KIRKLAND M&A UPDATE | 2 privileged material) based on a fear that he would convey the information to the fund. The court noted in dicta that, “When a director serves as the designee of a stockholder … 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.” Of note, the case-law does not provide clear guidance as to when a director is deemed to act as the “stockholder’s representative” (e.g., how to treat a nominally independent director identified by an activist investor for nomination?) and leaves open the possibility that a company may deem it appropriate to prohibit such a transmission of some or all confidential information (e.g., a company could choose to allow sharing of business and financial information for purposes of analysis by the shareholder, but not information about board deliberations or decisions). Of course, a stockholder who receives information from a director is not free to share the information with others and is exposed to insider trading risk if it trades while in possession of material non-public information received through its director. Facing these realities and uncertainties, companies with constituency directors may want to consider combinations of policies and agreements applicable to the director and/or her sponsor to supplement basic fiduciary duties in order to manage confidentiality, information use and insider trading concerns that arise from the broad access rights of the director and, by extension, the sponsor. Whether these policies or agreements can be imposed, as opposed to agreed upon, may be a function of the specific circumstances such as a legitimate concern about a conflict (see, e.g., Universal American where the court held the company could insist that a designee director sign a confidentiality agreement as a condition to being seated because the nominating stockholder was engaged in litigation with the company).

In certain circumstances, such as an issue of direct adversity between the company and the nominating stockholder, a withholding of limited information or use of a special committee may be permissible to limit or delay information flow to the designee director on the specific issue of adversity. **** With the increasing prevalence of directors designated by specific stockholders being added to boards (and the possibility of even more if proxy access regimes take hold), companies must find the right balance of rights and restrictions to address the access that a director designee and the designating stockholder have to company information. Even if the company or the rest of the board perceives the designee as being “hostile” or not aligned with the other directors and the company’s other stockholders, the ability to restrict access must take account of the Delaware principle that favors director rights to review the company’s books and records. A full understanding of the director’s legal rights, and the various techniques that can be used to mitigate resulting risks, is an important element of the onboarding process for these constituency directors. If you have any questions about the matters addressed in this M&A Update, please contact the following Kirkland author or your regular Kirkland contact. Daniel E.

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