Should You Take That Board Seat?

Should You Take That Board Seat?

Questions to ask before becoming a private company director. 

An invitation to serve on a board of directors of a private corporation can be an interesting, even flattering opportunity. 

Before accepting an appointment to a board, however, a potential director should engage in an in-depth review of the corporation. They should also ask pointed questions of the corporation’s management and the other directors on the board to obtain a complete picture of the state of business and operations, including any potential legal and business risks that may expose the director to unwanted liabilities.

Here is a checklist of questions to ask before you accept a position:

•          Why is there an open seat on the board? Was the size of the board increased or is there a current vacancy? If the latter, why did the former director leave the corporation?

•          Are there existing conflicts? Are there any areas of conflict or disagreement among the controlling or major shareholders, the directors or between the board and the senior executives? If there have been any such conflicts or disagreements, how have they been resolved? Do these conflicts relate to a systemic issue or does it appear as though the conflicts have been addressed and will not arise again?

•          What is the financial condition of the corporation? Have there been, or are there expected to be, any significant changes in the finances of the corporation? If so, why? How often does the board receive information relating to the finances of the corporation? Does the board have a meaningful opportunity to review and ask questions about those materials? In addition, one should ask to review the financial statements of the corporation.

•          Is there a succession plan in place? What is the plan for dealing with a corporation’s loss of a key member of the board or a senior executive?

•          What is the corporation’s ability to indemnify its directors and what is the strength of its director and officer insurance coverage? You should consider the corporation’s financial ability and legal commitment to indemnify the directors and advance expenses for defending litigation. Indemnification agreements should be in place for all directors. Adequate director and officer insurance coverage can fill the gap left by a corporation’s legal or financial inability to protect directors through indemnification.

•          Does the corporation comply with its corporate governance and other policies? Do any shareholders have significant influence over the decisions of the board or does the board have independence with respect to its decision-making? Are any shareholders (such as preferred stockholders) entitled to appoint a designated director? What is the dynamic between the board and the senior management of the corporation? What types of committees does the corporation have (e.g., audit committee, compensation committee). Does an independent committee deal with decisions regarding insider transactions?

•          Are there any pending or threatened claims against the corporation or any directors? If so, what is the nature of the claims? What was the outcome of any past claims? Did the corporation fully indemnify the directors for such claim and advance expenses to the directors on a “pay as you go” basis? Was insurance available to defend this claim?

•          Has the corporation adopted exculpatory provisions permitted by state statute? These “opt-in” provisions generally prohibit suits based on acts or omissions that would constitute negligence, but would not protect against claims based on breach of the duty of loyalty, intentional misconduct or bad faith.

Getting a clear understanding of these issues is critical to a decision to join a private company board.

Allan Grauberd is the Chair of Moses & Singer’s Securities and Capital Markets Practice group, practicing primarily in the corporate and securities areas, including corporate governance issues. David Lee Kovacs is a partner in Moses & Singer’s Corporate/Mergers & Acquisitions group, practicing in most areas of corporate law involving complex business transactions. Lindsay R. Kaplan is a partner in Moses & Singer’s Corporate/Mergers & Acquisitions group, representing both buyers and sellers with regards to mergers, acquisitions, and divestures across an array of industries.