When to Break a Confidence

Can you reveal to the owners that a board member is leaking information to the super about confidential board discussions?

For the last year, my board has been struggling with what to do about a super who has not been doing the job, but has many allies among the shareholders for whom he does work or other favors. One of those allies is a board member who leaked information about our board discussions, which led the super to go on disability both to try to prevent his firing and because he is angry that the board was discussing the termination of his services. Now that board member is putting together a slate to try to unseat the existing board at the upcoming annual meeting, and several long-serving board members can’t take the pressure and have announced that they’re not running. I need to know whether that board member was allowed to leak the board information, and whether I can disclose to shareholders that this board member and some others on his slate are paying the super on the side to do work on their apartments.

Board members have a statutory duty (BCL Section 717(a)) to act “in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances.” They also have common law fiduciary duties of care, loyalty, unselfish action, honesty, morality, and the like in their dealings with and on behalf of the corporation that they serve and its shareholders. One appellate court recently held (in State of New York v. Greenberg) that a director must maintain the “confidentiality” of “communications” between the board and its attorneys; in other words, that it is not for an individual director to decide to waive the attorney client privilege with regard to a corporation’s communications with its attorney. In any case, this would apply to sensitive board deliberations even when not involving communications with an attorney, as for example deliberations about the job performance and possible termination of a co-op’s superintendent.

On the other hand, situations do arise in which a board member justifiably concludes that disclosing at least the existence of the deliberations – and even certain aspects of them – not only does not violate the board member’s fiduciary duty, but, in fact, is mandated by it; for example, if the board member perceived that the board was considering action against a superintendent that was improperly conceived or motivated, and about which a substantial portion of shareholders would object. So, there is no hard and fast rule governing this, unless the attorney-client privilege prevents the disclosure.

For boards, when deliberating about sensitive and potentially controversial matters, the guiding principle should be to not let the deliberations and decision-making drag on any longer than absolutely necessary, because the more time that passes the more likely it is that any objecting board members will the feel the need and have the opportunity to reach out for support beyond the board, and thereby inevitably reveal matters and details that the board would like to keep confidential at least until the decision is made and implemented.

As a postscript, some boards have considered adopting board standards of conduct, which typically include loyalty and confidentiality provisions. These could enhance a co-op’s claim for damages if it decided to pursue a board member for damages arising from a breach of confidentiality. This could have a strong deterrent effect even if the likelihood is low that a co-op would or successfully could pursue such a claim. But most board members will not knowingly open the door to this additional burden on their already tenuous desire to serve; and most shareholders would be reluctant to chill the willingness of a board member to approach them directly if an impropriety is suspected. So, it seems that these types of provisions are not likely to become widespread.

As another postscript, the questioner should be very careful revealing to shareholders any suspected improprieties by the board member who disclosed the deliberations regarding the superintendent. If those improprieties are untrue, or even simply exaggerated, the board member could strike back with defamation claims.