How liable are advisory boards? Since precedent is scarce, caution is prudent.

AuthorBest, Stephen
PositionADVISORY BOARDS

DURING YOUR CAREER as an executive, you probably hoped that your hard work and dedication would pay off some day with a position on the board of directors of a prestigious public company. Such a position would be a perfect cap to an already successful professional career.

Recently, however, I'm sure you've wondered whether it is now worth it. In today's world, the level of personal scrutiny and responsibility associated with board membership is at an all-time high. Significant responsibilities are being placed on board members under recent legislation such as the Sarbanes/Oxley Act; D & O coverage (in many cases more limited than in years past) is increasingly expensive for companies, sometimes prohibitively so; and plaintiffs' lawyers are in a feeding frenzy, hoping to cash in on recent corporate scandals.

Advisory board service, which is distinct from service on the statutory boards of directors responsible for overseeing company management, may be an alternative, but caution is still necessary.

Advisory boards usually are not empowered to make binding decisions for companies but are designed to provide expertise to directors and management. Typically, advisory boards do not go beyond making recommendations. Because of these distinctions, advisory board members do not normally bear the risks of personal liability that directors face. For instance, directors owe shareholders and their company fiduciary duties, including duties of loyalty, care, and disclosure. While such fiduciary duties are not clearly established for advisory board members, guidance is surprisingly scarce, and it would not be implausible for a court to hold that advisers to a company, who are compensated and on whose advice the company relies, do have duties of good faith and loyalty to the company.

In the Crosshairs

In today's environment, one can easily imagine a case in which a shareholder sues directors and officers for corporate waste or breach of fiduciary duty only to learn during discovery that the transactions in question were recommended by the company's advisory board. The shareholder's lawyer would surely not hesitate at that point to add the members of the advisory board to the lawsuit.

In the absence of clear precedent, the likelihood that the claim would succeed will depend on several factors, including the extent of the advisory board's involvement in the decision, the influence the advisory board has over company directors, and the advisory board...

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