Stake-building is officially back in vogue[1], with bidders of high conviction using the tool to get their foot in the door and get the ball rolling. What can a nominee director do to help? And more importantly, what can’t they do? Some superannuation funds are already seeking to nominate directors to Boards of listed companies. But what’s a shareholder to do once it gets the stake? A US court recently curtailed the infamous activist investor Carl Icahn from using information obtained by his nominee director after a small share raid. It’s a timely reminder to shareholders that they can’t assume that their nominee directors have an unfettered discretion to share information with them, particularly in the context of a control transaction.
As we already exposed[2], it is a corporate myth that large shareholders are entitled to a seat on the Board. The next myth to be busted is the idea that if a shareholder does get a nominee director, that director is per se permitted to share information with its nominating shareholder.
The Wall Street titan Carl Icahn recently faced this issue.[3] Funds controlled by Carl Icahn (Icahn Funds) acquired a small stake in the NASDAQ listed Illumina, and then got a nominee director appointed at the AGM. The nominee director provided the Icahn Funds with confidential and privileged Illumina information which was then used by those funds to bring legal proceedings against certain Illumina directors for a breach of directors’ duties case. Unsurprisingly, a Delaware Court ruled earlier this year that the Icahn nominee director was not permitted to share confidential and privileged information about Illumina to the Icahn Funds in that manner.
Delaware Courts have in the past permitted nominee directors to share company confidential information with its appointing shareholder – generally where the shareholder has the right to nominate a director (either by contract or through voting power), or where the nominee director serves as a controller or fiduciary of the shareholder (such that the nominee director can’t split their brain between their position as nominee director, and controller of the shareholder).
Importantly for local bidders, no such right exists under Australian law. If an appointing shareholder wants access to company information, it must negotiate the right to do so and cannot expect its nominee director to have an unfettered discretion to share confidential company information.[4]
The Icahn scenario is incredibly unique (i.e. involving information being used for a derivate claim). A more common scenario is the flow of information from a nominee director to a nominating shareholder in circumstances where the shareholder is considering a control transaction. Public companies have navigated this in the past through a conflict-of-interest policy, requiring the nominee director to agree not to share company confidential information to a third party and not to use company confidential information for any purpose other than in discharging their duties as a director (see approach taken by Atlas Arteria in granting IFM a Board nominee[5]).
Of course, this does not mean that stake-building cannot be an effective component in the chemistry of public M&A. Like all matter it has is strengths and weaknesses. But let buyers be aware, you can’t expect your nominee director to share inside information with you.
https://www.afr.com/companies/financial-services/corporate-myths-that-should-die-by-christmas-20221204-p5c3h1.
Icahn Partners LP et al. v. Francis deSouza et al., C.A. No. 2023-1045-PAF: chancerydaily.com/documents/65a7bf4c0280a.
See in particular s183(1)(a) of the Corporations Act which prohibits a director from using information to gain an advantage for themselves or somebody else.
