Presenting a live 90-minute webinar with interactive Q&A
Corporate Governance in M&A Deals:
Protecting Shareholder Interests,
Avoiding Litigation and Investigations
Assessing and Managing Governance Issues During
Due Diligence, Deal Execution, and Post-Merger Integration
1pm Eastern
12pm Central | 11am Mountain
10am Pacific
Today’s faculty features:
Nicholas O'Keefe, Partner, Kaye Scholer, Silicon Valley, Calif.
George Chin, North America Managing Director, Transaction Services,
Resources Global Professionals, Santa Clara, Calif.
Jeff Barlow, Senior VP - General Counsel, Molina Healthcare, Long Beach, Calif.
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Corporate Governance in M&A Deals:
Protecting Shareholder Interests, Avoiding
Litigation and Investigations
September 3, 2015
Some Drivers for the Increased Importance of Governance in M&A Deals
Cornerstone Research Review of 2014 M&A Litigation
– In 2014, 93% of M&A deals valued over $100 million were litigated
– The average number of lawsuits per deal was 4.5
Ratcheting up of governance environment in aftermath of Enron (Sarbanes-Oxley
Act of 2002) and financial crisis (Dodd-Frank Wall Street Reform and Consumer
Protection Act)
Increased spotlight on boards and board processes and more vigilant oversight by
institutional shareholders
Rules of the Road in a Sell-Side Process
The independent directors need to run the process, not management
– See, e.g. In re: Netsmart Technologies, Inc. S’holders Litig., 924 A.2d 171 (Del. Ch. 2007)
(Special Committee not formed until management had sold the board on focusing on
private equity acquirors)
The Board or Board Committee needs its own financial and legal advisors
– They cannot be conscripted by management. See, e.g. Netsmart (court critical of Special
Committee’s use of financial advisors that had long-standing relationship with
– Need for competent and independent advisors heightened, given potential for
management conflict
– Reflects judicial policy underlying Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1986)
Procedures should be in place that limit the ability of management to
communicate directly with potentially interested parties, except at the direction of
the Board/Committee
– In re Dole Food Co., Inc. S’holder Litig., C.A. No. 8703-VCL (Del. Ch. Aug. 27, 2015)
Rules of the Road in a Sell-Side Process (cont’d)
Composition of any Transaction Committee
– Independence from potential bidders and from management
• Disabling conflict has to involve factors that are material to the director. See, e.g. In re: MFW
S’holders Litig., 67 A.3d 496 (Del. Ch. 2013)
Relevant industry expertise
M&A expertise
Director personalities and ability to work together
Optimal size
Conflicted directors can still be involved if valuable to the process
Committee mandate (special committee v. transaction committee)
Buy-Side M&A Considerations
Buy-side M&A process considerations:
Duty of care; business judgment rule
Management committee delegated greater authority for small deals, but Board
still has important role for raising issues
Standing team covering major legal and operational areas
Establish tiered Governance Structure
Board – monthly, fiduciary responsibility, oversight, deal approval (over threshold)
Executive Deal Committee – bi-weekly, deal approval, budget, top-level guidance
Steering Committee – bi-weekly, cross-functional, decision-making, direction
Execution teams – weekly, due diligence, integration planning & execution
Clear Roles & Responsibilities
Use standard reporting templates, checklists, etc.
Review acquisition integration Value Drivers quarterly over 2-3 year period
Sample Buy-Side Deal Governance Schedule
Due Diligence /
Integration Team
Steering Committee
Sign Term Sheet
Due Diligence Kickoff
Executive Committee
Term Sheet Approval
Term Sheet Approval
(if nec.)
Deal Approval
Deal Approval (if nec.)
