Canada: Information Flows Between Nominee Directors And Their Appointing Shareholders

Torys Quarterly: The Cross-Border Update



Minority stake acquisitions are emerging as a global trend in today's business environment. There are many reasons for this: the rise of shareholder activism and activists' pursuit of minority investments in order to influence corporate agendas; increased regulatory and foreign investment oversight of control-stake acquisitions in certain markets and industries; and the heightened competition for acquisition targets, causing many investors to turn to minority investments as a way to deploy excess capital.

Getting a seat at the table through board nomination rights is one of the most common ways for minority investors to maintain oversight of their investment. The ability to do that depends on access to information about the investment, and the commercial reality is that directors nominated by significant shareholders will often convey information back to the shareholders who nominated them. The question is: are nominee directors lawfully permitted to do so?

Delaware Perspective

Although a director may be placed on a board in order to represent the interests of a large shareholder, directors must, in exercising their fiduciary duties, act in the best interests of the corporation and not in the best interests of their nominator. All decisions made by the nominee director must accordingly be taken from that perspective.

The duties of every director, including nominee directors, include a duty to maintain the confidentiality of corporate information. The scope of that duty is not precisely defined, giving rise to uncertainty regarding the legality of information sharing between a nominee director and the nominating shareholder. In a co-authored 2008 article, former Delaware Chief Justice E. Noman Veasey succinctly described the legal tension created by information sharing with nominee directors: such information sharing seems like it "would violate the directors' duty to protect [the company's] confidential information. Yet that result might also seem inconsistent with the parties' understand­ing that [the nominee directors] were on the board to be the preferred stockholders' eyes and ears and to represent and protect their interests."1 Information sharing was thought by commentators to be permissible, provided that consent had been expressly or impliedly provided by the corporation.2

In the United States, the Delaware courts have considered the issue of information sharing between nominee directors and their nominators. In Kalisman v. Friedman,3 the board withheld information concerning a proposed recapitalization from a nominee director who was also a founding member of the corporation's largest shareholder (OTK). The board did so against the backdrop of the corporation's mounting tensions with OTK, who intended to propose their own slate of directors at the corporation's upcoming annual general meeting. In considering the question of information sharing, Vice-Chancellor Laster of the Delaware Court of Chancery stated, "When a director serves as the designee of a stockholder on the board, and when it is understood that the director acts as the stockholder's representative, then the stockholder is generally entitled to the same information as the director."

The duty of confidentiality in Delaware accommodates information sharing with a nominating shareholder, but that duty continues to prevent the nominee director or the nominating shareholder from exploiting corporate confidential information. Vice-Chancellor Laster has commented in a co-authored article published after the Kalisman opinion that:

Delaware law has developed a rule that accommodates information sharing. To the extent a director misuses confidential information or permits his affiliate to misuse confidential information, the corporation has a remedy against the director for breach of fiduciary duty. The corporation can also require the director's affiliate to enter into a confidentiality agreement that restricts the use or further dissemination of the information.

Vice-Chancellor Laster explained this accommodation of information sharing as a reflection of practical reality and the fact that any rule to the contrary would be honoured in the breach rather than by observance:

This rule reflects the practical reality that director representatives in both pub­lic and private companies routinely share confidential corporate information with colleagues at their affiliated investment funds. The managing directors of these funds regularly meet to monitor their investments, and they routinely re­ceive reports from their director designees on the performance of their portfolio companies. In most cases, the blockholder directors themselves are managers or fiduciaries of the fund that made the investment, and the managers of the fund are often fiduciaries of the limited partners or other investors in the fund. A bright-line rule against information sharing would create the potential for breaches of duty at two levels: first at the corporate level by preventing the director representatives from engaging in behavior that is currently a normal part of the investment and monitoring process, and second at the fund level by preventing the director who was a fund fiduciary from sharing information that was material to the fund. Such a rule only would be honored in the breach. Rather than an actual rule to guide conduct, a rule against information sharing would put a cause of action in the hands of the corporation to use at its discre­tion. And if a corporation were to try to enforce it, a seemingly bright-line rule would turn out in practice to involve fact-laden litigation about the degree to which other directors knew about and consented to the sharing or engaged in similar information sharing themselves. The better approach, which Delaware has adopted, is therefore to permit information sharing and allow corporations to address risks by contracting with the affiliate and by enforcing the directors' fiduciary duties.4

While Delaware law permits nominee directors to share information with their nominating shareholder, corporations can consider limiting that information flow on a need-to-know basis. For example, confidentiality policies can be put in place limiting disclosure of information by nominee directors to members of the nominating shareholder's senior management who are responsible for managing and monitoring the investment in the corporation.

Equally important is that disclosure of information happens only on the clear understanding that the information is confidential and that it may not be used for the benefit or advantage of the nominating shareholder.

The Canadian Perspective

Canadian courts have commented often on the duties of nominee directors generally, emphasizing that the duties are owed to the corporation, not the nominating shareholder, and are the same as those owed by other directors. However, Canadian courts have not provided any guidance on the particular question of whether and in what circumstances information sharing between a nominee director and the nominating shareholder might be permissible in light of the director's duty of confidentiality.

We would expect Canadian courts to be generous in implying consent for all of the reasons that Delaware accommodates information sharing and that the Kalisman decision would be influential in Canada if the issue came before a court.

