Earlier this month, the Delaware Chancery Court ruled on the
extent to which a director of a company can seek to obtain information from the
company in order to discharge applicable duties.
extent to which a director of a company can seek to obtain information from the
company in order to discharge applicable duties.
In Kalisman
v. Friedman, the court was concerned whether Jason Kalisman, a director of
Morgans Hotel Group Co., was entitled to certain information regarding the
company. Kalisman was a representative of OTK Associates, an investor in
Morgans. Once OTK Associates indicated its intention to seek control of Morgans
through a proxy contest, Kalisman was deliberately kept out of the
decision-making process of the company. Kalisman initiated legal proceedings
seeking a broad right to information regarding the company, including
information that was covered by client-attorney privilege.
v. Friedman, the court was concerned whether Jason Kalisman, a director of
Morgans Hotel Group Co., was entitled to certain information regarding the
company. Kalisman was a representative of OTK Associates, an investor in
Morgans. Once OTK Associates indicated its intention to seek control of Morgans
through a proxy contest, Kalisman was deliberately kept out of the
decision-making process of the company. Kalisman initiated legal proceedings
seeking a broad right to information regarding the company, including
information that was covered by client-attorney privilege.
The Delaware court ruled in favour of Kalisman recognizing
an unfettered right of the director to information regarding the company.
Moreover, it held that the information must be made uniformly available, and
some directors cannot be preferred over the others. The same holds good for
privileged information.
an unfettered right of the director to information regarding the company.
Moreover, it held that the information must be made uniformly available, and
some directors cannot be preferred over the others. The same holds good for
privileged information.
A post
on the The Columbia Law School Blue Sky Blog highlights the significance of
this decision as follows:
on the The Columbia Law School Blue Sky Blog highlights the significance of
this decision as follows:
On the substantive matters, the
ruling shows that decisions taken without proper notice to a dissident, or
otherwise not in accordance with good governance practices, will be subject to
harsh judicial scrutiny, and that the courts will not hesitate to interfere
with corporate action apparently designed to interfere with an electoral
challenge or a transaction undertaken to thwart a dissident. The episode
reaffirms that while well-counseled boards can create significant leeway to
respond to dissident directors, they must be careful to establish a record of
open and informed deliberation that facilitates the ability of all directors to
fulfill their fiduciary duties.
ruling shows that decisions taken without proper notice to a dissident, or
otherwise not in accordance with good governance practices, will be subject to
harsh judicial scrutiny, and that the courts will not hesitate to interfere
with corporate action apparently designed to interfere with an electoral
challenge or a transaction undertaken to thwart a dissident. The episode
reaffirms that while well-counseled boards can create significant leeway to
respond to dissident directors, they must be careful to establish a record of
open and informed deliberation that facilitates the ability of all directors to
fulfill their fiduciary duties.
Some of these principles of transparency and equality of
information to directors will be relevant in the Indian context as well.
Although the Companies Act, 1956 details the set of information to be shared
with shareholders, it is somewhat flexible regarding the sharing of information
with directors and leaves it to the company and the board to set up sharing
mechanisms. That is generally consistent with the philosophy of intensive
regulation of shareholder decision-making but greater flexibility to the manner
of board decision-making. To that extent, these general principles of
transparency rather than rigid rules ought to prevail in board matters depending
on the facts and circumstances of each case. Ultimately, it would be open to
the boards (with a special role to the chairperson) to set up mechanisms for
sharing of information such that there is a level of uniformity and parity of information
communicated amongst members of the board.
information to directors will be relevant in the Indian context as well.
Although the Companies Act, 1956 details the set of information to be shared
with shareholders, it is somewhat flexible regarding the sharing of information
with directors and leaves it to the company and the board to set up sharing
mechanisms. That is generally consistent with the philosophy of intensive
regulation of shareholder decision-making but greater flexibility to the manner
of board decision-making. To that extent, these general principles of
transparency rather than rigid rules ought to prevail in board matters depending
on the facts and circumstances of each case. Ultimately, it would be open to
the boards (with a special role to the chairperson) to set up mechanisms for
sharing of information such that there is a level of uniformity and parity of information
communicated amongst members of the board.
Non-executive directors are particularly in an unenviable
position as they are not involved in the day-to-day functioning of the company.
Their role in the decision-making is largely premised on the level and type of information
that is communicated to them. It seems unreasonable to impose fiduciary duties
and responsibilities on directors if they do not have access to information that
is necessary for them to discharge those in the required manner.
position as they are not involved in the day-to-day functioning of the company.
Their role in the decision-making is largely premised on the level and type of information
that is communicated to them. It seems unreasonable to impose fiduciary duties
and responsibilities on directors if they do not have access to information that
is necessary for them to discharge those in the required manner.
Issues of dissidence on boards have not
developed to a large extent in India yet, but given the significant momentum
gathered by shareholder activism in recent years, this may not be far from the
reality soon.
To share own random thoughts >
"….It seems unreasonable to impose fiduciary duties and responsibilities on directors if they do not have access to information that is necessary for them to discharge those in the required manner…"
Answer-ability, transparency and right of access to information, and its ilk, are all profound ideological concepts, or expectations, so inter-connected and inter-twined as to have an important role to play in 'good governance'. In other words, without a healthy bundling or blending of these and putting into practice, good governance can only be expected to remain an idler’s day dream as ever. Inability to or denial of access to any such in-house info. , is, if strictly viewed, not to be mistaken to be a valid defence available to anyone with a fiduciary function ,just as a non-executive director, if and when confronted with a charge of his having failed to discharge his responsibilities in the manner required or enjoined. The fiduciary responsibilities are vested in and hence expected to be equally shared, fulfilled, and burden borne by all directors, not excluding non-executive ones. On that premise, in order not to dilute the essence of 'good governance’, in any event, if unsuccessful despite the individual having been vigilant enough, the ultimate remedy or right recourse seems to lie in a like course of action as resorted to by the aggrieved director in the reported court case.