A Director’s Duty to Remain Silent

Protecting confidential and non-public information

In the criminal world you may have a right to remain silent, but if you are a director in a corporation you have a duty to remain silent.

As outlined here, directors of a corporation must act in accordance with their fiduciary duties.  Included among these fiduciary duties are the duties of loyalty and care.

Director's duty to protect confidential information

The duties of loyalty and care require, among other things, that management protect all confidential and non-public information obtained due to their directorship (absent permission from the board to disclose the information).  Consequently, (and it should go without saying) a director may not use confidential information for his or her own personal benefit or to benefit persons or entities outside the company.  Notably, this confidentiality requirement is on-going and continues after the director’s service with the corporation has ended (except if the board permits disclosure or as required by law – such as by a court order, subpoena, etc…).

The type of information a director must keep under wraps is quite limitless.  In fact, one court has defined the scope of this expansive duty as follows:

This rule applies to all information received by a director in the course of his or her duties that is not in the public domain, and that the corporation does not presently want to have publicized.

In re Mortgage & Realty Trust, 195 B.R. 740, 750 (Bankr. C.D. Cal. 1996).  With the foregoing in mind, confidential information will likely, if not absolutely, include non-public information about: (1) the corporation’s financial condition; (2) the corporation’s prospects or plans; (3) marketing matters, sales programs and initiatives, and research and development information; (4) mergers and acquisitions; (5) stock splits and divestitures; (6) possible transactions with other companies; and (7) information about the corporation’s customers, suppliers or joint venture partners, which the corporation is under an obligation to maintain as confidential (perhaps by a non-disclosure agreement, often referred to as an NDA).

What’s the big deal?  Other than the obvious issues and liabilities that may arise if confidential information is released (harm to the company) or if the director uses confidential information for personal use (insider trading), confidentiality creates an atmosphere in which the board can properly serve the best interests of the corporation.  In short, confidentiality promotes full and frank discussions between board members and encourages a free-exchange of ideas in the board room.  Conversely, a lack of confidentiality (or even a hunch that confidentiality may be compromised) can undermine the board’s ability to fully vet an issue, deliberate, and make timely and appropriate decisions. If confidentiality did not exist and board members were concerned their comments and viewpoints would be disclosed to third-parties, the ability for a board to properly function would be critically impaired.

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
This entry was posted in Business Owner, Director, Litigation, Shareholder and tagged , , , , , , , . Bookmark the permalink.

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