Directors and 'unfettered' rights to company information: can directors share information learned in the boardroom with their designating investors?

• Author: Raymond, Doug
• Position: LEGAL BRIEF

A recent case involving petroleum coke seller Oxbow Carbon and one of its significant investors, Crestview, shines a light whether there should be "unfettered" director rights to all information in the boardroom.

Crestview had invested in Oxbow Carbon in 2007 and as a result had the right to appoint two directors to the board. By 2014, Crestview apparently wanted to pull out and wanted the company to either buy out its units or sell the entire company. The majority investor, who was also the CEO, disagreed.

As a consequence, Oxbow Carbon alleged, Crestview persuaded its appointed directors to assist them in a "secret mission" to replace the CEO. Thereafter, the directors allegedly took steps to effect Crestview's objectives. In response, the company filed a complaint alleging that the Crestview-appointed directors had breached their fiduciary duties by becoming adverse to the company, and thus should no longer enjoy "virtually unfettered informational rights that included access to the company's privileged documents."

At many private and public companies, some of the directors act also as representatives --sometimes even employees--of certain investors, as was the case at Oxbow Carbon. When a director is an employee or representative of a private equity or venture fund or other investor in the business or is an industry expert backed by an investor during a contested election, the question generally arises: What, exactly, may these designated directors share with the investors who put them in the boardroom? Surprisingly, the answer is not always clear, and there can be significant consequences for the directors, and the investors, if this issue is not properly handled.

Under traditional corporate law principles, including in Delaware, a sitting director's right to information about the company is "essentially unfettered in nature," regardless of any affiliation he or she may have with any of the company's investors. However, this right is tempered by the director's own fiduciary duties of loyalty, which includes the obligation to keep confidential information learned as a director. Nonetheless, courts have recognized that directors who serve as representatives of an investor or investor group will often want to share information with the investors and have generally permitted this, at least where the director takes reasonable care to keep the information confidential and investor's interests are not hostile or adverse to the corporation.

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