Hypotheticals: No Guidance in Canada Consider the following fact pattern. A Canadian public company is contemplating a strategic acquisition of a business in which the board chair has a meaningful equity interest. The board established a special committee of independent directors to consider the transaction. Although excluded from the special committee, the chair is curious regarding how negotiations are proceeding and, having overseen numerous acquisitions in her 15-year tenure at the company, asks the committee’s lead director if she can review the committee’s minutes and provide feedback. Although the chair’s request is believed to be made in good faith, her traditionally outsized role on the board prompts the lead director to consider whether knowledge of the chair’s review could influence the committee’s ongoing deliberations. The lead director consults with the general counsel to understand the committee’s obligations. The general counsel refers to the applicable corporate statute, which provides that board and committee minutes must be open for inspection by all directors. Consider a different scenario—one in which the board chair receives an anonymous tip alleging that a director has breached the company’s code of conduct. After several weeks of investigation conducted by the board and in-house counsel, the impugned director catches wind of the inquiry and requests to see the board’s materials and in-house counsel’s advice relating to the investigation. These hypotheticals do not fit neatly into the collateral purpose or litigation/adversity exemptions we previously discussed; the chair’s offer to review the special committee’s minutes may be made in good faith and the investigation may not enter the zone of litigation or be found to satisfy the requisite level of adversity.
Nonetheless, a director’s access to information in such scenarios may compromise the board’s ability to freely investigate and deliberate or to assert privilege. Although Canadian jurisprudence does not offer direct guidance to a board faced with the foregoing scenarios, it is worthwhile exploring how a board may set up its governance structure to put itself in a strong position to manage information issues engaged by director conflicts. We start by reviewing how similar issues are addressed in Delaware.
Director Access to Board Records in Delaware
Delaware’s corporate statute provides a director with a right to inspect a company’s books and records for a purpose reasonably related to their position as a director. As in Canadian corporate law, these rules are animated by the principle that directors are responsible for the management of the corporation and require unfettered access to information in order to effectively discharge their duties. In addition, a Delaware corporation and its directors are regarded as joint clients for the purpose of legal advice furnished to the corporation, with the result that there can be no assertions of confidentiality or privilege between the corporation and a director in respect of materials created during the director’s tenure. Unlike in Canada, however, the Delaware courts have recognized three means by which a board may alter the default rules and successfully assert privilege against a director: – F irst, a director’s right to privileged information can be restricted by contract, such as a confidentiality agreement.
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Governance Insights 2024
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