PART I – 2013 Changes to the Iowa Business Corporation Act.
This post is the first in a series of posts that will address several changes to the Iowa Business Corporation Act (Iowa Code Chapter 490) as approved by the Iowa legislature and signed by Governor Terry Branstad during the 2013 legislative session.
One many changes to Iowa’s Business Corporation Act relates to a directors’ duty to disclose information in discharging his/her fiduciary duties. The newly adopted subsection, which amends Iowa Code Section 490.830, states:
In discharging board or committee duties a director shall disclose, or cause to be disclosed, to the other board or committee members information which the director knows is not already known by them but is known by the director to be material to the discharge of their decision-making or oversight functions, except that disclosure is not required to the extent that the director reasonably believes that doing so would violate a duty imposed under law, a legally enforceable obligation of confidentiality, or a professional ethics rule.
Upon first blush, this language may seem fairly straightforward. In practice, however, and upon deeper analysis, the language may raise several questions and dilemmas. For instance, when a plaintiff asserts a claim against a director (hereinafter “defendant-director”) under this language and attempts to prove the defendant-director violated this subsection by failing to disclose “material information” (as referenced above), how will a plaintiff successfully prosecute and prove up his/her case against the defendant-director? Specifically, how will a plaintiff establish the defendant-director knew with certainty (as opposed to whether the defendant-director “reasonably believed”) the remaining board / committee members did “not already know” the “material information.” Common sense tells us that when a case hinges upon proving someone else possessed specific knowledge (the defendant-director’s knowledge) about what another person knew at a specific point in time, you are likely facing an uphill battle. Why an uphill battle? In many cases a defendant-director may prevail by raising a simple defense and claiming:
At the [relevant] point in time, I didn’t know for sure who the other director(s) spoke with, what they discussed, or what the other director(s) had read or otherwise learned, and consequently, I didn’t and couldn’t know with certainty everything the other director(s) knew at that point in time. Therefore, because I did not know for certain what the other director(s) knew at that point in time, I was not required (under this subsection) to disclose this material information; and thus, the claim must fail.
When such a defense is raised, proving the defendant-director’s state of mind at a particular point in history – and specifically what he/she knew with certainty about what someone else knew – may be very difficult.
In theory, the foregoing tells us that to strictly comply with the new language, a director with “material information” must first question his/her fellow directors about whether they are aware of the “material information.” Upon learning a fellow director is not aware of the “material information,” the director possessing the information must then discharge his/her new “duty” under this subsection and disclose the information in accordance with the remainder of the subsection. In other words and in practice, this new subsection appears to create a duty to question, followed by a duty to disclose.
Finally, in this author’s mind, the new subsection renews several issues initially raised when Steve Jobs, former Chairman and CEO of Apple, revealed his personal health problems while at Apple. Many criticized and questioned whether fiduciary duties were breached when Steve Jobs allegedly failed to timely disclose his health problems – an issue that many blamed for several precipitous drops in Apple’s stock price. See this article. For some, in addition to the dilemma identified above, the new subsection may create a question as to whether a director (particularly in a company where the director plays a critical role or where the company is built around the director) who learns of a terminal health problem is required to disclose his/her personal health problem – a matter that may significantly affect the company in an adverse manner – in order to comply with the new duty to disclose “material information.”
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