M&A Transactions: Assessing D&O Fiduciary Dutiesmedia.straffordpub.com/products/m-and...and-o-fiduciary-duties-2012-03-07/presentation.pdfMar 07, 2012 · – The business judgment

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




TargetCo Stock in 2010-2011

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Global Government Contract Opportunities


A Solution for TargetCo?

BUYERCO Worldwide, Inc.


A Solution for TargetCo?

Worldwide, Inc.


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


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?


People Issues: Executives

• Timing Regarding Change-of-Control Pay Vote

– Pre-transaction – Time of transaction

• Timing of Executive “New Deal” Discussions


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


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”)?


Options for the Board/Committee

• Just say no • Further discussions with BuyerCo • Commence broader strategic alternatives

process


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


Deal Announcement


Investigating Potential Fiduciary Duties


Upward Trend in M&A Litigation


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


Who is sued?

• Defendants – TargetCo – Directors and certain officers of TargetCo – BuyerCo – Advisors?


Where are they sued?

Source: Cornerstone Research


D&O Insurance Considerations

• Notice to Insurance Companies – Demand? – Lawsuit?

• Selection of Counsel – Panel Counsel? – Separate Counsel for Some Defendants?

• Applicable Retentions


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


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


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


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?


Settlement Strategies


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


Settlement Stats

Source: Cornerstone Research


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



• 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



• 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



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

[email protected]

Tom Harris [email protected]

Ernest Martin

[email protected]