Governance Insights 2024 Nominee Directors: Fiduciary Obligations and the Limits of Information Sharing
CONTRACTING FOR INFORMATION SHARING RIGHTS Generally, the parties should memorialize a corporation’s consent to information sharing in a written agreement that establishes the terms on which the nominee director may share confidential material with the nominating shareholder. The nominee and the nominating shareholder will want to ensure that the communication of corporate information is undertaken with clear consent from the corporation. The corporation, too, will want to ensure that any information sharing is conducted appropriately with a view to its best interests. Although the parties may be able to rely on implied consent in certain circumstances, a written agreement will usually be the best option. Information-sharing arrangements with a nominating shareholder ordinarily focus on regulating the types of information that a nominee director may share with the nominator and the manner in which disclosure can be made. The details of any such agreement will be fact- specific and highly negotiated but will often address one or more of the following issues: (i) the nominating shareholder’s obligation to treat the information as confidential; (ii) whether the nominee is responsible for the nominating shareholder’s misuse of the information; (iii) restrictions on the use of the information by the nominating shareholder; (iv) limits on the representatives of the nominating shareholder who have access to the information; (v) limitations on information sharing regarding matters that engage conflicts of interest; and (vi) limitations on sharing privileged materials. THE LIMITS OF INFORMATION SHARING: FIDUCIARY OBLIGATIONS Regardless of the terms of any contractual information- sharing arrangement agreed between the parties, a nominee may be liable for breaches of fiduciary duty if they share information for a purpose other than the
best interests of the corporation. Accordingly, the nominee must consider the purpose of the disclosure in each instance, not only to ensure that it complies with the terms of any contractual information-sharing arrangement, but also to consider whether it comports with their duties to the corporation. THE LIMITS OF INFORMATION SHARING: TIPPING AND INSIDER TRADING In the case of a public company, a nominee’s disclosure of confidential information to the nominating shareholder raises selective disclosure (tipping) concerns. Securities legislation prohibits a public company director from disclosing material non-public information of the company to another person unless such disclosure is made in the “necessary course of business” (NCOB). Determining whether a given communication will be made in the NCOB should not be considered a perfunctory or simple endeavour. The Ontario Capital Markets Tribunal (Tribunal) has stated that the word “necessary” in the NCOB exception elevates the criteria for selective disclosure beyond a mere business purpose or business rationale to something that is “essential,” “indispensable” or “requisite” to the business. 7 Significantly, the Tribunal also noted that it should not be taken to have thus far concluded “that in all factual situations the NCOB exception is limited to a consideration of what may be in the necessary course of the issuer’s business” (emphasis added). In so doing, the Tribunal left the door open to a finding that selective disclosure may be defensible where made in the necessary course of the tipper’s business (such as, for example, the nominee’s business), although caution is recommended until the limits of this opening have been tested in further decisions. For further reading, refer to our more detailed discussion of the NCOB exception to the prohibition against selective disclosure (here).
7 Kraft (Re), 2023 ONCMT 36.
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