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October 10, 2006


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As far as I know, the contracts that Dean Levmore anticipates don't exist. (Do any Board member readers know otherwise?) From this we can guess at a few things. One possibility is that the problem of boardroom leaks is handled by unwritten contracts -- every board member knows that if they go outside of certain bounds that the firm's investigative machinery will bear down on them. (In an upcoming interview with "60 Minutes", ousted HP board member Patricia Dunn says that these practices are ubiquitous.) If this is the case, then the conduct in the HP case directed at board members may be fine; the conduct directed at third parties, like reporters, might be another story, since they would not be party to the tacit agreements that bind board members. Maybe board members didn’t expect phone pretexting, but it might not be as far a field of acceptable conduct as it seems at first.

Another possibility is that the costs of writing these contracts, either explicitly or otherwise, would be too high, since they may undermine board collegiality. In other words, they would be like pre-nuptial contracts. If so, then the law may have a role to play in changing the equilibrium: we could establish a default rule one way or the other and force the parties to contract. The first-best solution might be to have a statutory rule that empowered the CEO or a special committee of the board to conduct such investigations, akin to those required under the Caremark case, in certain cases, unless the firm’s charter or by-laws provided otherwise. This way all parties would be on notice that this was possible, and shareholders and directors would have the choice to make.


Timothy Glynn (Seton Hall Law School), guest-blogging at _Concurring_Opinions_, discussed this last week.


Specifically, he considered, "What if members of HP’s Board of Directors had agreed in advance to be spied on?"


I think Prof. Levmore is suggesting that boards, even if they have not historically done so, may want to impose confidentiality and other obligations on directors by contract and have directors pre-authorize investigators to obtain phone records, etc., in the event of leaks.

This could, of course, be in the bylaws, but I would counsel a corporation thinking of this approach to prepare a separate agreement and have each director sign it.

I don't believe a statutory solution is necessary or desirable, as I see no reason why a contractual approach would not work.

Sounds like an ingenious solution to the H-P problem to me.

Dirk van de Broek

so is Hewlett-Packard going to be eud or not?

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