Disclaimer: This video discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinions.

In prior posts, we’ve discussed the general makeup and duties of the Board of Directors. The Board has the ultimate supervisory authority over the company and must consider what is in the best interest of the shareholders when making decisions. The Board also must make certain recommendations to the shareholders. When the Board makes recommendations or provides updates to shareholders, it must be fully truthful and transparent. “Fully transparent” means that the Board (and the executive suite) must provide a broad spectrum of information and opinions relevant to shareholders when making a decision related to the company.

The Board’s duty to disclose extends beyond simply providing shareholders with the requested documents. The Board and executive team are responsible for giving shareholders a complete picture of the company’s standings. They cannot disregard adverse facts or possibilities. The Board must accurately assess the company’s situation and potential outcomes. The partial disclosure of information or the absence of material information that would make a difference between a yes or no vote on a matter is something that the Board must provide. What constitutes “material information” can differ in different circumstances. A company should speak with counsel if a concern around this comes into question. However, a duty to disclose goes beyond just providing documents. It also includes providing an accurate assessment of opportunities and risks.

Some situations where the duty to disclose may arise include:

  • when a company is asking for changes to the corporate charter, bylaws, or other key governing documents,
  • when a company is asking to raise money,
  • when a company is requesting to incur debt,
  • when a company is evaluating an exit or acquisition.

Generally, shareholder documents will govern whether the Board must seek the shareholders’ approval on certain company decisions. If shareholder approval is required, the company must make a full disclosure related to the decision. It may be tempting to provide some facts that highlight the company’s positives or that weigh in favor of where the executives think the company should go. However, this is not permitted under Delaware law. When a director presents information in an ambiguous, incomplete, or misleading manner, it breaches its duty to the corporation and the shareholders, and there’s potential liability.

When it comes to the duty to disclose, each fact pattern and case is different. An attorney can help the company sort through what it must provide to shareholders. An attorney can also weigh in on whether the company’s presentation displays information fairly, accurately, and compliantly. Check out our other posts on board-related issues. We’re happy to answer any questions you have.