Boards are, for the most part, collegial affairs. Decisions are made by consensus. Dissention is unusual (certainly public dissention is unusual). If there is a trouble maker on the board, the problem is a short term one. When the nominating committee votes on the candidates for the upcoming meeting, its a straight forward matter to drop the ne'er-do-well.
Sometimes, though, conflicts emerge. It may be a spat that somehow leaks to the press. The recent dispute between Bill Ackman and JP Penney is a rare example. There are, however, instances when the SEC mandates disclosure of a disagreement between directors and the board. Item 5.02 of Form 8-K requires certain disclosures whenever a director resigns or refuses to stand for re-election "because of a disagreement with the company "on any matter relating to the registrant’s operations, policies or practices" that is "known to an executive officer of the registrant".
The provision is fairly blunt. It requires disclosure of disagreements that explain a director's departure without affirmatively conditioning them on a standard of materiality. It is enough that the disagreement "may be material" to investors. See Exchange Act Release No. 26587 (March 2, 1989)("In reviewing the need for more prompt disclosure regarding changes in independent accountants, the Commission noted that disclosures concerning the resignation of adirector may be of similar importance in bringing to light disagreements or difficulties concerning management policies or practices that may be material to an investment decision with regard to the registrant's securities.").
This brings us to the resignation of a director at Dish Network Corporation. According to the WSJ, a director resigned "amid a disagreement over the company's handling of a bid for a telecommunications firm". The director served on the special committee appointed to vet the deal. The special committee recommended that the company make a bid for the firm. According to the article:
- In July, Dish said in a filing a special board committee recommended its $2.22 billion bid for [the firm]. People involved in the matter say the committee members, two independent directors, also indicated to the board they expected the committee to have an ongoing role in the deal discussions.
This did not, apparently, occur.
- The board disbanded the committee at a July 21 board meeting, to the surprise of the committee's members, the people said. On July 23, Dish made its bid for [the firm]. On July 25, [the director], a nearly eight-year veteran of the board, resigned.
In disbanding the committee, the other directors apparently "felt that once the special committee blessed the idea of the deal, the company had sufficient internal controls to ensure a deal would be fair to shareholders".
The company filed a current report on Form 8-K disclosing the resignation. The current report did not, however, disclose the disagreement mentioned in the WSJ article. It may have been that the director did not resign over the behavior described in the WSJ as a "disagreement." Alternatively, there could have been a disagreement that was not known to any "executive officer" of the company.
The latter possibility reveals a potential gap in the disclosure regime applicable to resigning directors. Item 5.02 does not require the company to ask directors about the reasons for resigning. As a result, a director resigning over a disagreement may not inform any executive officer, eliminating the company's disclosure obligation under Item 5.02. That effectively leaves the decision over disclosure in the hands of the resigning director, irrespective of its materiality. Perhaps this should be changed. One way would be to require that resigning directors provide the company with an affirmative statement as to whether the resignation was prompted by a disagreement.