Risk Review
Sign DA/ Announce
Integration Planning
Integration Plan Kickoff
EE Alignment Review
EE Alignment Approval
Value Driver Approval
Legal Close (Day 1)
Integration Execution
Value Driver Review
Integration Kickoff
GTM Review
GTM Review
Value Driver
Value Driver Achievement
90 Day Review
Post 90 Day Review
Post 90 Day Review
Post 90 Day Review
Quarterly Reporting
Quarterly Metrics
Quarterly Review
Quarterly Review
Financial Advisors
Under Delaware law, directors are “fully protected in relying in good faith upon the
information, opinion, reports or statements presented to the corporation by any of
the corporation’s officers or employees . . . or by any other person as to matters
the [directors] reasonably [believe] are within such other person’s professional or
expert competence and who has been selected with reasonable care by or on
behalf of the corporation. DGCL §141(e)
Inquire at outset into conflicts
– Disabling conflicts v. conflicts that are disclosed and addressed
– In re: El Paso Corp. S’holder Litig. 41 A.3d 432 (Del. Ch. 2012)
Conflict v. need banker with industry competence and relationships
Build oversight controls into engagement letter
– In re Rural Metro Corp. S’holders Litig. 88 A.3d 54 (Del. Ch. 2014)
– In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011)
Typically a small number do bake-off to Board/Committee
Compensation Matters
Compensation of committee members
– See Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002) (director may be materially interested
in a transaction if fees “exceed materially what is commonly understood and accepted to
be a usual and customary director’s fee”)
– Southeastern Pa. Transp. Auth. v. Volgenau, 2013 WL 4009193 (Del. Ch. Aug 5, 2013) (a
$1.3m bonus payable to charities with which a director is affiliated “raises serious
concerns regarding [the special committee member’s] motivation for completing a
– In re Tele-Comm’ns, Inc. S’holders Litig., 2005 WL 3642727 (Del. Ch. 2005) (where $1m
payments to special committee members was not awarded until after the committee
members’ duties had ended, court nonetheless held that “the uncertain, contingent,
and potentially large nature of the payments, without any objective benchmarks or
other measures, could have given [the committee members] additional and undisclosed
financial interests in the transaction that might have affected their judgments.”)
Compensation Matters (cont’d)
Note that committee member fees not typically disclosable on Form 8-K, but will
need to be disclosed in proxy statement
Executive compensation matters for buy-side M&A
– Impact of benchmarking
Buyer packages for target executives
– See, e.g. City of Miami Gen. Empl. and Sanitation Empl. Ret. Trust v. C&J Energy Services,
Inc., 2014 WL 7243153 (Del. 2014) (no likely duty of loyalty breach where, among other
things, executive negotiated employment terms after all material deal terms had been
negotiated, and board was closely involved throughout deal process)
In Revlon proceedings, directors typically have the initial burden of showing
reasonable decision-making process. See, e.g. Revlon v. MacAndrews & Forbes
Holdings, Inc., 506 A.2d 173, 182 (Del. 1986); In re Dollar Thrifty S’holder Litig., 14
A.3d 573, 598 (Del. Ch. 2010)
– Higher burden if entire fairness applies, such as a controlling shareholder take private
transaction. See, e.g. Kahn v. Lynch Comm’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994);
In re Dole Food
There are typically key points in the deal process for which reasonable board
decision-making needs to be clearly supported in the record, e.g. lowering of
projections, decision to grant exclusivity, failure to include certain bidders in the
process, decision to pursue a sale transaction over stand-alone strategy
– Record should reflect the reasons underlying the Board action including the advice on
which it was based
General (cont’d)
Minutes, board material, contemporaneous notes and emails are an important
part of the record that is relied on by courts
– See, e.g. In re Dollar Thrifty S’holder Litig. (in denying motion for preliminary injunction,
court referred heavily to board meeting minutes and materials presented to the board,
in conjunction with deposition testimony); In re Orchid Cellmark, Inc. S’holders Litig.,
C.A. No. 6373-VCN (Del. Ch. May 12, 2011) (in denying a motion for preliminary
injunction, the court looked at meeting minutes and deposition testimony to find that
the board was reasonably informed as to the possible paths to value maximization)
Depositions are also an important part of the record that courts consider. A good
documentary record helps directors prepare for depositions, which will enhance
the quality of the depositions
Minute Taking
Need sufficient detail but not a transcript
– Capture key board discussions and decisions
– Identify the key information that the Board relies on in making its decisions, including
input from experts and Board materials
For example of court frustration at sparse minutes, see In re Inc.
