Academic journal article Law and Contemporary Problems

Director Confidentiality

Academic journal article Law and Contemporary Problems

Director Confidentiality

Article excerpt



The Hewlett-Packard board-leak-investigation scandal in 2006 and the push for board representation by shareholder activists both focused attention on the obligation of directors to maintain the confidentiality of corporate information. (1) There is, however, sparse analysis of that aspect of director duties in American legal materials. The Corporate Directors Guidebook contains the bare proposition that "a director must keep confidential all matters involving the corporation that have not been disclosed to the public." (2) The Guidebook also provides the following supporting material:

   A director who improperly disclosed nonpublic information to
   persons outside the corporation could harm the corporation's
   competitive position or damage investor relations and, if the
   information is material, could trigger personal liability as a
   tipper of inside information or cause the corporation to violate
   federal securities laws. Equally important, the unauthorized
   disclosure of nonpublic information by directors can damage the
   bond of trust between and among directors and management,
   discourage candid discussions, and jeopardize boardroom
   effectiveness and director collaboration. (3)

This article explores the need to modify the flat recitation of a rule of director confidentiality in light of the limited authority for a blanket restriction, and the necessary exceptions in the business contexts in which the issue arises. In particular, many situations do not involve damage to the corporation, or there is express or implied consent to the sharing of information.



A. Statutes

A confidentiality requirement does not arise directly from statutory formulations. Section 8.30 of the Model Business Corporation Act (MBCA) describes the following director standard of conduct:

(a) Each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith, and (2) in a manner the director reasonably believes to be in the best interests of the corporation.

(b) The members of the board of director's ... shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. (4)

Most state statutes, notably excluding Delaware, contain similar formulations. (5) The Official Comment to section 8.30 states that section 8.30(b) is often characterized as a duty of care and that "[s]ection 8.30(a) establishes the basic standards of conduct for all directors," including a duty of loyalty. (6) Although there is no discussion in the Official Comment of a director's duty of confidentiality to the corporation, section 8.30(c) does deal with director disclosures to the corporation's board or a committee, and contains an exception to the obligation because of a "legally enforceable obligation of confidentiality." (7) Section 8.62(b) contains the same exception. (8) The Official Comment to section 8.62(b) uses the example of "common directors who find themselves in the position of dual fiduciary obligations that clash." (9)

B. Restatements

Although corporate directors are neither trustees nor agents, there are sufficient similarities in the positions to allow references to the moreestablished bodies of law in dealing with fiduciary duties of trustees and agents to use those principles in defining the obligations of corporate directors. The Restatement (Third) of Trusts section 78 states as to the duty of loyalty:

(1) [Al trustee has a duty to administer the trust solely in the interest of the beneficiaries....

(2) ... [T]he trustee is strictly prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee's fiduciary duties and personal interests.

Additional General Comment:

i. …

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