The Merger and Acquisition Process
The Merger And Acquisition Process- Today I am continuing my discussion on the responsibilities of the board of directors and in particular their fiduciary duties related to merger and acquisition transactions. In the last Lawcast in this series I highlighted the duties of directors, including duties of honesty and good faith as well as the duty of care, duty of loyalty and a duty of disclosure. I also outlined the business judgment rule, enhanced scrutiny business judgment rule and the entire fairness standard.
As with many aspects of securities law, and the law in general, a director’s responsibilities and obligations in the face of a merger or acquisition transaction depend on the facts and circumstances. From a high level, if a transaction is not material or only marginally material to the company, the level of involvement and scrutiny facing the board of directors is reduced and only the basic business judgment rule will apply. For instance, in instances where a company’s growth strategy is acquisition-based, the board of directors may set out the strategy and parameters for potential target acquisitions but leave the completion of the acquisitions largely with the c-suite executives and officers.
Moreover, the director’s responsibilities must take into account whether they are on the buy or sell side of a transaction. When on the buy side, the considerations include getting the best price deal for the company and integration of products, services, staff, and processes. On the other hand, when on the sell side, the primary objective is maximizing the return to shareholders though social interests and considerations (such as the loss of jobs) may also be considered in the process.
The law focuses on the process, steps and considerations made by the board of directors, as opposed to the actual final decision. The greater the diligence and effort put into the process, the better, both for the company and its shareholders, and the protection of the directors in the face of scrutiny. Courts will consider facts such as attendance at meetings; the number and frequency of meetings; knowledge of the subject matter; time spent deliberating; advice and counsel sought by third-party experts; requests for information from management; and requests for and review of documents and contracts.
In the performance of their obligations and fiduciary responsibilities, a board of directors may, and should, seek the advice and counsel of third parties, such as attorneys, investment bankers, and valuation experts. Moreover, it is generally good practice to obtain a third-party fairness opinion on a transaction. Most investment banking houses that do M&A work also provide fairness opinions on transactions. Furthermore, most firms will prepare a fairness opinion even if they are not otherwise engaged or involved in the transaction. In addition to adding a layer of protection to the board of directors, the fairness opinion is utilized by the accountant and auditor in determining or supporting valuations in a transaction, especially where a related party is involved. This firm has relationships with many firms that provide such opinions and encourage our clients to utilize these services.
In the next Lawcast in this series I will continue to discuss the duties of the board of directors in a merger or acquisition transaction including Delaware case law on the subject.
I’m securities attorney Laura Anthony, Founding Partner of Legal and Compliance, LLC. Should you have any questions about today’s topic visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always encouraged.