Governance Insights 2024 Protecting Information to Protect Process – When is it Appropriate to Restrict a Director’s Access to Board Records?
The Special Committee Unlike in Delaware, Canadian courts have not opined on the special committee as a mechanism through which a director’s access to privileged materials may be restricted. The absence of judicial consideration in Canada, however, should not be reason to conclude that a special committee is not a viable governance tool to protect information. The use of a special committee to facilitate independent director oversight of a corporate matter is a well-established practice in Canada—one recognized both in Canadian jurisprudence and in the decisions and commentary of securities regulators. Indeed, a board that is considering a transaction in which a director has a conflicting interest will, in many cases, establish a committee of independent directors to consider whether, among other things, the transaction is in the interests of the corporation and minority shareholders. Similarly, a special committee may be established to conduct an independent investigation in respect of a fellow director. Often the committee will refrain from using the company’s regular outside legal counsel and engage independent advisers. Although this is intended to ensure the committee is obtaining independent advice, it also potentially limits who may access that advice. The practice of establishing a special committee that is advised by independent counsel has the clear purpose of facilitating independent consideration of a conflicted transaction or oversight of an investigation; it can also have the added benefit of ensuring that the directors deliberating the matter may avoid any undue influence that could arise from the prospect of having their minutes reviewed by the excluded director during the course of the mandate. Put differently, protecting the confidentiality and privilege of committee materials operates in service of the committee’s independent oversight function.
– S econd, the board can form a committee that excludes the director and retains and consults confidentially with its own legal counsel. The special committee must be formed openly, with the knowledge of the excluded director. However, the degree to which such a committee would be required to provide updates to the board and the extent to which a committee can protect its information from non-committee members after its work has been completed have not been substantively considered by the Delaware courts and would likely be fact-dependent. – T hird, a board or committee can withhold privileged information once sufficient adversity exists between the director and the corporation, with the result that the director could no longer have a reasonable expectation of being a client of the board’s legal counsel. Examples of “sufficient adversity” have included (i) a director making an offer to purchase the corporation, and (ii) a member of a special committee discovering that the other members were meeting with the committee’s counsel without him (the clandestine meetings related to a transaction to which the excluded director’s nominating shareholder objected; the court held that the director could access the legal advice prepared up to the point of the discovery of his exclusion). As noted earlier, some Canadian courts have adopted Delaware’s “sufficient adversity” rule, concluding that a director’s access to privileged information is “truncated when a director is in an adversarial position to a corporation” and that such adversity will arise when the director ceases to have a reasonable expectation of being a client of the corporation’s lawyer.
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Davies | dwpv.com
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