M&A Transactions: Assessing D&O Fiduciary...
Transcript of M&A Transactions: Assessing D&O Fiduciary...
M&A Transactions: Assessing D&O Fiduciary Duties Mitigating Risks of Shareholder Litigation When Evaluating and Negotiating Deals
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WEDNESDAY, MARCH 7, 2012
Presenting a live 90-minute webinar with interactive Q&A
Thad Behrens, Partner, Haynes and Boone, Dallas
Ernest Martin, Jr., Partner, Haynes and Boone, Dallas
Tom D. Harris, Partner, Haynes and Boone, Dallas
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© 2012 Haynes and Boone, LLP
Director Fiduciary Duties in Merger & Acquisition Transactions
Thad Behrens
Tom Harris Ernest Martin
March 7, 2012
© 2012 Haynes and Boone, LLP 6
Directors’ Fiduciary Duties
Duty
Duty
“Duty”
of Loyalty
of Care
of Candor
© 2012 Haynes and Boone, LLP 9
TargetCo Stock in 2010-2011
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AUG
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SEP
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$5.00
$4.00
$3.00
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$0.00
NO
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$10.00
$8.00
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$0.00
© 2012 Haynes and Boone, LLP 13
The Contact by BuyerCo
• Is the approach really “casual”? • Corporate acquiror? • Private equity acquiror? • Oral communication versus
– Teddy Bear Hug Letter – Bear Hug Letter – Public Announcement
© 2012 Haynes and Boone, LLP 14
Is TargetCo Prepared?
• Board recently discussed a potential sale? • Current market conditions? • TargetCo’s specific condition? • Effective anti-takeover defenses in place?
– Legal defenses (Poison pill, etc.) – Practical defenses (insider ownership, etc.)
• Adequately prepared on people issues?
© 2012 Haynes and Boone, LLP 15
People Issues: Executives
• Timing Regarding Change-of-Control Pay Vote
– Pre-transaction – Time of transaction
• Timing of Executive “New Deal” Discussions
© 2012 Haynes and Boone, LLP 16
Importance of Early Lawyer Involvement
• Avoid early critical missteps • Advise on conflict of interest issues • Protect TargetCo (confidentiality/standstill issues) • Advise on securities trading issues • Ensure effective documentation of process (Note: Audience
is shareholders/public/SEC from this point forward) • Advise on public disclosure triggers (be careful about written
communications) • Advise on D&O insurance implications, including renewal
© 2012 Haynes and Boone, LLP 17
What does Board do next?
• Convene ASAP • Consider conflict/committee issues
– Does CEO (or any other Board member) have an actual or potential conflict of interest?
– Would recusal work? (Practical?) – Would a Special Committee be better?
• Who should be on the Special Committee? • What should the Special Committee’s mandate be? • Does the Special Committee need separate counsel and financial
advisors? • How confidential must a Special Committee’s process be (Can
the CEO be kept “in the loop”)?
© 2012 Haynes and Boone, LLP 18
Options for the Board/Committee
• Just say no • Further discussions with BuyerCo • Commence broader strategic alternatives
process
© 2012 Haynes and Boone, LLP 19
Beware: Deal Traps
• Revlon duties • Risk of losing a bidder • Deal protection provisions (Break-up fees, etc.) • Fiduciary “outs” • Market check/go-shop/limited market check
Note: Early advice from counsel can prevent
significant heartache for Board/Special Committee
© 2012 Haynes and Boone, LLP 23
Shareholder Lawsuit
Shareholders will immediately allege: • Directors and others had conflicts of interest • Transaction process was rushed, ill-considered • Inadequate/misleading disclosures to shareholders • Deal is coercive to shareholders • Deal is for unfair price • Transaction should be enjoined
© 2012 Haynes and Boone, LLP 24
Who is sued?
• Defendants – TargetCo – Directors and certain officers of TargetCo – BuyerCo – Advisors?
© 2012 Haynes and Boone, LLP 26
D&O Insurance Considerations
• Notice to Insurance Companies – Demand? – Lawsuit?
• Selection of Counsel – Panel Counsel? – Separate Counsel for Some Defendants?
• Applicable Retentions
© 2012 Haynes and Boone, LLP 27
M&A Litigation is Intense, Distracting
• Expedited Production of Documents – Board minutes and presentations – E-mail and other e-data – Third party discovery
• Expedited Depositions • Experts • Overlaps with “selling” the deal to
stakeholders
© 2012 Haynes and Boone, LLP 28
Potential D&O Coverage Issues
• Insured versus insured exclusion • Conduct exclusions
– Fraud – Illegal profit or advantage
• Exclusion for undisclosed matters in application • Fraud in the application • Payment of defense costs • Allocation issues
© 2012 Haynes and Boone, LLP 29
Procedural Defenses Are Bigger in Texas
• Shareholders Sue Derivatively, Not Directly • Shareholders Must Make a Demand on the Board
Before Suing (No demand futility) • Shareholders Must Wait 90 Days to Sue Unless
Corporation Will Suffer “Irreparable Injury” • TargetCo May Form Special Litigation Committee
to Investigate Plaintiffs’ Claims/Obtain Stay • Suit Then Limited to Special Litigation Committee’s
Decision, Not Underlying Deal
© 2012 Haynes and Boone, LLP 30
Defending the Merits of the Case
• Business Judgment Rule or Entire Fairness – The business judgment rule shields directors from
liability, and applies unless: • Decisionmakers were not independent and disinterested; • Decisionmakers abdicated all duties • Process was grossly negligent
– If business judgment rule does not apply, then company must prove the “entire fairness” of the transaction
• Adequacy of disclosures?
© 2012 Haynes and Boone, LLP 32
Settlement Strategies
• Typical Settlement – Deal modifications – Enhanced disclosures – Plaintiffs’ fee – Subject to court approval
• Carrier consent required • Coverage for, and reasonableness of, Plaintiffs’
fee typical point of dispute with carrier
© 2012 Haynes and Boone, LLP 34
Hindsight Advice for TargetCo’s Board
• Do not engage in actions that could cause loss of the business judgment rule – Conflicts of interest – Insider trading issues – Failure to be informed – Abdication of decision-making authority to advisors – Failure to supervise advisors – Rush to judgment
• Assume all actions will be scrutinized and second guessed – Review all transactions from the outside looking in
© 2012 Haynes and Boone, LLP 35
Hindsight Advice for TargetCo’s Board
• Careful Evaluation of Decisionmakers’ Actual or Potential Conflicts of Interest – Selection of special committee members – Documentation of inquiry into independence – Exploration of financial and other compromising
relationships – See that special committee has appropriate mandate, is
properly funded, and has appropriate advisors
© 2012 Haynes and Boone, LLP 36
Hindsight Advice for TargetCo’s Board
• Focus on process and documentation – Act on an informed basis – Devote time and attention – Follow up until satisfactory answers are provided – Fully participate – Obtain adequate professional and expert advice on a
timely basis – Ask “hard” questions of advisors (Del Monte) – Directors with particularized knowledge should make use
of that knowledge where appropriate
© 2012 Haynes and Boone, LLP 37
Hindsight Advice for TargetCo’s Board
Focus on process and documentation (cont.) • Observe corporate formalities • Address significant matters at a meeting rather than
by written consent • Document the materials provided to the board or a
committee • Document board and committee actions in
appropriately detailed minutes
© 2012 Haynes and Boone, LLP
Director Fiduciary Duties in Merger & Acquisition Transactions
Thad Behrens
Tom Harris [email protected]
Ernest Martin