When contemplating a merger, sale, or acquisition, there are a number of matters for directors to consider. From a legal perspective, one of the primary concerns with pre-combination actions taken by the board is ensuring that the transaction will receive the benefit of the business judgment rule.
A Quick Review of the Business Judgment Rule
The business judgment rule is a principle which, absent special circumstances, such as a conflict of interest, provides that courts will presume the propriety of directors’ decisions.
Delaware’s business judgment rule creates a presumption that directors’ decisions were made by disinterested and independent directors who acted in subjective good faith, and employed a reasonable decision making process. Under those circumstances, the directors’ decisions are reviewed not for reasonableness, but for rationality: a director will not be held liable for unreasonable decisions so long as the decision is rational.
In order to overcome the business judgment rule presumption, a plaintiff must effectively demonstrate that the board of directors, in reaching its challenged decision, breached any one of its triad of fiduciary duties, loyalty, good faith, due care.
Directors that contemplate the following issues will be more likely to secure the protection of the business judgment rule:
- Do any of the parties involved have personal relationships or other conflicts which would give rise to questioning the duty of loyalty?
- Do the directors have as much information regarding the transaction as is reasonably available?
- Have the directors thoroughly reviewed the information collected?
- Have the directors sought expert advice from lawyers, bankers, and accountants to ensure they have a firm grasp of the transaction?
- Have the directors contemplated the merits of alternative options, including the option of completely walking away from the transaction and not seeking alternative deals?
- Have the directors openly debated the merits of the transaction amongst themselves?
- Do the directors understand all the material terms of the agreement and alternative terms that might be included in the agreement, including pricing terms, conditions to closing, restrictions prior to closing, “no shop” provisions, and “break up” provisions?
- Do the directors understand the tax consequences of the transaction?
- Are the directors aware of all the relevant regulatory restrictions?
- Do the shareholders have a right to vote on the transaction?
- Do the directors understand the confidentiality terms of the transaction negotiations?
- Are appropriate measures in place to protect the confidential nature of the negotiations?
- How is the company going to explain the transaction to the press?
- What is the structure of the corporation’s governance following the transaction?
- Is any corporate stock subject to accelerated vesting upon completion of the transaction?