Conflicts of interest are expected between a company and a member of the Board of Directors when you have Board members doing their jobs well. Indeed, a person that brings opportunities to a company which he serves as a director may be the recipient of an income stream from such opportunity, as when, for example, a director is a significant shareholder of a company going into contract with the company on which he is on the Board. In such a case, that director should not generally be part of the discussion and approval process – that is, he should recuse himself from the discussion, stepping out from the meeting or getting off the call, so as not to inappropriately influence the decision-making of the other Board members.
Similarly, a Board member that serves on a Board of a company where she has not been able to review all the relevant materials to make an informed decision should abstain from voting on that issue even if she is not otherwise conflicted out of voting because of an opportunity for personal gain or any other reason.
Recusal is more expansive than simply abstaining. It is important to know that, ordinarily, a director should participate in voting. Indeed, depending on Board constituency, failure to have that person vote may result in deadlock. Simply abstaining as a routine is to be avoided.
Being a member of a Board of Directors is a serious responsibility. Sometimes people agree to be on a Board thinking it will be prestigious and that they can participate in name only, but that should not be the approach a company should take when building a Board, and it is certainly not the tactic the director should take when agreeing to be on the Board.
While members of Boards of Directors more often than not can accept general advice and guidance from the company’s counsel, there are circumstances where the director needs his or her own counsel – particularly regarding navigating conflicts of interest matters.
This Firm has advised directors of for-profit and not-for-profit companies and has advised on important conflicts of interest matters, including advising on when a director should recuse himself or herself or whether a director should abstain from voting on an issue. Different obligations may apply depending on the company’s jurisdiction of incorporation. Directors should not hesitate to seek independent counsel, especially when the company is threatening to hold the director liable for taking a particular action or failing to act. A director should be on the look-out for situations where he or she could create a problem by participating not only in a vote, but in the discussion in the first instance, e.g., approval of a contract between two companies of which he or she sits on both of the Boards of Directors. While a well-connected director is certainly a desirable member of the Board, he or she may not always be able to steer and guide, especially when he or she may have confidential information belonging to one of the parties because of his or her role with that could impact the transaction. Knowing what can be shared and what cannot be is also something a director may need to discuss with independent counsel.
Whether or not the company will reimburse the director for independent legal advice does not change the balance. Independent counsel is necessary to assist the conflicted director and help him or her decide whether and how to proceed when difficult, but inevitable conflicts of interest arise.