Conflicts of Interest (Part Three - Recusal)
A useful test for determining whether recusal is necessary is:
If the board’s decision were challenged at a later date, could a reasonable person argue that the outcome was influenced by a director’s undisclosed or unmanaged interest? If the answer is yes, recusal is likely required.
Disclosure is not recusal
Boards sometimes conflate disclosure with recusal, but they are distinct safeguards.
Disclosure requires a director to place the nature and extent of their interest before the board. This allows the other directors to assess the conflict and properly evaluate any contribution the interested director makes to the discussion.
Depending on the circumstances and the applicable law, an interested director may still be permitted to participate. This may be appropriate where the board is fully informed, concludes that the director’s input would be valuable and determines that the interest will not compromise — or appear to compromise — the integrity of its decision.
Recusal goes further. It is appropriate where the conflict is sufficiently material that the interested director’s participation, even after full disclosure, would be inappropriate or could undermine the integrity or credibility of the board’s decision.
Recusal is more than abstaining from the vote
A director is not necessarily recused merely because they abstain from voting.
In the Delaware case Voigt v. Metcalf, C.A. No. 2018-0828-JTL (Del. Ch. Feb. 10, 2020), the Court rejected the notion that interested directors could address the problem simply by abstaining from the final approving vote. Their abstention could be viewed as a performative, “cookie-cutter step” because they “did not absent themselves from the process entirely.”
Effective recusal generally requires the interested director to refrain from participating in the decision-making process from the time the matter is raised through the conclusion of the deliberations and any vote. It may also require the director to avoid receiving privileged or confidential materials concerning the matter, except where access is legally required or otherwise appropriately authorised.
Recusal often means leaving the room
In practical terms, recusal will often require the interested director to leave the meeting.
A conflicted director who remains in the room may influence the discussion even without speaking. Other directors may become more guarded or diplomatic in their comments and may be less willing to offer candid or incisive views. The interested director’s expressions, body language and general demeanour may also — intentionally or unintentionally — affect the deliberations.
Physical absence helps the remaining directors discuss the matter freely and demonstrates that the conflict was managed substantively, rather than merely as a procedural formality. For virtual meetings, the equivalent may require the director to leave the call or be placed in a separate virtual waiting room.
Timing and documentation
Recusal should occur before deliberations begin. The interested director should return only after the discussion and, where applicable, the vote have concluded.
The minutes should record:
the director’s disclosure of the interest;
the board’s decision that recusal was required;
when the director left the meeting;
confirmation that the director did not participate in the deliberations or vote;
the board’s decision; and
when the director returned.
If the matter appears on several successive board agendas, the conflict should be addressed— and the recusal properly implemented and recorded — on each occasion. Recusal from one meeting does not automatically establish that the director was absent from every later stage of the process.
Substance over form
Proper recusal is not a tick-box exercise. Its purpose is to protect the integrity of the board’s process and preserve confidence in its decisions. The precise requirements will depend on the governing law, the organisation’s constitutional documents and conflicts policy, and the nature and materiality of the interest.
Recusal undertaken in the right way and at the right time may materially reduce the risk of a successful challenge to the board’s decision, the avoidance or invalidation of a transaction, and potential liability for breach of fiduciary duty.
Read our previous articles in this series:
