No one ever thinks the merger or acquisition they are working on will end up in court. Encouraging board members who oversee your business to ask questions as the deal is being negotiated can reduce your risk of legal headaches, says Jayne E. Juvan, a partner at Tucker Ellis LLP.
“In looking at corporate governance best practices and the best way for an individual director to conduct himself or herself, one key point is to engage in healthy skepticism,” Juvan says. “The more questions directors ask, the more likely it is that their process would survive if it’s reviewed by a court down the road.”
While the courts are working to limit the number of frivolous claims that are being brought, companies engaged in M&A talks still need to take a thoughtful approach to their work. Juvan counsels public and high-growth private companies, as well as private equity and venture capital funds through all stages of the business life cycle.
We spoke with Juvan about what’s driving the increased scrutiny on corporate transactions and the points companies should consider before entering into their next deal negotiation. What follows is a transcript of the above video, edited for readability.
M&A deals are facing greater scrutiny
In looking at the way the board’s role in serving in the capacity of a director has changed and evolved over the years, what we’re seeing is that boards of directors are coming under heightened scrutiny. Some of that is playing out in litigation and in the courts, and it’s playing out in the media as well. When we look at and consider M&A transactions, they are regularly being scrutinized because stakeholders and investors are bringing litigation.
Now the courts have responded and have attempted to limit the number of frivolous claims that are being brought, but directors need to understand that M&A processes and corporate transactions that they decide to enter into are going to be potentially reviewed in the court. On the media side, what we’re seeing is that this is the information age that we’re living in. Because of that, there is an abundance of information that is being put out there not just in the written press, but online as well.
Because of that, there are journalists and citizen journalists even that are following the actions of boards. That means that directors can expect that the deals they are reviewing are going to play out in the press. So, for directors today, it’s important that they be mindful of their fiduciary responsibilities, that they take care of thoroughly examining the actions that are before them and that they take their responsibilities seriously.
Put dealmaking on the agenda
In looking at what a board should do prior to a transaction actually being before them for a review, boards should take a whole host of actions. In fact, if a board waits until a transaction comes to them to determine what they should be doing, it’s actually far too late. In terms of the board’s agenda, usually the board is responsible for considering a whole host of issues. But the board needs to take care, and the chairman or lead director need to ensure that M&A is listed as an agenda item at all board meetings.
This gives the board the opportunity to review what the organization’s corporate growth strategy is, whether it’s appropriate to have an M&A component or whether it’s more appropriate for the organization to grow organically and not through M&A. The board should engage in questioning the management team and questioning each other to determine what is the industry seeing in terms of M&A activity. How robust is the industry that the organization is in in terms of growth?
What is the organization’s risk profile? Is this the appropriate time for the organization to engage in a series of acquisitions? Or is there another management team that should come in that makes it so a sales process would be more appropriate? In terms of the timing, the board also needs to inform the management team that the management team needs to keep the board apprised at all stages in terms of what the M&A strategy is. That means it wouldn’t be appropriate for the management team to spring a transaction on the board because the board would be at risk of not fulfilling its fiduciary responsibilities.
The board should also, from an acquisition standpoint, make sure that the organization is assessing targets to make sure there is a healthy pipeline of deals in the event that M&A is part of the strategy. The management team also needs to have an appropriate process in place when it decides it wants to complete a deal and also after a deal is completed. The management team should also think through the post-integration process.
Questions need to be asked
In looking at corporate governance best practices and the best way for an individual director to conduct himself or herself, one key point is to engage in healthy skepticism. As directors, our role is to be the devil’s advocate. That can be really difficult, particularly when you have a strong CEO and other strong board members and they are wedded to a particular transaction. But the role of individual directors is to ask questions, ask questions and ask questions.
The more questions directors ask, the more likely it is that their process would survive if it’s reviewed by a court down the road. The type of questions directors could ask are: Is this truly the right transaction for us? Is the timing right? Have we taken into consideration macroeconomic issues? Industry specific occurrences? Our corporation’s current performance? Have we looked at other potential transactions that might be a better fit for us? Those are the types of questions that directors need to be asking. They shouldn’t be afraid to ask, even if there is widespread support for a particular transaction within the management team or even on the board itself.