Part 6: Legal liabilities for advisory boards and companies

By Matthew Pringle - October 16, 2018

Part 6 in a six part series - 'The ins and outs of advisory boards' - on establishing advisory boards for small and medium enterprises.

In Part 1 of this series, we explored the distinctions between a board of advisors and a board of directors. In particular, we outlined that the directors of a company’s main board owe duties of good faith and care to the company and can be liable if they fail to meet these obligations. On the other hand, advisory board members do not owe these duties as they are not directors.

However, caution should still be exercised. If clear lines of demarcation between the roles of the advisory and main board have not been established, there may be circumstances where a court thinks that the main board relies on the advice of the advisory board without giving it due analysis and consideration, particularly if there is a negative outcome for the owners of the company. This may lead to accusations that the advisory board members are acting as shadow or de facto directors. A shadow director or a de facto director is deemed by the Corporations Act to be a ‘director’ and will be liable for breaches of directors' duties. 

A de facto director is a person who is not actually appointed as a director but acts as if he or she were (often incorrectly believing that he or she has been properly appointed as a director, or that he or she hasn’t been formally appointed so carries no risk). In some cases, informal involvement in the decision-making of a company can lead to a de facto directorship. A shadow director is also not appointed as a director but is a person on whose instructions or wishes a company’s board members are accustomed to act. These are legal issues which advisory boards seek to avoid. 

Creating a formal charter outlining duties and responsibilities of the advisory board, as explored in Part 3 of this series, will help to properly distinguish its role from that of the main board. This minimises the chances of liability for advisory board members. The charter should include statements about the advisory board members not being appointed ‘directors’ and having no authority to act on behalf of the company or to make decisions on behalf of the company. The charter should also clearly state that the advice given is non-binding. Directors on the main board are still expected to discuss, debate and decide on a course of action themselves, having considered the advice of the advisory board. This charter should be ratified by the business owners and / or the main board. 

Advisory board members should only attend main board meetings when presenting their advice. They should not be generally present for the board’s general business and decision making. To protect the company, the advisory board members should be acting in the best interests of the company and not for personal gain. Their agreement with the company should include a condition requiring disclosure of potential conflicts of interest. They will also be privy to sensitive company information so signing a confidentiality agreement should also be considered. 

Equally, potential advisory board members should undertake a similar level of due diligence on the company as they would when joining a main board, because they may not have access to limited liability, indemnification or insurance on an advisory board as these generally apply to a company’s ‘directors’ and ‘officers’.

Read Part 1: Advisory board vs board of directors – defining the difference

Read Part 2: Do you need an advisory board?

Read Part 3: How to set up an advisory board

Read Part 4: Establishing guidelines for your advisory board

Read Part 5: Finding the right people for your advisory board

Download our 10 tips for creating an effective advisory board

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