Beware Observers And Nominee Directors

Shareholders and investors require visibility on the day to day management of a company in which they hold economic interest. The same holds good for lenders with respect to the affairs of the borrowing company. To ensure control and supervision, clauses providing for the appointment of observers and nominee directors on a company's board are commonplace in transaction documents today. The observer is often a predecessor of the nominee director. Since the observer is appointed post-signing but before the consummation of a transaction, once the transaction is consummated, his role ends and the role of the nominee starts. It is thus important for both the nominator as well as the observer/nominee to understand the risks associated with his appointment.