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

2. Topics Fiduciary Basics Director Conflicts of Interest
Director Confidentiality
Conclusions

3. 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

4. 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

5. 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.

6. 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

7. Iowa Law Goodbye: IBCA Section 490.832
Hello: IBCA Sections
Subchapter “F” of MBCA

8. 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 )
Expressly eliminates judicial fairness review for transactions not covered by bright-line definition

9. 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

10. 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

11. 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

12. 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

13. 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?

14. 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

15. 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

16. 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 ?

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

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

19. 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

20. 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