Over the last decade, boards of directors considering corporate transactions have come under fire. While public company M&A litigation has declined in recent years, in 2014, plaintiffs challenged about 93 percent of transactions involving public companies in court. On the private company side, attorneys are becoming even more diligent about structuring these deals to avoid potential litigation. In addition, media outlets eager to distinguish themselves in a saturated marketplace are constantly scouring for deficient board processes and dysfunctional board situations that capture the attention of their audience, thereby raising reputational risk for directors. Given that corporate transactions are highly scrutinized in the courtroom and by the press, boards need to prepare themselves to effectively navigate these stormy waters. To protect itself from legal liability and reputational damage, a board should take the following steps:
- Conduct training and education on fiduciary duties. The board should have strong training on legal fiduciary responsibilities and any other laws and policies that apply when a transaction is being considered. In Ohio and Delaware, boards enjoy business judgment rule protection because courts are reluctant to second-guess business decisions. A plaintiff may, however, overcome the judicial presumption by showing that the directors breach their fiduciary duties — namely, the duty of care or duty of loyalty.
In the M&A context, claims in change of control transactions brought under Delaware law often assert that directors failed to satisfy their “Revlon” duties. Pursuant to Revlon Inc. v. MacAndrews & Forbes Holdings Inc., boards have a duty to maximize stockholder value. Ohio, however, departs from Delaware and has adopted a stakeholder statute. This statute requires directors to consider the interests of the corporation’s shareholders, but also allows directors, in their discretion, to consider a variety of interests of other stakeholders such as employees, suppliers, creditors and customers.
- Ensure corporate growth strategy is a recurring agenda item. The chairman or lead director should ensure that the board’s agenda devotes sufficient time to addressing corporate growth strategy. Directors should be asking a variety of questions at meetings to make sure they understand the strategy and have an opportunity to influence it. Boards also should ensure that management understands its obligation to communicate with the board early about potential transactions that may be on the horizon.
- Identify and resolve conflicts of interest. One common mistake that can get boards into trouble is the failure to identify in a timely manner and appropriately resolve conflicts of interest. When directors have conflicts, in some instances, it may be sufficient for directors to simply recuse themselves. In other instances, it might be more appropriate for the board to form a special committee to oversee the transaction.
- Be actively engaged during a transaction. Throughout the transaction, the board should be actively engaged and ensure it is fully informed. The board should oversee negotiations, understand critical issues, review material terms in transaction documents and approve important decisions. Boards should also consider hiring separate counsel and other experts. Directors should engage in healthy skepticism, be willing to ask hard questions and challenge management assumptions. Boards should also take care to ensure that their process and decisions are appropriately scripted and documented in meeting minutes that demonstrate the board understood and fulfilled its fiduciary duties.
Jayne E. Juvan is a partner at Tucker Ellis. She serves as co-chair of the Corporate Governance practice group and chair of the Private Equity practice group at the firm. Juvan counsels public and high-growth private companies, private equity funds and venture capital funds from initial formation through all stages of the business life cycle.
