Impartiality is best

Private equity-backed company boards need independent directors, as without them, the legal risks can be high, according to an article in Private Company Director magazine.

The article argues that many companies controlled by a single stockholder or affiliated stockholder have significant minority investors. This is particularly common in private equity-backed companies where the lead private equity fund may have partnered with another fund that takes a secondary position, and where the management team typically also has an equity stake. The article says that while it is not remarkable that owners and their representatives wear multiple hats with private equity-backed companies as well as in other businesses, without careful advance planning, multiple roles can create complex challenges for the controlling owner and its representatives on the board of directors.

This can sometimes lead to directors biting off more than they can chew if troubled times arrive. While there is no perfect solution to handling conflicts, particularly when facing troubles such as a liquidity crisis or other challenges, many difficulties can be avoided if the board has included at least one director who reasonably would be considered to be independent from the controlling stockholders.

The article adds that engaging a truly independent director, preferably two, can be a fairly inexpensive insurance policy against future challenges. It suggests the creation of a special committee by the board to manage such matters and four key points to consider when establishing this committee. These include:

1. Establishing a clear mandate.
2. Guarding against undue influence of interested parties.
3. Retaining knowledgeable, independent advisers.
4. Maintaining accurate record-keeping. 

The full article can be found here.