CONFLICTS AND CONFIDENTIALITY IN THE BOARD ROOM John Pietila Davis Brown Law Firm

Topics Fiduciary Basics Director Conflicts of Interest Director Confidentiality Conclusions

Fiduciary Basics All corporate directors owe two core duties to the company and stockholders Duty of Care Duty of Loyalty Directors owe fiduciary duties to all stockholders, not just to the stockholders responsible for their nomination or election

Fiduciary Basics Duty of Care: directors must discharge their responsibilities in good faith, exercising the same degree of diligence, care, judgment and skill that a prudent person would ordinarily exercise when in the same position under similar circumstances Duty of Loyalty: directors must put the interests of the corporation and its stockholders ahead of their own personal interests

Fiduciary Basics Business Judgment Rule: in making a business decision, directors are presumed to have acted on an informed basis, in good faith and with the honest belief that the action taken was in the best interests of the corporation and the stockholders.

Conflicts of Interest Conflicts of interest situations typically implicate duty of loyalty issues In situations where duty of loyalty claims are triggered, directors are not entitled to the benefit of the business judgment rule Implications for explication/indemnification or D&O coverage

Iowa Law Goodbye: IBCA Section 490.832 Hello: IBCA Sections 490.860-490.863 Subchapter “F” of MBCA

Iowa Law What’s the difference? Bright-line definitions “conflicting interest transaction” “fair to the corporation “material financial interest” “related person” “qualified director” (IBCA Sec. 490.143) Expressly eliminates judicial fairness review for transactions not covered by bright-line definition

Iowa Law What’s the difference? Eliminates judicial fairness review of covered transaction, if proper disclosure and approval process is followed Covered transaction may be upheld on review if transaction was “fair to the corporation” Disclosure and approval process eliminates liability on the basis of conflicts of interest, but not on any other basis

Iowa Law What’s the difference? Legal emphasis has shifted to benefits of certainty, including efficiency of planning and managing director conflicts of interest Process matters

Conflicts of Interest Statutory conflicts of interest Director is a party to a transaction with the corporation or controlled affiliate Director has knowledge of a corporate transaction in which director has a material financial interest Director has knowledge of a corporate transaction in which a related person has a material financial interest

Managing Conflicts Transaction should be assessed to determine if there is a conflict of interest Individual directors should be encouraged to make full disclosure of conflicts The corporation should have a transparent and thorough process for conflict review and management

Managing Conflicts Code of Conduct for Directors Standing governance or other committee General Counsel When is the last time General Counsel reviewed the conflicts of interest policy?

Managing Conflicts Do we really need to do this? Impossible to avoid all conflicts Conflicts compliance a key element of director duties Stronger policy provides clearer guidance and reduces risk of legal challenge to board decisions where conflicts are implicated Enhanced process better protects individual directors and may be a tool for director recruitment and retention

Director Confidentiality Duty of loyalty includes duty to safeguard non-public information that is subject to board deliberations or that is learned by directors in their role as fiduciaries At a minimum, confidential information should not be disclosed in a manner adverse to the corporation

Director Confidentiality Exact scope of duty of confidentiality not yet defined What information is confidential? What constitutes unauthorized use or disclosure? What are the exceptions? What are the consequences of violation? Damages or equitable remedies Discipline Removal ?

Director Confidentiality In the absence of bright line legal framework, confidentiality and disclosure policies may be used to identify and implement appropriate solutions

Managing Leaks Code of Conduct for Directors Confidentiality policy Confidentiality bylaw Confidentiality agreement Nomination or re-nomination process Publicizing leaks or breach of trust

Managing Leaks Do we really need to do this? Leaks compromise board cohesion and effectiveness Leaks may erode corporate culture Policies can be tailored to fit the corporation, taking into account board composition and any unique issues Policies can facilitate fair debate and vigorous dissent while protecting the corporation and individual directors

Conclusions Regular General Counsel review of policies, processes and culture Educate internally: provide meaningful examples and stress director responsibility and accountability Encourage planning and pre-scripting rather than in the moment reaction or ad hoc problem solving