The director was a shareholder in Coastal and the
managing director of Coastal’s European subsidiary.
Coastal alleged that the director breached his duty to
Coastal by surreptitiously helping to arrange and advocate for a sale of the subsidiary to members of the
subsidiary’s management team and a private equity firm.
Coastal’s case never proceeded to a full trial, but the
B.C. Supreme Court did enjoin the director from further
pursuing the transaction. The Court held that Coastal
had raised a fair question as to whether the nominee
director had breached his duty of loyalty to Coastal by
creating “a binding deal internally, obtaining the buy-in,
support and commitment of senior management to the
proposed transaction before the board [of Coastal] had
any knowledge of its terms or existence.”
STRATEGIES FOR MANAGING RISK
There are several strategies that Canadian nominee
directors should consider to help mitigate risks posed
by potential conflicts:
1. Be Vigilant in Identifying Potential Conflicts of Interest
This is particularly important in situations where the interests
of the portfolio company and the fund diverge. If a potential
conflict arises, nominee directors may wish to notify other
1. Frederick Hsu Living Trust v. ODN Holding Corp, CA No. 12108-VCL, 2017 Del. Ch. 2. CA No. 12108-VCL, 2017 Del. Ch., at 1. 3. CA No. 12108-VCL,
2017 Del. Ch., at 61. 4. 2010 BCSC 1415. 5. 2010 BCSC 1415 at para 50. 6. Regulvar Canada Inc. v. Ontario, 2004 CanLII 6318 (ON CA), 70 O.R. (3d)
641 (C.A.) at para 19. 7. Obasi Investment Ltd. v. Tibet Pharmaceuticals, Inc. et al, No. 18-1849 (3d Cir. 2019). 8. No. 18-1849 (3d Cir. 2019) at 20-21.
board members of the potential conflict, recuse themselves
from voting with respect to the potential conflict or seek
shareholder consent in relation to the conflict, and consider
obtaining both disinterested director and disinterested
shareholder approval of any decisions in which the director
has a potential conflict.
2. Exercise Rights as a Shareholder
Ontario’s Court of Appeal has confirmed that when “acting
as a shareholder, a director is not generally prohibited from
acting in his or her own best interest.”
6 In situations where a
private fund’s consent is required for a portfolio company
action, directors may also wish to consider, wherever
possible, exercising rights as a shareholder, not a director.
3. Consider Acting as a Board Observer
The U.S. Third Circuit Court recently held that two board
observers were not liable for the misconduct of the
7 The board observers in this case were
distinguished from directors because, among other things,
they could not vote on any board action.
8 To mitigate risk,
private fund representatives could consider whether their
goals for joining the board could be equally met by becoming a board observer.