Richards Layton & Finger

The Rights and Duties of Blockholder Directors

Winter 2014/2015

Delaware corporate law embraces a “board-centric” model of governance contemplating that, as a general matter, all directors will participate in a collective and deliberative decision-making process. Rather than serving as a justification for a board majority to disempower directors elected or appointed by or at the direction of a particular class or series of stock or an insurgent group—which we refer to as “blockholder” directors—this system recognizes the need for a balancing of both majority and minority rights. In this article, we review the rights and duties of all directors and highlight cases where both board majorities and blockholder directors have overstepped their bounds. We caution that board majorities should deliberate carefully before taking action that limits a blockholder director’s rights or excludes the blockholder director from participation in fundamental corporate matters. At the same time, we caution that blockholder directors should take care when exercising their rights, given that their affiliation with investors may make them vulnerable to duty of loyalty claims. We urge both sides to proceed with a sense of empathy toward the other and seek to make reasonable accommodations, and we emphasize the role that experienced corporate counsel can play in mediating disputes, resolving tensions, and striking the appropriate balance in the boardroom.

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