Directors’ Duties – Loyalty to a Nominating Shareholder?
Private equity funds and venture capital funds often have the right to appoint directors to the boards of their portfolio companies.
So, the following question naturally arises, “Does a nominee director have a duty to represent the interests of her nominating shareholder when acting on a board?”
The short answer is “no.” A nominee director is not an agent of a nominating shareholder when acting in her capacity as a board member. This is a common misconception.
Both federal and Ontario corporate statutes and Canadian case law make it clear that directors owe a duty of loyalty to the corporation and must act in the best interests of the corporation. So, in a scenario where a nominating shareholder’s interest and the corporation’s interest diverge, a nominee director must take care to act in a manner that he believes is in the best interests of the corporation.
In the leading BCE case, the Supreme Court of Canada noted that directors, in considering what is in the best interests of the corporation, “may look to the interests of… shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.”[1]
It is important for nominee directors to understand that they are not agents of their nominating shareholders when acting on a board but, instead, their duties of loyalty and care lie with the corporation.
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This article is for informational purposes only and does not constitute legal advice. For more information about this topic, contact David Kim of Crescendo Law at [email protected]. To learn more about Crescendo Law, visit our website at www.creslaw.com.
[1] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69