Shakerhill Partners

When Board Interests Clash


Alan Hibben, ICD.D. 

A debt holder joining a board stands to have different interests than those of the shareholders. In such a case, boards should openly discuss director independence and have a well-planned set of protocols in place.

Board members involved in the venture capital business are very familiar with representing investors who have disparate economic interests. Around the boardroom table might be representatives of common shareholders, holders of preferred shares with a “double-dip” feature, convertible note holders and venture debt providers. Typically, these companies are private and the governance tends to be quite collegian – at least until a financial crisis develops or a realization is in sight. Board dynamics also tend to be unremarkable on a typical public company board, where all of the directors have been elected by the general body of shareholders. In these circumstances, all of the directors come to the board table in the same manner, free from any actual or perceived loyalties to any one or more individual stakeholders. In recent years, a number of public companies have appointed (or elected) directors based on their relationship to a debt holder. Recent, high-profile
examples include:


  1. The appointment of representatives of Fair fax Financial Holdings Ltd. to the board of BlackBerry Ltd., pursuant to the terms of a private convertible debt offering (2013).
  2. The appointment of a director to the board of Yellow Media Ltd. by restructured debt holders (2012).
  3. The appointment of trustees pursuant to a restructuring of the debt of Tree Island Wire (2009).
  4. The appointment of directors to the board of Timber West Forest Corp. by British Columbia Investment Management Corp. and the Public Sector Pension Investment Board, pursuant to a convertible debt recapitalization (2008).

These transactions, and others like them, typically involve convertible debt, occasionally debt plus warrants and sometimes debt plus common shares. While all of the above examples relate to recapitalization or restructurings, other examples with less public disclosure can involve the pure market purchase of debt and common shares, followed by threatened or actual proxy battles which result in board representation (such as Achernar Oil and Gas Ltd. in 2012).

The net result of these types of transactions is that new members are added to boards representing (or often employed by) investors who have a different payoff interest than common shareholders


In Canada, directors owe their fiduciary duties to the corporation, which, while subject to extension and interpretation following the Supreme Court of Canada’s BCE Inc. decision, generally requires special attention to the interests of shareholders. And while board members representing hybrid or other securities may also own common shares, the balance of their interests sometimes may not align with those of common shareholders. Consider these examples before a board:


  1. A convertible debt holder is far out of the money when a small but very risky project is being discussed.
  2. A holder of debt below par with a small shareholding is present when a large capital project to be financed with additional senior debt is discussed.
  3. There is a potential for a covenant in the debt to be triggered by a proposed transaction or by forecast operational issues.

In these cases, the payoff to shareholders is viewed completely differently than the payoff to the debt holder. In certain circumstances, the debt holder may prefer the high-risk solution; in others, the debt holder may prefer the “stay the course”, low-risk solution. Neither may be in the best long-term interests of the corporation or its shareholders.


In a number of cases, a debt holder will also have elements of business control that are derived from the covenant pattern of the instrument. In addition, the debt holder may have the right to receive certain reports and information that provide the debt holder with greater insights into the company’s operations than the typical board member. Finally, the terms of these debt instruments may, directly or indirectly, afford the debt holder greater influence over the corporation’s management and its decision-making.


This difference in payoff and influence changes the dynamic of the boardroom. As chair of such a company, how can you ensure that alignment is maximized and good working relationships are maintained? Or as an interested board member, how can you ensure that you appropriately discharge your fiduciary duties?


  1. One of the jobs of the chair is to identify the “elephant in the room”, and this is likely best addressed in the first meeting of a reconstituted board. All members should be aware of the potential for conflict on the part of the interested board members and not be afraid of it. Rather, the potential conflict should be acknowledged, accepted and managed as part of the new dynamic.
  2. The board should deal openly and objectively with the issue of director independence, paying particular attention to the implications of independence assessments for committees such as audit, governance and compensation. The board should also be aware of the difference between independence and “interest”, where the latter might be applicable only in certain circumstances and perhaps not generally. Directors representing an investor may be employees of the investor, co-investors of the investor or simply nominated by the investor. Each circumstance must be viewed individually to determine independence and identify the circumstances in which a conflict of interest may arise
  3. Members representing an investor should have their own counsel advise them on the circumstances in which they should recuse themselves from participating in a discussion or simply abstain from voting on a decision. In addition, representatives of debt holders should be clear themselves of the circumstances where it is possible that “lender’s liability” might be
    attracted and exacerbated by their board positions.
  4. The board should have a full and frank discussion of both the strategy of the company and the conclusions of the board with respect to the express risk tolerance of the company.
    Following a full discussion, the basic tenets of the company’s strategy and risk tolerance should be documented. Such a document can be a useful guideline for future meetings and can serve as an objective reference point during times of stress.
  5. A schedule of cascading “in camera” meetings at each board meeting will provide a regular forum for the discussion of potential issues that may arise from time to time due to disparate
    perspectives and interests. It is particularly important for the company’s management to be able to speak frankly with the board about structural and other issues within the debt instrument
    that may give rise to strategic or tactical differences with the debt holder. This is particularly the case where the debt instrument has covenants that may restrict the company’s strategic options. As usual, this will require a chair that is well versed in the art of board dynamics.

In a large number of cases, having interested party directors on the board will not only be uneventful, but useful. If business results meet expectations, there is typically little difference in board dynamics compared to a fully independent board. However, in those circumstances where results don’t meet expectations, or where proposed transactions reveal a difference inpayoff between common shareholders and debt holders, a well-planned set of board protocols will be helpful to all.

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