arrangement stands.