Keith Paul Bishop raises an interesting point:
Yesterday’s post concerned the attorney-client privileged issues in Vice Chancellor J. Travis Laster’s recent decision in Kalisman v. Friedman, 2013 Del. Ch. LEXIS 100 (April 17, 2013). I found another statement in the decision even more intriguing -
When a director serves as the designee of a stockholder on the board, 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.
This statement appears to be at odds with the statements of Chancellor William T. Allen in Holdgreiwe v. The Nostalgia Network, Inc., 1993 Del. Ch. LEXIS 71 (April 29, 1993), a case cited by Vice Chancellor Laster in Kalisman (albeit for a different proposition). InHoldgreiwe, the corporation sought to condition inspection by one of its directors, Daniel Holdgreiwe, upon the signing of a confidentiality agreement. Mr. Holdgreiwe was a nominee of one of the corporation’s stockholders, Concept Communications, Inc. Chancellor Allen declined to impose that condition, saying:
But conditioning Holdgreiwe’s right to inspect Nostalgia’s corporate books and records on his entry into an agreement binding him not to disclose any of the information he obtains to any third parties, including AVI [an affiliate of Concept] and Concept, seems to me to add little. He is already under an obligation to maintain the confidences of Nostalgia; to use its confidential information only to inform discussion among directors and action by the board or a committee. Disclosure of such information to AVI is a violation of duty whether or not an undertaking is entered. Thus, such an undertaking seems unnecessary.
On the one hand, Chancellor Allen seems to be saying that information conveyed to a director may be used only for the purposes of the corporation. On the other hand, Chancellor Allen quite conspicuously (and I assume intentionally) refers solely to AVI when speaking about a potential breach of fiduciary duty (Concept, not its affiliate AVI, had elected Mr. Holdgreiwe).
It's an interesting issue of state corporate law, but don't forget that it also raises serious federal insider trading questions. Remember the debate a few months ago about whether hedge funds could compensate their director nominees? Suppose a hedge fund nominated Bainbridge to be a director of Acme. Bainbridge is elected. In addition to his director fee from Acme, Bainbridge also gets a performance-based annual bonus from the hedge fund. Bainbridge provides material nonpublic information to the hedge fund, which then uses it to trade. Has Bainbridge made an illegal tip?
In order to hold Bainbridge liable, the government would need to show that he (a) disclosed material nonpublic information to the fund (b) in return for a personal benefit (c) and, probably, expecting the fund to trade. Does the bonus count as the requisite personal benefit (even if there is no explicit quid pro quo)? Could the government argue Bainbridge gets an enhanced reputation, which would constitute a nonpecuniary benefit?
BTW, with respect to state law, I think it probably matters whether you are dealing with a close or public corporation. In a close corporation, if one shareholder gets to name a director and the other shareholders make an informed agreement to allow the director to share information with the shareholder, I don't see a problem. But in the public corporation, I think the law probably should require confidentiality.
