It is quite common for a third party to participate in meetings of a board of directors of a limited liability company. Does the duty of discretion imposed on all directors apply to those third parties?
Although no legal provisions impose expressly a duty of discretion on directors of limited liability companies, it is unanimously admitted by case law and legal authors that, within the framework of their office, directors of limited liability companies have to comply with a duty of discretion. This duty prevents the directors from disclosing information they became aware of as a result of the exercise of their functions when such disclosure may affect the company.
In other words, the said duty of discretion aims at protecting a company from the disclosure of, among other things, business secrets, commercial decisions and general strategic orientation, in particular, vis-à-vis its competitors.
The duty of discretion is, from a legal perspective, mainly based on the general obligation to execute agreements in good faith. As a director is legally bound to the company by a mandate given by the general meeting of shareholders, it is admitted that a director disclosing sensitive information to the outside world (and even in certain cases to shareholders – see art. 540, al. 1. of the Companies Code) is in breach of his obligation to execute his mandate in good faith.
Knowing that, it is worth analysing whether the above mentioned duty of discretion also applies to third parties participating in meetings of the board of directors.
In practice, we note several situations in which such a third party would take part in the meetings of the board of directors. For instance, the following happens regularly (the below list is not exhaustive):
- In case some resolutions require explanation from an external expert (such as an accountant, a banker, a lawyer, a tax adviser, etc.).
- In case of transfer of shares and earn-out payment mechanisms, the beneficiaries of the earn-out payments (being the sellers of the shares) may require the presence of a third party observer to monitor the decisions of the board of directors and their impact on the result of the company.
As explained above, it is quite common for third parties to participate in deliberations of the board of directors and, therefore, become aware of information regarding the company, such as business secrets or prospective strategic decisions.
However, the duty of discretion of a director does not automatically extend to those third parties. Indeed, a third party is not contractually bound to the company, as is the case for a director. Therefore, the general principle of execution of contractual obligations in good faith does not apply as such to third parties participating in meetings of the board of directors of a limited liability company. However, those third parties may of course be held liable on the ground of common principles of liability for disclosing information.
From a practical point of view and to be on the safe side, as the duty of discretion imposed on directors does not extend to third parties participating on meetings of the board of directors, it is highly recommended that a non-disclosure agreement is signed by those persons before any participation in the meetings of a board of directors. By doing so, any participant in board meetings disclosing information will be in breach of his contractual obligations and, on that ground, may be held liable vis-à-vis the company.
