Board Observers: Directing From The Shadows?

In typical private equity/venture capital transactions, investors require visibility on the day-to-day functioning of an investee entity. For this purpose, the right to appoint observers and directors forms part of the plethora of rights investors seek from investee companies. However, at times, investors refrain from appointing any director to the board of directors because of the conflict of interest between the investor as a shareholder and the duties of an investor director towards the company.

As the name suggests, a board observer merely observes board meetings but does not vote or participate in discussions on the matters put forward before the board of directors. Therefore, a board observer does not automatically, on the face of it, become equivalent to a shadow director.