Board Observers

Transcript:

Hello!

With relation to the Board of Directors, what is an “observer” and what powers does an observer have?

Observers are common in venture capital, private equity, and lending settings[1], and are often appointed[2] by significant[3] investors or stakeholders. Observers may attend board meetings, access information, and participate in discussions, however they have no voting rights. They aren’t formal directors and typically don’t hold the same fiduciary duties or legal liabilities[4].

Powers:

• Access to Information: Observers have the right to receive all board materials and attend meetings, which provides them with critical insights into the company’s operations, strategy, and financial health;
• Speaking[5]: Observers can participate in discussions, ask questions, and offer advice or express concerns[6] on behalf of[7] their appointing party[8]. This allows them to influence decisions indirectly through persuasion and reasoned arguments;
• Monitoring: They serve as a vital link for investors, allowing them to monitor their investment and ensure the company’s strategic direction aligns with their interests;
• Expertise and Guidance: Often, observers bring valuable industry knowledge and experience that can benefit the board, especially in early-stage companies.

Limitations:

• No Voting Rights: Observers cannot vote on any matters[9] submitted to the board for a decision. Their presence does not count towards a quorum;
• No Fiduciary Duties: Unlike[10] directors, observers typically do not owe[11] fiduciary duties to the company or its shareholders;
• Limited Decision-Making Authority: Their only influence is advisory;
• Risk of “Shadow Director” or “De Facto Director” Status: In some jurisdictions, if an observer’s influence becomes too strong, and the formal directors are accustomed to acting[12] on their instructions, the observer could be deemed[13] a “shadow director” or “de facto director.” This can expose them to the same legal liabilities and fiduciary duties as formally appointed directors, which is often what parties seek to avoid by using an observer.

Here is an example regarding the appointment of observers in the Articles of Association:

The shareholders’ meeting is entitled to appoint and dismiss, even without cause, persons to observe the board of directors during its meetings (each an ‘Observer’). Each Observer shall have the right (i) to attend and observe any meeting of the board of directors, (ii) to receive, together with the directors, any relevant and related information or supporting documents, and (iii) to speak and comment on the matters discussed at the board of directors meeting; Observers shall not be considered for the purposes of the quorum required for the approval of any decision of the board of directors, nor shall they have any voting rights or any other powers vested in the directors. Notwithstanding the foregoing, Observers shall be subject to the same provisions applicable to directors as regards the duration of their mandate and the confidentiality commitments related thereto[14], it being understood that Observers shall not be entitled to any remuneration in relation to their office.

Thank you very much and see you next time for more Peter’s Pills to improve your Legal English!

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Note

[1] lending settings – ambiti del finanziamenti

[2] appointed – nominati

[3] significant – di rilievo

[4] legal liabilities – responsabilità legali

[5] Speaking – interventi

[6] express concerns – esprimere preoccupazioni

[7] on behalf of – per conto di

[8] appointing party – la parte che li ha nominati

[9] matters – questioni

[10] Unlike – a differenza degli

[11] do not owe – non hanno doveri/ non devono dare

[12] acting – seguire/agire

[13] deemed – ritenuto/qualificato

[14] thereto – connessi

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Find out more on Board Observers here: “Board Observers – spectators or participants – help or hindrance?” (Source: “Mayer/Brown“).