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ATLANTA � When the management of AHL Services Inc. agreed in August 2003 to be acquired by an Atlanta private equity fund for about $118 million, the marketing company decided it needed a second opinion on whether the deal was fair to shareholders. To get that second opinion, Arlington, Va.-based AHL formed a special committee from its board of directors and hired Kilpatrick Stockton partner David Stockton to advise the committee. The members of the new committee weren’t AHL employees and had no business relationship with the company. And they had no financial stake in the going-private transaction, the company said. Stockton said his practice of giving advice to these so-called special independent committees is growing � he’s advised 10 such committees in the past five years. It’s not an inexpensive proposition, according to Stockton. The company must pay fees to the special committee members � fees that are in addition to the normal compensation they get from serving on the regular board of directors. A company also will often hire a law firm to advise the new committees. Depending on the size of the acquisition, the law firm’s fees can range from $100,000 to $750,000. But companies increasingly are incurring the extra expense partly because of the Sarbanes-Oxley Act, Atlanta transactional lawyers say. “There is nothing in SOX that specifically requires a special independent committee, but it’s the whole atmosphere of SOX,” Stockton said. Executives are starting to think that forming a special independent committee can help prevent securities fraud litigation when they complete a deal or are involved in an internal investigation, Stockton said. Or, if these committees don’t stop that type of litigation altogether, they can give executives the ammunition to fight the litigation. “Your goal is to show the plaintiffs’ lawyers, here is the set of minutes that shows you took all the right precautions,” Stockton said. “That, in many cases, will cause the plaintiffs’ lawyers to go away, or dramatically reduce their settlement demands.” SCANDALS A CATALYST The rash of corporate scandals in the United States during the past five years also has spurred the formation of independent committees. Companies want to prevent the types of multibillion-dollar securities fraud cases that destroyed shareholders’ investments and sent executives to jail.
‘Boards of directors are becoming in-creasingly sensitive to the fact that man-agement is going to have a dog in the hunt and they’re going stick around after the sale’

RICK MILLER Powell Goldstein

“Enron and WorldCom ratcheted it up,” said Burr & Forman partner Paul O’Hearn. “You had executives like [former Enron CEO] Jeff Skilling and [former WorldCom CEO] Bernie Ebbers getting their boards, who were supposed to be independent, to rubber-stamp what they wanted to do.” An increasing amount of case law also suggests that directors can be held liable. In some recent securities fraud investigations, the U.S. Department of Justice has rejected the recommendations of a board of directors because the board did not form a special independent committee to produce the recommendations, said Powell Goldstein partner Rick Miller. Private equity’s boom times have also helped. Special independent committees are frequently formed in private equity deals, because company management is often participating in the buyout. When a private equity fund acquires a company, management often invests alongside the fund. Private equity funds give management that opportunity to invest with them, because funds don’t want to run the company themselves; they want to keep existing management around. If management is on the same side of the deal table as the buyout fund, a special independent committee will provide advice to the company’s other shareholders on whether the private equity fund’s offer is fair. “Boards of directors are becoming increasingly sensitive to the fact that management is going to have a dog in the hunt and they’re going stick around after the sale,” said Miller. “The board will form a special committee to bless the transaction,” said Miller, who has advised two special independent committees this year. In one of this year’s biggest private equity buyouts, HCA Inc., the Nashville, Tenn., operator of for-profit hospitals, hired Shearman & Sterling to advise its special committee on the merits of the $21.3 billion acquisition proposal from Bain Capital LLC, Kohlberg Kravis Roberts & Co. and the private equity fund of Merrill Lynch & Co. HCA management participated in the buyout. ILLUSION OR REALITY? Some attorneys who have represented shareholders in securities fraud suits argue that special independent committees are mere window dressing � a way for a company to make it appear it’s getting nonbiased advice when it really isn’t. “We view it as more of a show that puts form over substance,” said Chitwood Harley Harnes partner Robert Killorin. “They try to give the appearance of independence when that’s often really not the case.” “Frankly, it can be part of an effort to whitewash a situation and manipulate the witnesses before anyone has a chance to talk to them,” Killorin said. Because special independent committee members come from a company’s existing board of directors, they ultimately must answer to the CEO who appointed them, said University of Georgia corporate law professor James Ponsoldt. “Members of these committees owe their current and future status to the board chairman and frequently provide him the desired advice,” Ponsoldt said. Stockton disagrees that special committees are poorly disguised tools of the CEO, because the people appointed to the special committees are obligated by law to be independent of the CEO. “What I tell people is, ‘You have a personal stake in this,’” Stockton said. “‘You may have known the CEO for a long time and like him, but that’s all out the window now, because we’re talking about lawsuits against you personally.’” Stockton tells independent committee members that if the company is sued, they could be deposed in court and subjected to questioning about whether they spoke with the CEO and what they said. Their personal records could also be searched. Stockton acknowledges that there have been times when independent committees have been shown to be far from independent. Sometimes company executives figure out ways to glean information from the “other side of the table.” Although they are paid handsomely for their efforts, lawyers can expect an intense work schedule when advising a special independent committee. Earlier this year, Powell Goldstein’s Miller advised a special independent committee to Encore Medical Corp. on its $870 million acquisition by The Blackstone Group. Miller said he met with the special committee 16 times over the course of 60 days, each meeting lasting several hours. Although Encore was served with two shareholders’ suits when its deal closed, Miller said the company was able to reach a quick settlement. Encore agreed only to provide a draft of its proxy statement before it was mailed to all shareholders, and to pay the plaintiffs’ lawyers fees. That was a much more amenable settlement than what’s typical in securities fraud litigation, Miller said. “With a special independent committee, you’re trying to bulletproof yourself against lawsuits,” Miller said. “And in Encore, we had a pristine process.” Andy Peters is a reporter with the Fulton County Daily Report, a Recorder affiliate based in Atlanta.

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