In today’s investment world, private equity firms, investment managers and other investors often acquire a substantial interest in a business and, as a consequence, earn the right to put “their people” on the company’s board. That person then becomes a “dual fiduciary”—someone with fiduciary obligations to his or her investment firm and also to the “portfolio” company to which the person is appointed to serve. Of course, that person is often well-versed in the portfolio company’s business precisely because of the work of the investment firm, and the person can therefore bring expertise and value to the portfolio company’s board. But because the person owes duties to both entities, this scenario can present challenging issues on the proper exercise of fiduciary duty. In particular, the board member might be called upon to take action that does not benefit the investment firm.
For example, what expectations should we have when the fiduciary participates in decisions that affect both entities? Does the duty owed to one entity “outweigh” the duty owed to the other? How are the two simultaneously existing duties reconciled? How is the business judgment rule—which generally protects corporate directors’ decisions made on an informed basis and in good faith—implicated? And what happens if the portfolio company faces financial distress that requires the board to make hard decisions affecting the investment made by the fiduciary’s “parent” firm? Simply put, can a fiduciary in this position serve two masters?
Core Principles
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