It’s pretty standard for private equity funds to have the right to designate directors of their portfolio companies. There are all sorts of good business reasons to do that, but from a legal standpoint, designated directors and their PE sponsors can confront some thorny issues associated with the fiduciary duty of loyalty. A Quinn Emanuel memo takes an in-depth look at those issues. Here’s the intro:
For the partners and managing directors of PE firms who have also been designated to serve as directors of one of the firm’s portfolio companies (“designated directors”), navigating potential conflicts of interest is a fact of life. As businesses brace for the next economic downturn in the wake of the coronavirus pandemic, these conflicts are likely to become more prevalent and may expose directors to increased litigation risk.
Designated directors need to be particularly cautious in circumstances where the investing firm’s interests diverge from those of the portfolio company—and crises like the current pandemic, which has placed many portfolio companies under financial stress, often give rise to conflicts. In this Client Alert, we address these challenges in the designated director context, focusing primarily on the duty of loyalty under Delaware law.
The memo reviews the application of the duty of loyalty to transactions involving conflicts of interest, identifies potential legal defenses, and discusses approaches for addressing specific types of conflict scenarios.
-John Jenkins, DealLawyers.com October 14, 2020