In times of Board stress, it is possible to rent one or more directors to do your heavy lifting.  Hence, “Special Purpose Directors.”

Typically, if there is a possible conflict of interest to be resolved, or if there is a pending derivative suit against the board brought by a stockholder, or if a forensic investigation is called for, standing directors may be ill-suited, too conflicted, or too time-constrained, to undertake the fiduciary duty of investigating and deciding on proper corporate action. In these instances it is growing more common to retain one or more completely independent directors to undertake the intense task.

(Note that if there is no apparent conflict involving the board or controlling stockholder, as in the case of a possible company sale to an independent third party, boards typically form their own special committee from existing members and are advised by independent outside sources.  But if there is an odor of possible conflict of interest suffered by the whole board or a substantial portion of the board, it is not unusual to recruit outside.)

The test for independence in such circumstances is very strict, beyond the definition of independence typical of SEC or Exchange situations; and, the actual appearance of independence on the part of the new directors, in fulfilling their duty, also will be examined for any taint of bias even after they are elected.

Speaking of elections, a board needs to be sure that it has the power under charter and by-laws to expand the board without a shareholder meeting (pretty critical for public companies), or it may need to ask one or more directors to step down and make room within a board size cap.  And it is wise to provide a mechanism to make sure that a specially named director steps down when the dust settles; holding a resignation subject to board acceptance is one easy method.

Finally, compensation must be addressed.  Serving as a special director is more like a full-time job in intense situations, and generally cash compensation well beyond the typical board stipend is in order; equity can be considered although in some circumstances it may create a hint of self-interest.


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