Earlier this month, the Delaware Chancery Court ruled on the extent to which a director of a company can seek to obtain information from the company in order to discharge applicable duties.
In Kalisman v. Friedman, the court was concerned whether Jason Kalisman, a director of Morgans Hotel Group Co., was entitled to certain information regarding the company. Kalisman was a representative of OTK Associates, an investor in Morgans. Once OTK Associates indicated its intention to seek control of Morgans through a proxy contest, Kalisman was deliberately kept out of the decision-making process of the company. Kalisman initiated legal proceedings seeking a broad right to information regarding the company, including information that was covered by client-attorney privilege.
The Delaware court ruled in favour of Kalisman recognizing an unfettered right of the director to information regarding the company. Moreover, it held that the information must be made uniformly available, and some directors cannot be preferred over the others. The same holds good for privileged information.
A post on the The Columbia Law School Blue Sky Blog highlights the significance of this decision as follows:
On the substantive matters, the ruling shows that decisions taken without proper notice to a dissident, or otherwise not in accordance with good governance practices, will be subject to harsh judicial scrutiny, and that the courts will not hesitate to interfere with corporate action apparently designed to interfere with an electoral challenge or a transaction undertaken to thwart a dissident. The episode reaffirms that while well-counseled boards can create significant leeway to respond to dissident directors, they must be careful to establish a record of open and informed deliberation that facilitates the ability of all directors to fulfill their fiduciary duties.
Some of these principles of transparency and equality of information to directors will be relevant in the Indian context as well. Although the Companies Act, 1956 details the set of information to be shared with shareholders, it is somewhat flexible regarding the sharing of information with directors and leaves it to the company and the board to set up sharing mechanisms. That is generally consistent with the philosophy of intensive regulation of shareholder decision-making but greater flexibility to the manner of board decision-making. To that extent, these general principles of transparency rather than rigid rules ought to prevail in board matters depending on the facts and circumstances of each case. Ultimately, it would be open to the boards (with a special role to the chairperson) to set up mechanisms for sharing of information such that there is a level of uniformity and parity of information communicated amongst members of the board.
Non-executive directors are particularly in an unenviable position as they are not involved in the day-to-day functioning of the company. Their role in the decision-making is largely premised on the level and type of information that is communicated to them. It seems unreasonable to impose fiduciary duties and responsibilities on directors if they do not have access to information that is necessary for them to discharge those in the required manner.