What is Advisory Board Agreement?

The Advisory Board Agreement is the formal legal agreement between the company and each member of the advisory board.

The Corporations Act defines directors as (i) people whom are appointed as directors, but also (ii) non-elected people with power and influence over the company.  Such people are known as shadow directors. A shadow director is someone in accordance with whose directions or instructions the directors of the company are accustomed to acting.

It needs to be clear in the Advisory Board Agreement that the advisory board does not have these powers or obligations. Your advisory board agreement should be clear that advisory board members do not have power and influence over the company. The advisory board cannot give directions or instructions to the directors of the company. The company is not required to act in accordance with directions or instructions of the advisory board. This clarifies the role and helps protect your advisory board from being seen as a director and having director’s liability.

Role of the Advisory Board

Unlike the members of a company’s board of directors, shareholders do not elect board advisors. The advisors instead are appointed by, and generally serve at the pleasure of, the board or company management. Before a company begins a relationship with a board advisor or establishes an advisory board, the company and its counsel should have a clear idea of the benefits the company expects from the relationship and how the relationship will function in practice. A company and its counsel should also be prepared to address common board advisor concerns and protect key company interests throughout the relationship.

A board advisor’s precise duties and responsibilities depend on the company’s particular needs and objectives. Board advisors generally provide the company with knowledge, expertise, and connections that expand those of the company’s management and directors. For example, an entrepreneurial company may engage board advisors who have started their own businesses to help identify common pitfalls or be a sounding board for product or business plan ideas. A mature, public company may organize an advisory board because, unburdened by regulatory and oversight responsibilities, the advisors will be free to focus exclusively on strategic issues, such as technology improvements, product marketing and development, and the like.

 

Advisory Board Agreements – Key Provisions 

Duties 

The agreement should specify that the advisor’s role is to provide consulting services, either to the board of directors or to management, as an independent contractor. It should make clear that the advisor has no power to act for, represent, or bind the company and cannot take action that implies it has this type of authority. The agreement also should specify the duties the company expects the advisor to perform, which may include: (1) the number of meetings, conference calls, or other events the advisor must attend; (2) any preparation the advisor should complete in advance of these meetings or events, including reviewing materials such as business plans or budgets; and (3) any other duties the company and advisor have agreed upon, such as identifying business opportunities or assisting the board with management communications. 

Term of Service 

Advisors generally serve at the will of the board or company management. However, providing for a term encourages advanced planning and helps ensure the company and advisor are on the same page about the minimum commitment expected. It also provides the company a graceful way to exit the relationship if the advisor does not add value. Even if the agreement specifies a term, it should also clearly state that the advisor serves at the will of the board or management and that the agreement may be terminated at any time by either party, with or without reason.

Compensation

Companies take different approaches to compensating their board advisors. Whether or not the advisor is compensated, the agreement should address which party is responsible for expenses and how expenses must be reported. If the advisor will be compensated, the amounts and timing of payments should be specified. If the compensation involves an equity component, then there will be many more issues for consideration and much more documentation involved, all of which is beyond the scope of this article. 

Information and Participation Rights 

Unlike directors, board advisors have no statutory or common law right to receive notice of meetings of the board, to receive any materials or other information provided to directors, or to inspect the corporation’s books and records. Any rights extended to the advisors, therefore, are provided voluntarily by the directors or company management. Also, unlike board observer arrangements, the right to access company information is, in most cases, expressly reserved to the company in its sole discretion.

In order to ensure that the advisors can assist the board or management effectively, however, the company should provide copies of all notices, minutes, reports, and other materials that the corporation provides to members of the board (or committee) at such time as those documents and materials are provided to members or the board or committee. That said, the agreement should be clear that the company, in its sole discretion, may or may not provide information as it deems necessary or appropriate.

Confidentiality and Privilege 

Given that board advisors will have access to board meetings and sensitive corporate materials, all confidential and proprietary materials and information furnished to the advisor must remain the property of the corporation, and the use and disclosure of such materials and information should be restricted. The agreement should contain a detailed definition of what constitutes “confidential information” and should require the advisor to keep those materials confidential, subject to customary exceptions (e.g., where the disclosure is required by law).

The advisor will want to ensure, however, that the confidentiality restrictions are not drafted so broadly as to encroach upon his or her other business activities. For this reason, the company should carefully consider any conflicts of interest that might develop in light of its business and an advisor’s other activities and commitments.

If the agreement permits the advisor to share confidential information and materials with his or her representatives, it should obligate the advisor to inform such representatives of the restrictions on the disclosure and use of such information and materials and instruct them to comply with those provisions. The agreement also should provide that the advisor is responsible for any breach of the agreement by his or her representatives.

A corollary to confidentiality is attorney-client privilege. A recent Illinois decision confirms that, generally speaking, the privilege does not extend to advisors. (See BSP Software, LLC v. Motio, Inc. (N.D. Ill., June 12, 2013).) This includes discussions during board of directors’ meetings with counsel regarding privileged matters. As a practical matter, this means that advisors should be asked to step out of any meeting when privileged matters are being discussed, and privileged documents should not be shared with advisors.

Protecting Intellectual Property, Disclosing Conflicts of Interest 

The company also should take steps to protect any intellectual property its advisors may create while performing their roles. Developments or other works created by advisors generally would not be deemed work-for-hire owned by the company. As a result, any intellectual property rights would generally be retained by the advisor. Therefore, the agreement should contain an express assignment to the company of any developments or works created by the advisor within the scope of his or her engagement, or that otherwise arise from the use of the company’s confidential or proprietary information.

More broadly, the company again should consider potential conflicts of interest of its advisors or prospective advisors. Generally speaking, a company may not want to engage an advisor that is also serving on the board of, or consulting with, a competitor or company in a related industry. Those circumstances create conditions for potential cross-over discussions of proprietary information or trade secrets, which may lead to disputes over IP rights. For this reason, the agreement should clarify whether the advisor’s role with the company is exclusive, and the advisor should represent and warrant that his or her duties under the advisory board agreement do not conflict with any arrangement with another company or venture. 

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