In connection with a sale of the company, the board of directors of the target faces the formidable task of discharging its fiduciary duties to its stockholders in a context in which the board’s actions are likely to be scrutinized in subsequent litigation. The following article provides guidance to target boards, and the lawyers who advise them, in the public M&A context on topics that the Delaware courts have recently considered.
Conflicts of Interest
In any M&A transaction, a target board must be mindful of conflicts of interest affecting directors, the chief executive officer, and the board’s financial advisor. The clearest conflict arises where one of these participants holds an ownership or other business interest in the acquiring entity or any of its affiliates.
To address these conflicts, and conflicts generally, the board should:
- Identify and understand the conflicts at the outset of the transaction. For example, the board should address all potential conflicts at the first board meeting where it considers a bid.
- Avoid or mitigate identified conflicts. For example, the board may need to create and empower a special committee of disinterested directors, retain an independent, third party financial advisor, or remove the CEO from negotiations to address the particular conflict.
- Monitor for emerging conflicts continuously throughout the transaction.
- Document in the minutes of the board every effort to identify, understand, and address conflicts, including explanations for permitting any potential conflicts.
- Disclose conflicts to stockholders.
