Unfettered discretion is paramount: the governance relationship between the private equity firm and the underlying portfolio investee company
Author Wentzel Oaker
Affiliations: BA LLB LLM LLD Post-Doctoral Law Fellow, Stellenbosch University, Visiting Post-Doctoral Law Fellow, Duke University
Source: Stellenbosch Law Review, Volume 31 Issue 1, 2020, p. 158 – 176
One of the features of private equity investing is the private equity firm appointing individual(s) to serve on the board of directors of the underlying portfolio investee companies to manage the interest of the private equity fund and ultimately to act in the best interests of the fund’s investors. This article discusses the statutory and common-law duties of a director, including the specific issues related to the interrelation between private equity firms and the portfolio companies in which they invest. However, in the context of a private equity fund, this expectation can often be problematic because directors must exercise their duties with unfettered discretion. Directors cannot, without the consent of the company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings. Therefore, a director who is appointed to represent certain shareholders (albeit a private equity fund(s)), is still obliged to exercise his or her discretion and must act positively to protect the interests of the company even if they conflict with those of the people who elected him or her.