This case highlighted a number of issues that shareholders should consider when entering into shareholder contracts containing confidentiality clauses. It also addresses the functions of directors and, in particular, whether there is a conflict of interest between directors appointed as representatives of certain shareholders and whether this conflict can be avoided if the directors act in the best interests of the company as a whole. The Levine brothers, appointed to the board of directors by Chester, acted both as richmond directors and as chester`s representatives. These regulations clearly raised the potential for a conflict of interest between Chester`s and Richmond`s interests. The Court found, however, that the founding shareholders (like the Richmond directors at the time) had authorized the Levine brothers, in entering into the shareholder agreement, to act in two capacities, provided that Chester complied with its obligations under the shareholders` agreement. There is, therefore, tacit authorization of a conflict of interest that ultimately occurred. When Chester violated the confidentiality provisions of the shareholders` agreement by authorizing the disclosure of confidential information to potential purchasers, the Court found that the Levine brothers did not comply with their obligation to avoid any conflict of interest under Section 175. This was a conflict of interest whose authority could not be determined by the Board of Directors because it involved a violation of the shareholders` pact (even the instrument that led to the implied authorization). It could be a breakdown of the social relationship or the unfortunate bankruptcy, or even the death of a shareholder. Many companies find themselves in precarious situations because shareholders have not given enough thought to what might go wrong. The above does not summarize all the important clauses that a shareholders` pact should contain. Some other widely recognized clauses relate to drag-along rights, liquidation preferences and debt and equity agreements. Shareholders need to meet and discuss their expectations and commitments to the company before a watertight shareholder contract can be developed.
Finally, a shareholder contract may be terminated if only one of the shareholders wishes to leave the company. In this case, there will be certain provisions of the shareholders` pact to plan what should happen in this scenario. A few years after the agreement was reached, Chester attempted to sell his stake in Richmond and appointed a corporate finance advisor, to whom he disclosed Richmond`s confidential information, as permitted by the confidentiality clause.