As a recipient of confidential information, a nominating shareholder may receive material non-public information of the company and is prohibited from trading in the company’s securities on the basis of it, subject to limited exceptions. Practical Takeaways — A nominee is subject to the same fiduciary obligations as other directors. The fact that a director has been nominated by a shareholder does not alter or otherwise attenuate the director’s duties to the corporation. The nominee must act in the best interests of the corporation, subordinating the interests of the nominating shareholder to those of the corporation. The stringent demands of the nominee’s duties may come as a surprise to nominating shareholders and nominee directors alike, who may expect that the nominee should represent and advocate for the interests of the shareholder. Director education is crucial for good governance, starting with onboarding sessions and materials that clearly outline the nominee’s responsibilities. — A nominee may share confidential information with their nominating shareholder only if the company, whether impliedly or expressly, consents; however, a nominee cannot contractually override their fiduciary obligations to act in the best interests of the corporation. A nominee director must maintain the confidentiality of corporate information received in the course of their position as a director. Absent the corporation’s consent (whether express or implied), a nominee director is prohibited from sharing confidential information with the nominating shareholder.
Parties will often agree to a nomination right with a view to the benefits that accrue from an information-sharing arrangement: the company may want the nominee and the nominating shareholder to meaningfully consult so that the company can leverage the expertise of the shareholder; and the shareholder may benefit from consultation as a means to monitor and influence its investment. As a matter of best practice, parties that wish to permit the nominee director to share confidential information with the nominating shareholder should enter into a written agreement that sets out the terms under which disclosure may be made. Even where the corporation agrees to an information- sharing arrangement, the nominee director is subject to the overriding obligation to ensure that information is shared only with a view to the best interests of the corporation and not for an improper purpose. — A nominee should actively manage conflicts of interest that may arise due to their relationship with their nominating shareholder. The nominee’s fiduciary duties include an obligation to avoid conflicts of interest with the corporation. Whether a director should deliberate or vote in respect of a given corporate matter will depend, among other things, on whether the director is sufficiently independent – that is, free from conflicts of interest that could reasonably be expected to interfere with the exercise of their independent judgment as a fiduciary. Both the corporation and the nominee should consider whether the nominee’s relationship with the nominating shareholder may lead to a real or perceived conflict. Where the nominating shareholder’s interests in respect of a transaction diverge from those of other shareholders, the board should consider appropriate steps to ensure any conflicted nominee does not participate in,
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Governance Insights 2024
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