Fiduciary Duties of Overlapping Directors
A recent settlement involving Clayton Act enforcement highlighted antitrust concerns arising from situations in which directors and officers of one corporation serve in similar capacities on the board of a competitor. This settlement also indirectly heightened attention to a more frequent scenario in nonprofit health systems—board and officer overlap between parent and affiliate companies, and their related fiduciary obligations.
As health systems grow and mature, corporate law and governance issues regarding the relationships between parent and subsidiary organizations are becoming more complex, and increasingly more ripe for substantial disagreement or dispute between those organizations and their officers and directors. An increasingly prominent example of this is confusion on the duty of loyalty owed by subsidiary corporation officers and directors—especially those who may simultaneously serve as officers and directors of the parent organization.
There is not, of course, any fundamental legal concern with overlapping officer or directorships between affiliated companies in a nonprofit health system. However, confusion may arise as to the potential for conflict when subsidiary board members are called upon to vote on matters where there is a theoretical or actual potential for conflict between the interests of the subsidiary corporation and the parent. To which organization is their duty of loyalty owed? This potential for conflict can arise regardless of whether the subsidiary directors or officers are simultaneously serving as fiduciaries of the parent, are appointed or elected by the parent, or the parent otherwise exercises substantial reserved powers over the subsidiary.
The conflicts risks arising from these situations can be substantially mitigated by the incorporation in the corporate purposes clause of all of the nonprofit subsidiary corporations, a statement that says, in essence, that their primary organizational mission includes the support of the charitable mission of the parent organization. Such a “common purposes clause” serves to clarify that the ultimate duty of the subsidiary director is to serve the interests of the parent organization.