Conflicts of Interest Like all directors, a nominee is required to manage conflicts of interests that would interfere with the exercise of their independent judgment as a fiduciary. The nature of the relationship between a nominee director and their nominating shareholder can be a potential source of conflict with the nominee’s duties to the corporation.
been nominated by a “repeat” nominator, such as a shareholder activist, whose strategy includes the cultivation of symbiotic relationships with nominees in which future directorships are tacitly proffered by the nominator as a quid pro quo for the directors’ cooperation with the shareholder’s agenda.3
MANAGING CONFLICTS
Both the company and the nominee should proactively identify and manage conflicts to which the director may be subject. Even in the absence of formal changes in the relationship between the nominating shareholder and the nominee, the obligation to assess independence is ongoing and should not be limited to a point-in-time analysis undertaken at the outset of the nomination. Although conflicts must be identified and managed in the normal course, scrutiny is paramount for transactions in which the nominating shareholder may have an interest that differs from other shareholders. When a conflict transaction of this nature materializes, the company and the nominee director should confirm (i) whether the nominee remains independent of the nominating shareholder, and (ii) if the nominee is not independent, how the parties can best manage the conflict. Conflicts in corporate transactions can materialize overtly or more subtly. Recent Delaware cases provide instructive examples of how the interests of a company and a nominating shareholder can diverge. Although the duties of a nominee director have been well articulated in Canadian jurisprudence for some time now, Delaware case law offers a fresh application of fiduciary principles to sophisticated commercial transactions. The instances of conflict that have been litigated include situations in which the nominating shareholder has favoured a
SOURCES OF CONFLICT
The determination of a director’s independence is a fact- specific analysis and, in the case of a nominee, requires careful scrutiny of the director’s relationship with the nominator. That said, the fact that a director has been nominated by a shareholder does not, in and of itself, compromise the nominee’s independence. Some sources of conflict may be obvious. For example, where a nominee director is also a fiduciary of the nominating shareholder, the nominee will face the challenge of being a “dual fiduciary” whose obligations owed to one beneficiary (e.g., the duty of confidentiality) have the potential to conflict with those owed to the other (e.g., the duty of disclosure). This is not uncommon in the private equity and venture capital space, where a senior officer of a fund may be placed on the board of an investee company. If the interests of the shareholder and the investee company conflict and cannot be proactively addressed through recusal or similar mechanisms, the nominee’s dual obligations may be rendered untenable and require the nominee to resign. In other cases, the source of conflict arising from a nominee-nominator relationship may not be as direct. For example, in Goldstein v Denner the Court of Chancery of Delaware called into question the independence of a hypothetical director that has
3 Goldstein v Denner , Del Ch, May 26, 2022.
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Governance Insights 2024
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