As an executive, you’ve spent a tremendous amount of time building your company. Choosing to enter into a sale transaction is a major decision that will determine the future of the company you’ve worked so hard to grow, as well as your own.
“Because of that, you want to do all you can to protect the deal if you conclude it’s the best thing for the company, and also to protect yourself from liability,” says Marc Schneider, General Counsel for Stradling Yocca Carlson & Rauth and a Shareholder in the securities and business litigation department.
Taking measures to protect the deal and yourself isn’t just a precaution — it’s a necessity. Schneider warns that these types of transactions are magnets for shareholder challenges, often resulting in lawsuits.
“But if you take the right steps, you’ll be in a very good position to either effectively defend the suit or prevent the suit from ever happening in the first place,” he says.
Smart Business spoke with Schneider about how businesses should approach M&A deals to prioritize shareholders and protect both the transaction and themselves.
Why are M&A deals at such risk from stockholder attack?
Shareholders’ positions change fundamentally — these deals generally mean an exit for them. This simply is not an ordinary transaction, so it receives a lot of attention from shareholders.
And just as importantly, these transactions have received more attention from the plaintiff’s bar over the last few years. As with any other business, the plaintiff’s bar tends to reallocate its resources to more productive uses.
We’ve seen fewer stock price drop cases because recent legislation has made those cases more expensive and difficult to bring. So the plaintiff’s bar has been increasingly focused on M&A activity, which is not as impacted by this legislation.
What should management and the board focus on when considering a deal?
The No. 1 goal is finding the best deal for shareholders, because their responsibility is to those shareholders — not to a deal or their own interests. And the best deal may be no deal; they should evaluate whether there are alternatives to selling that may create more shareholder value. When deciding between deals, the board may also consider factors other than price, such as closing risks and whether the deal includes an effective fiduciary out or a go-shop provision.
What are management and the board’s roles in the M&A process?
Management plays an important role, but that role is shaped both by the nature of the deal and the board’s approach to the deal. The board may decide to have management more involved or less involved.
The board must consider if there are any significant conflicts, such as whether or not members of management will be continuing with the company after the merger and whether their current compensation packages will be impacted. The board should be very active and well informed throughout the process, asking questions of management and the bankers.
How can businesses proactively protect the deal and themselves?
The first step is to do a thorough check of the market for an acquisition, as well as consider strategic alternatives to an acquisition. Think about creating a special committee of independent directors, as well as retaining an investment banker, to help with that market check and to take the lead on negotiations with potential bidders. When the potential bidders seek due diligence, consider an electronic data room to give equal access to all potential, serious bidders so there can’t be any allegations of favoritism.
For the same reason, when management is involved in due diligence or answering questions for potential bidders, consider a chaperone for management, which could be one of the independent directors from the committee or the banker. And you shouldn’t release management to negotiate their own deals for their post-acquisition roles until after the material deal terms are set.
In addition, make sure to do a transparent, accurate, and thorough job telling your story in the preliminary proxy — a critical document. Explain that you have conducted a thorough market check and had a solid process in place. This can help protect your deal and even discourage lawsuits.
Get a lawyer involved early on in the process to help the board and management understand their fiduciary duties and how best to meet them, and to help you put together a good, defensible process.
If named in a merger litigation, what action should a business take?
These types of litigations move really quickly, so it’s critical that you immediately retain experienced counsel that’s used to handling these types of litigations.
It’s also critical that you contact your directors and officers liability insurance carrier right away. Usually, a company has D&O insurance to cover these matters, and you want to act quickly to get the carrier involved in the potential litigation.
Marc Schneider is General Counsel for Stradling Yocca Carlson & Rauth and a Shareholder in the securities and business litigation department. Reach him at [email protected].
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