Duties of Directors in Mergers & Acquisitions

The Interdisciplinary Center – HerzeliyaPresenter: Nikol Wolpert

28.12.2014

Do the Duties of Directors Change in Mergers and

Acquisitions?

M & A – No Easy Ride High Stake – Money, Jobs,

Future of Corporation Fast Decisions Fertile environment for

conflicts Directors – Easy target for

Litigation Special activities of

Directors: Hiring advisors / screen for personal interest

5 Duties for Directors

1- Duty of LoyaltyDirector should not use corporate position to make personal profit or gain any other personal advantage (Guth v. Loft, Inc).

2- Duty of CareDirector assumes a duty to act carefully to fulfil important tasks: monitoring and directing the activities of corporate management (Lutz v. Boas)102 (b)(7) of DGCL: dismissal of damages claim if breach based solely on duty of care(Emerals Partners v. Berlin)

3- Independence Director’s decisions should be objective and based on an independent BJR (Beam v. Stewart). Sarbanes-Oxley: Section 10A(m)(1); New York Stock Exchange: Section 303A(10);DGCL: Section 144(a)(1) – the majority of directors disinterested

4- Duty of Candor - Disclosure

StandardThe obligation of Directors to disclose fully and fairly all information when seeking shareholder action.

Materiality: material that has substantial likelihood that a reasonable shareholder would consider it important to vote.(Arnold v. Society for Savings Bancorp,Inc.)

5- Business Judgment Rule

Delaware General Corporation Law – 8 Section 141(a): Good Faith Informed Basis Honest belief that

action in best interest of the corporation

BJR - Good FaithFaithfulness and devotion to interests of the corporation and its shareholders.

Bad Faith is intentional misconduct and knowing violation of the law (Disney)

BJR - Informed Decisions

Gross Negligence

A Director’s duty is to inform himself in preparation for a decision (Smith v Van Gorkom)Section 251(b) of DGCL:

Board approves whether a merger agreement is advisableSection 242(b)(1) of DGCL: before submmiting to stockholders***Section 102(b)(7): liability-limiting provision and dismissal of duty of care claims

Hostile Takeovers2 Case Studies

Unocal Corporation v. Mesa Petroleum

• April 1985, Mesa (owner of 13% Unocal stock) commenced a tender offer ($54 per share) and a supplemental proxy statement.

• Directors of Unocal decided it was not an grossly inadequate offer – the share was worth minimum $60. Decided to take defensive measures against the hostile takeover.

Enhanced Business Judgment Rule (Poison Pill)

Is the offer in the best interests of the corporation and shareholders?

-Reasonable grounds for threat: Directors must show reasonable grounds for believing threat

-Balance: Defensive measure must be reasonable in relation to threat posed

• Board agreed to defensive tactic, a self-tender offer of $72 per share and exclusion of Mesa from the proposal.

• Consequences: $6-6.5 Billion additional debt

• Questions:-Did the board have the duty and power to oppose a takeover?

Yes, 8 Del.C 141(a) and 160(a), and duty to protect the corporate enterprise.

Revlon, Inc v. MacAndrews & Forbes Holdings

• Pantry Pride made unsolicited tender offers at a price the Revlon board found inadequate.

• Revlon board implemented several defensive measures, including a poison pill and repurchase of $10 million shares of common stock.

• As another defensive measure, Revlon entered into agreement with Forstman Little & Co. – a “white knight”- which included several protective provisions

•But at this point Break-up of Revlon became inevitable.

•“The duty of the board has thus changed from the perservation of Revlon as a corporate entity to the maximization of the company’s value at a sale for the stockholders’ benefit.”

•Question of defensive measure became moot. Role of Directors: defenders auctioneers.

•The merger agreement with Forstmann was unreasonable in relation to the threat. While Forstmann’s offer was higher, when you adjust it with the time value of money, its a worse agreement.

Entire Fairness Standard• Fair Dealings- when the transaction was timed, how was it

initiated, structured, negotiated, disclosed to directors, and how were approvals obtained?

• Fair Price- financial consideration of proposed merger. • Includes all past duties.

Thank You!