Dilemma of a nominee director sharing confidential information

Company law states that directors must fulfil their fiduciary duty and act in the company’s best interests. However, it may be challenging for a nominee director (nominee), who has also to consider the interests of their nominator that may conflict. May the nominee relay sensitive company information to their nominator or do they have a duty of confidentiality? The nominator may expect the nominee to pass on valuable board information, but this expectation mismatch may cause the nominee to breach their fiduciary duties.

Under section 166(2) of the Companies Act, 2013, a director is required to act in good faith to promote the objects of the company. Section 166(3) provides that a director must carry out his/her duties with reasonable care, skill and diligence, and must exercise independent judgment. While there is no specific provision governing the right of nominees to share information against their confidentiality obligations when dealing with sensitive information, precedent suggests the nominee is duty-bound to put the company’s interest before that of the nominator.

It may be argued that this duty is greater where the nominee accesses and exchanges sensitive business information that could jeopardise the interests of the company and minority shareholders. In that case, the nominee may not be permitted to share any such information with his/her nominator at all. However, this fails to appreciate the nominee’s unique position. Informal channels of communication always exist between the nominator and the nominee, and communication takes place in the shadows, as pointed out in the Kotak Committee Report on Corporate Governance (report).

Instead of allowing information sharing in legitimate cases, such as with strategic investors, regulation ignores the possibility that communication takes place, and simply checks for compliance or lack of it after the event. This regulatory vacuum allows misuse of sensitive business information, especially by significant shareholders, and leads to differential use of information, depending on the bargaining power of different nominators.

Strict interpretation disregards the fact that sharing of information between the nominee and the nominator may be beneficial for the company. A company with a majority holding in another company may not be able to raise funds in time to subscribe to a rights issue, the details of which its nominee had not passed on. This may adversely affect the interests of the majority shareholder and the company.

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), allow an insider to communicate information, including unpublished price sensitive information (UPSI) in “furtherance of legitimate purposes, performance of duties or discharge of legal obligations”. Such legitimate purposes include sharing information in the ordinary course of business by an insider, provided that such sharing has not been carried out to evade or circumvent prohibitions. In Rakesh Agrawal v SEBI, where the UPSI was shared, not with a view to make any personal benefits or secret profits, but to enable a purchase of shares by the preferential allottee that was in the company’s interest, it was held that there was no violation of the PIT Regulations.

To legitimise information sharing between nominees and their nominators, the report recommended a regulatory framework in which listed entities could enter into agreements with a significant shareholder. The nominee would be given access only to such material information, including UPSI, as would be shared with such nominee “in the normal course by virtue of his directorship in the listed entity”. The agreement would maintain confidentiality and the counterparty could share the information subject to compliance with the PIT Regulations.

Perhaps the Securities and Exchange Board of India was unable to accept this recommendation as not being consistent with a key principle in the listing regulations, requiring listed entities to ensure equitable treatment for all shareholders, including minority and foreign shareholders. However, the report provided a mature starting point. Accepting the report’s recommendation, perhaps in a modified form, would harmonise the dual roles played by nominees, without violating the PIT Regulations.

Bharat Vasani is a partner at Cyril Amarchand Mangaldas. Associates Varun Kannan and Rajashri Seal also contributed to the article.