Considerations in Drafting Board Observer Arrangements

April 2014

Publication| Corporate Transactions| Corporate & Chancery Litigation

Although board observer arrangements are not uncommon, there is little case law squarely addressing the rights, duties, and potential liabilities of board observers. Reference to basic principles of corporate law, however, should provide corporations and investors sufficient guidance in structuring board observer arrangements. These arrangements may offer several advantages over a traditional designated board seat. From the investor’s standpoint, the arrangement may provide insight into a corporation that operates in a business line in which the investor is currently active or in which it is seeking to expand. At the same time, the arrangement helps to avoid subjecting the investor’s designee to traditional fiduciary duties. From the corporation’s standpoint, the arrangement may give the corporation access to an investor designee who has knowledge of the corporation’s business, and it may serve to promote a relationship with a potential strategic partner. The arrangement might also represent a compromise by which the corporation grants greater access and information to the investor in exchange for assurances that the investor will not be able to exert undue influence over corporate decisions or, in the event of intra-corporate disputes, gain access to privileged information. To function as all parties intend, a board observer arrangement should be carefully documented. This article sets forth some of the key issues that parties documenting board observer arrangements should consider.

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