Ask Habitat: What Happens If a Board Member Leaks Information?
Nov. 20, 2014 — A READER ASKS: For the last year, my board has been trying to figure out what to do about a super who has, in our opinion, not been doing his job. He has many allies among the shareholders because he does favors and side projects for them. One of those allies is a board member, who we believe tipped him off about our plans to fire him. The super, to safeguard his job, has gone on disability, and the board member is trying to unseat the current board at the upcoming annual meeting. Several longstanding board members can’t take the pressure and have announced they’re not running. Can I tell the shareholders that a board member leaked information to the super about confidential board discussions? And can I also disclose that the board member and some others on his slate are paying the super on the side to do work on their apartments?
HABITAT ANSWERS: Board members have a statutory duty — BCL Section 717(a) — to act “in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances.”
They also have common law fiduciary duties that include care, loyalty, unselfish action, honesty and morality in their dealings with and on behalf of the corporation they serve and its shareholders.
One appellate court recently held (in State of New York v. Greenberg) that a director must maintain the “confidentiality” of “communications” between the board and its attorneys. It is, therefore, not for an individual director to decide to waive attorney-client privilege with regard to a corporation’s communications with its attorney.
This ruling applies to sensitive board deliberations, even those that don't involve communications with an attorney, such as discussions about a superintendent's job performance and possible termination.
But what if a board member perceives that the board is considering improperly conceived or motivated action against a superintendent? The board member may justifiably conclude that disclosing at least the existence of the deliberations — and even certain aspects of them — does not violate the board member’s fiduciary duty, but, in fact, is mandated by it.
Not so clear-cut
So there is no hard-and-fast rule governing this issue, unless the attorney-client privilege prevents the disclosure.
When deliberating about sensitive and potentially controversial matters, a board's guiding principle should be to act as quickly as possible. The more time drags on, the likelier it is for objecting board members to reach out for support beyond the board, and thereby inevitably reveal confidential details.
Some boards have considered adopting standards of conduct, which typically include loyalty and confidentiality provisions. But it is unlikely that many board members, who already have a tenuous desire to serve, will want to shoulder the additional burden. And many shareholders will likely be reluctant to discourage a board member from approaching them directly about a possible impropriety. It seems, therefore, these types of provisions are not likely to become widespread.
The questioner should also be very careful about disclosing to shareholders any suspected improprieties by the board member who disclosed the deliberations regarding the superintendent. If those improprieties are untrue, or even simply exaggerated, the board member could strike back with defamation claims.
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