Directors Can (and Should) Talk to Investors, About All Sorts of Stuff

June 9th, 2010
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Contributed by: Michael R. Levin, The Activist Investor
As activist investors begin to win director elections, talk turns to the rights and obligations of these directors to share board-level information. To what extent may these new directors (or any directors, really) communicate with investors, and what must remain confidential?

On the one hand, investors think that they bought and paid for the winning election. They feel entitled to know what’s going on at the company, from their “insider”. On the other hand, incumbent directors deliberate privately, and feel free to express honest views among themselves only with the assurance that these views in fact remain private.

I recently had direct experience with this very problem. Investors in a portfolio company succeeded in electing an independent nominee to the Board of Directors. We had high hopes for an open dialogue with the newly-elected director, and even with the entire Board. Unfortunately, this director has disappointed us, and shut down all communication. The director claims that Board policy requires management to mediate all outside communications, and otherwise limits what directors can discuss with investors.

At least one commentator has advice for companies that confront such a situation. Charles Nathan of Latham & Watkins suggests that companies adopt comprehensive policies that limit directors’ communication outside of the boardroom. He worries that a “constituency director” might favor their supporting shareholder over the sanctity of board discussions.

My advice for investors: as well they should. Short of revealing trade secrets, employment matters, or financial results that could lead to insider trading charges, duly-elected directors have an obligation first to investors, and only then to other directors and management.

Back to our company. The independent director won an election outright, rather than taking a seat as part of a settlement between the company and the nominating investor. The nominee has no legal obligation to follow board policy, and (within the vague bounds of fiduciary duty, and the laws around trade secrets, employment, and insider trading) could discuss any board matters with anyone. Nathan generally agrees, stating “effective enforcement of a company’s confidentiality policies … may be difficult”.

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