Mayer Brown warns that a designated board seat exposes the investor who filled it

The fiduciary half of this is old law, and the memorandum says so. Quoting Delaware case law, the partners write that a director's duties run to "the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights" ^[5]. Liability, on their account, attaches when a designee acts to benefit or at the direction of the appointing stockholder to the detriment of the corporation and all of its stockholders ^[7].

The gap the memorandum is addressing is what sponsors assume. Mayer Brown writes that holders of designation rights may hold the mistaken belief that their designee is a representative who monitors corporate developments and votes in their interests ^[8]. Under the rule the partners describe, the instruction is itself the conduct a plaintiff has to show.

All three decisions come from one judge, Vice Chancellor J. Travis Laster ^[12], so the rulings rest on a single judge's reasoning ^[15]. They say nothing about how the rest of the Chancery bench would handle the same facts.

The one case described in the text shows how the dispute arises. Holders of Class A preferred had a designation right under a governance agreement, and they later alleged that the director they elected went along with the rest of the board through successive governance amendments and related transactions that reduced and then eliminated Class A rights and preferences ^[13]. Their claim was contractual: they sued on the implied terms of the governance agreement ^[13]. The published text breaks off before the court's answer ^[17].

The staffing is the part a sponsor can do something about. Designated directors are often principals, officers or employees of the appointing stockholder, and they can also be individuals independent of both the corporation and that stockholder ^[14]. A partner in the seat gives the fund judgement it trusts and direct sight of the board's deliberations. An independent designee weakens any inference that the fund directed the vote, and costs the fund that sight.

For a term sheet being negotiated this quarter, none of this changes what the seat is worth, because the duty attached to it has been settled in Delaware for years ^[4]. The change arrives the next time a conflicted transaction reaches the board, when the fund's designation right becomes one of the facts that determines its status under the amended statute ^[10].