Governance Insights 2024 Nominee Directors: Fiduciary Obligations and the Limits of Information Sharing
particular deal because the shareholder had a liquidity need (e.g., an imminent need to exit a large investment) or a need to crystalize a gain by a certain point in time (e.g., to avoid adverse changes in the tax rules), or because the transaction prioritized the return on the shareholder’s particular investment in the company (such as preferred shares or debt). 4 Given the case law on the duties of nominee directors in Canada, it is reasonable to think that similar litigation could find fertile soil here in Canada. In Manti Holdings, LLC v The Carlyle Group Inc. , the Delaware Court of Chancery denied a motion to dismiss an action alleging that nominee directors breached their fiduciary duties by favouring a premature sale of the company in the interests of their nominating shareholder, a private equity firm whose investment fund had purchased a stake in the company. The company was one of the fund’s remaining investments, and the firm was looking to close the fund imminently. The nominees actively pushed for a sale at a time when it was uncertain whether key customer contracts of the company would be renewed, with the sale price reflecting that uncertainty. The contracts were eventually renewed prior to signing the deal, but the sale price was not refreshed to account for the update. Against the protests of another board member to remarket the transaction, the nominee directors allegedly pushed the company to proceed with the sale as originally priced, in the interests of closing out the fund. 5 Manti Holdings , together with other recent cases in Delaware, signals increasing shareholder and judicial scrutiny of the role of nominee directors in sales processes. Although the Court’s consideration of the facts were limited to the motion before it, and no judicial conclusions were made regarding the conduct of the nominees, Manti Holdings presents a cautionary tale: boards must ensure that their sales processes are not 4 See Goldstein ; Manti Holdings, LLC v The Carlyle Group Inc. , Del Ch, June 3, 2022; Firefighters' Pension System of The City of Kansas City, Missouri Trust v Foundation Building Materials, Inc. , Del Ch, May 31, 2024.
tainted by the participation or influence of conflicted directors; and nominee directors must consider the propriety of their involvement in transactions in light of potential conflicts of interest arising from their relationship (fiduciary or otherwise) with their nominating shareholder.
Information Sharing Between Nominees and Nominators
A DIRECTOR’S RIGHT TO INFORMATION
In view of their corporate oversight obligations, directors are granted unfettered access to company records, subject to certain limited exceptions. The fact that a director has been nominated by a shareholder does not, in and of itself, alter the director’s information access rights. In a prior Governance Insights article we discuss those rare circumstances in which a director’s access to information may nonetheless be restricted, including where the documents relate to a matter in respect of which the director has a known conflict. CONFIDENTIALITY AND INFORMATION SHARING A director’s fiduciary duties include an obligation to maintain the confidentiality of corporate information received in the course of their directorship. This obligation is often repeated in, and may be informed by, the company’s code of conduct or an agreement between the company and director that addresses the latter’s confidentiality obligations. This rather straightforward requirement can, however, sit uncomfortably with the expectations of a nominating shareholder for whom access to information is a
5 Manti Holdings .
4
Davies | dwpv.com
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