What is clear is that in Canada, as in Delaware, information sharing is permitted if the corporation consents. Consent could be express, provided in advance on a blanket basis by way of shareholders agreement or a board policy, or provided on an ad hoc basis in response to particular information requests. Consent could also be implied from the circumstances. An implied consent may arise in a situation where it is the reasonable expectation of the parties involved that the nominee director will report to the nominating shareholder information learned at board meetings (which could include, depending on the circumstances, a situation where the nominee director is nominated pursuant to a nomination agreement between the nominating shareholder and the corporation). We would expect Canadian courts to be generous in implying consent for all of the reasons that Delaware accommodates information sharing and that the Kalisman decision would be influential in Canada if the issue came before a court. However, in our view, unless there is clearly implied consent for the nominee director to share confidential corporate information with the director's nominator, then explicit consent should be sought from the corporation.

We note that any consent to information sharing, whether express or implied, is unlikely to be viewed by a Canadian court as unconditional. As is the case under Delaware law, any information sharing will be subject to the nominee director's overriding duty of loyalty to the corporation, making the nominee director potentially responsible for any misuse of the information by the nominating shareholder. The nominee shareholder should therefore take care that appropriate arrangements are in place at the nominating shareholder to ensure that disclosure of the information is limited to those with a need to know and that the information will not be misused to the detriment of the interests of the corporation.

Securities Law Considerations

In circumstances where confidential information is material and the corporation on whose board the nominee director sits is a Canadian reporting issuer, the disclosure of that information to the nominating shareholder raises the question of whether the prohibition of "tipping" under securities laws is engaged.

Under anti-tipping rules, a person in a special relationship with a reporting issuer, such as a nominee director, may not disclose material facts or material changes about the issuer to another person, until such information has been generally disclosed, other than in the "necessary course of business."

What constitutes the "necessary course of business?" This exception has been broadly interpreted by regulators who have noted that the exception "exists so as not to unduly interfere with a company's ordinary business activities," also recognizing that disclosure of material information to controlling shareholders may in some cases fall under this exception.5

Canadian securities laws equally presume that nominee directors share information with their nominating shareholder, requiring, for example, a shareholder with board representation to obtain an independent valuation for purposes of engaging in a transaction under Multilateral Instrument 61-101—Protection of Minority Security Holders in Special Transactions, in order to address information asymmetries that may exist between significant and minority shareholders.

While the nominee director may be able to share material undisclosed information with the nominating shareholders, those shareholders are prohibited from further sharing of that information or trading in the issuer's securities until the information is generally disclosed.

Altogether, we believe that information sharing between nominee directors and nominating shareholders does not offend the anti-tipping prohibition under Canadian securities laws in light of the "necessary course of business" exception—so long as information sharing is done confidentially and narrowly, with limited scope. While the nominee director may be able to share material undisclosed information with the nominating shareholders, those shareholders are prohibited from further sharing of that information or trading in the issuer's securities until the information is generally disclosed.

Managing Conflicts

Managing conflicts of interest can be challenging for a nominee director who shares information with the nominating shareholder; for example, where the shareholder may be considering a transaction involving the corporation, information sharing may not be possible, and the nominee director's participation in board discussions may have to be limited. Another way that conflicts may materialize is under the "vital aspect" principle whereby a nominee director may be required to disclose to the corporation information she has that is confidential to the nominating shareholder, if that information goes to a vital aspect of the corporation. Resignation may be the only way to manage that conflict of interest.

Conclusion

While there is greater clarity in Delaware on information sharing, Canadian courts have not yet pronounced on this issue, and nominee directors will accordingly need to tread with care. It's also inevitable that there will be many variations in fact patterns that may affect this general approach to information sharing between directors and the shareholders that nominated them.

From the corporation's perspective, we expect that, in many cases, it will be helpful to understand the views of large-block shareholders as conveyed through their nominee director. This type of open communication practice is consistent with the Institute of Corporate Directors' (ICD) shareholder engagement model.

In the ICD's latest guidance for Canadian listed companies, boards of directors are encouraged to engage directly with significant shareholders on corporate and board governance matters, with the ICD predicting that engaging with shareholders will ultimately lead to improved communications, fewer proxy battles and other contentious matters. If the ICD's prediction is realized, it will be interesting to see the impact of integrated engagement practices like board nomination rights on broader governance trends.

Footnotes

1 E. Norman Veasey and Christine T. Di Guglielmo, "How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors," 63 The Business Lawyer 762 (May, 2008) at 774.

2 "When there is no express consent, the ability of a director to share confidences depends on whether the consent can be implied by the circumstances." Cyril Moscow, "Director Confidentiality," 74 Law and Contemporary Problems 196 (2008) at 205. The author notes (at 205) that in closely held corporations, implied consent is easier to find, and questions (at 207) whether the consent of shareholders could be implied in circumstances where a nominee director was put on a board following a proxy fight. Similarly, consent could also be implied in circumstances where the board seat was part of an investment agreement with an institutional shareholder.

3 C.A. No. 8447-VCL, April 17, 2013.

4 J. Travis Laster and John Mark Zeberkiewicz, "The Rights and Duties of Blockholder Directors," 70 The Business Lawyer 33 (Winter 2014/2015) at 54-55.

5 See National Policy 51-201 Disclosure Standards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Blake, Cassels & Graydon LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Blake, Cassels & Graydon LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions