What are board observer rights?

December 1, 2007

Some investors request that they have the right to have an observer at board meetings. The observer attends board meetings and may participate in board discussions, but does not have the ability to vote on matters. Some investors request that they have a board observer in addition to a board seat. An observer right is typically contained in a side letter in connection with a venture financing or one of the investment documents.

Board observers are sometimes excluded from portions of meetings in order to preserve attorney client privilege. This occurs when the board is discussing litigation or potential litigation. Communications between an attorney and a client are considered confidential and generally cannot be forced to be disclosed in litigation. For purposes of the privilege, board members are considered part of the “client,” but board observers are not. Depending on the culture of the company/board, observers may also be excluded from executive sessions of the board, where the board may discuss sensitive personnel matters or strategic matters.

One reason to limit board observer rights is to limit the number of people in a room during a board meeting, as larger meetings are more difficult to manage. Depending on the culture of the company/board, observers may participate in discussions like any board member or may be expected to remain silent (especially in the case of junior representatives of investors). As a practical matter, most companies/boards will allow an investor to bring another person to board meetings from time to time without a formal observer right.