The Third Circuit recently issued an important decision for
private fund advisors who serve on corporate boards. In a
precedential decision on a matter of first impression, the Third
Circuit distinguished the role of nonvoting board observers from
the function of formal corporate directors. And while the decision
was issued in the context of liability for alleged violations of
the securities laws, the Third Circuit suggested the analysis may
apply more broadly to other situations involving board
observers.
The case, Obasi Investment Ltd. v. Tibet Pharmaceuticals,
Inc. et al, began in New Jersey federal court as a class action
lawsuit alleging Tibet Pharmaceuticals failed to disclose certain
information about its financial health prior to its IPO. Two of the
defendants, Downs and Zou, claimed they were merely observers to
Tibet's board and therefore should not be found liable for any
misconduct of the company board. The trial court judge granted
summary judgment in
