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I recognize that many folks involved in the “D&O questionnaire” process view this annual exercise as no more than a “necessary evil” that must be tolerated and made as painless as possible (that’s why we have a “D&O Questionnaire Handbook” with an annotated questionnaire for members). But this recent blog from Woodruff Sawyer’s Lenin Lopez points out that it could be a good opportunity for discussion & training on conflicts of interest:

It’s easy to ask directors to disclose any potential conflicts of interest. The challenge is how to do so in a way that translates into directors openly disclosing any potential conflicts of interest to the company. This is not to say that directors would intentionally look to avoid disclosure. Rather, it is more a matter of education about what types of director-level conflicts they should be on the lookout for. A brief walkthrough of a case like the one discussed in this article can be the basis for a fruitful discussion with the board well in advance of any actual potential conflict of interest arising. As a practice point, this type of discussion may be worthwhile holding in parallel with your company’s annual director and officer questionnaire process or review of the company’s code of conduct.

Why is it worth having these conversations when “fiduciary duties” can also put folks to sleep? Well, every corporate lawyer is bound to face thorny director conflicts of interest at one point or another – and courts continue to interpret the types of relationships that could be problematic. If a director’s loyalty is challenged, you don’t want to be the one who failed to tell them about the issue on the front end – or failed to create a supportive record. The blog summarizes a scenario that the Delaware Supreme Court recently addressed. Here’s an excerpt:

We have previously covered developments in Delaware courts’ view of director independence, including in the context of business and personal relationships. Delaware courts continue to look beyond traditional situations where independence was historically questioned, like financial relationships, and expand their view to include personal relationships, involvement with charities, overlapping business networks, and even shared ownership of aircraft. Two additional situations where Delaware courts have focused their independence assessment, and which may come as a surprise, are personal admiration and director income. In Re BGC Partners, Inc. Derivative Litigation addressed both situations.

On its way to upholding a ruling in favor of the company to dismiss the case (which John wrote about on DealLawyers.com), the court considered a creative argument from the plaintiff that a “teary-eyed” deposition cast doubt on a director’s willingness to consider a demand to sue the company’s Chair & CEO. In doing so, the court considered whether the record showed that the director’s respect for the Chair & CEO was so personal or of such a “bias producing” nature that it would have clouded his judgment.

The blog goes on to offer strategies to help ensure that board decisions get the benefit of the business judgment rule if they are challenged. In addition to encouraging transparency through training, Lenin notes that it’s important to maintain a contemporaneous written record that demonstrates directors were disinterested in their decision making. The court’s commentary shows that it will review this record.

– Liz Dunshee