S’holder Litig., C.A. No. 7988-CS (Del. Ch. Dec. 17, 2012)(Transcript)(in enjoining a
stockholder vote on a merger, court expressed frustration at lack of detail in board
minutes regarding board’s deliberations concerning change in projections); Maric
Capital Master Fund, Ltd. v. PLATO Learning, Inc., 11 A.3d 1175 (Del. Ch. 2010) (in
enjoining stockholder vote on a merger, court noted “no evidence, such as board
minutes” in the record showing financial advisor had explained the high discount
rate to the special committee)
Minute Taking (cont’d)
Record should show directors were actively engaged and understood their role
– But no attribution
Make sure style/approach consistent throughout
Make sure the right person takes the minutes
Make sure minutes are prepared on a timely basis
– See, e.g. Netsmart (court critical of both inadequacy of board record and delayed
approval of 10 sets of special committee minutes one month after the merger
agreement was signed)
Other Board Materials
Under Delaware law, directors are entitled to rely in good faith on the
corporations’ records and upon information presented by the corporation’s offices
and employees. DGCL §141(e)
Former Vice Chancellor Strine acknowledged the importance of board materials as
part of the overall record in “”And when there is nothing
contemporaneously when you get to write the script in terms of the PowerPoint
presentations – PowerPoint is ubiquitous. Doesn’t even have to be in the minutes.
Could be a discussion of the banker’s process. There are all ways to do it. But
when none of it is in there, it makes you wonder.”
– See also In re MFW (extensive citation to discussion materials prepared by financial
Bankers books
– Lawyers/Boards need to understand the reasons bankers have made the selections they
have, e.g. selection of comparable companies, reason for a discount rate, change in
underlying projections, changes made between initial and final board books
Other Board Materials (cont’d)
– Inquire as to whether financial approach is consistent with its general practice/policies
– Document Board discussion in the minutes
– See, e.g. Netsmart (court critical of financial advisor who “dumped omnibus lists of
possible financial and strategic buyers on the board”); Maric Capital Master Fund, (court
noting failure of minutes to show financial advisor had explained the high discount rate
to the special committee)
– If any financial analysis is of less importance than the others, or has been intentionally
omitted, make sure that disclosure of that to the Board is documented
– Run redlines on board docs
– In a recent article, Chief Justice Strine also advocated making redlines available to the
Need timely delivery to the Board.
– See, e.g. Rural Metro (court critical of financial advisor’s delivery of board book 80
minutes before the meeting)
Notes & Emails
Can be helpful. See, e.g. In re Dollar Thrifty (court cites approvingly to several
notes and emails in the record)
Can also be harmful. See, e.g. New Jersey Carpenters Pension Fund v. Infogroup,
Inc., C.a. No. 5334-VCN (Del. Ch. Oct. 6, 2011)(court cites to email exchanges
among board members regarding board frustration with founder as evidence of
lack of board member independence in sale of control transaction); See also In re
Dollar Thrifty (court notes to several examples where plaintiffs attempt to use
emails to bolster their case)
Often prepared hastily, in undisciplined fashion, without oversight, and can be
interpreted in unintended way
But judges can view instructions to directors not to take notes suspiciously and as
Directors should at least be cautioned of the risks
Don’t forget antitrust!
Delivering Information to Directors
Board portals and other electronic devices
Ease of Access and User Friendliness
Intuitive Interface & Director Familiarity
Ability to review and mark-up lengthy documents
Ease of Administration
Director Training
Technical Support and Internal Support
Records of Director Usage and Evidentiary Risks
Paper Copies
Posting in advance of meeting
Shareholder Engagement
Institutional shareholders are increasingly engaged in oversight of Boards
Boards need to have an understanding of shareholder base in order to have a
sense as to whether there will be fundamental objections to an M&A strategy
Boards also need to effectively communicate their long term strategies to
shareholders, in order to facilitate messaging regarding M&A programs
– Proactively avoid the charge of pursuing wasteful M&A
– Standard refrain of activists
– Even very large companies have come under attack for their long term strategies, such
as Motorola, Qualcomm, DuPont, P&G, Forest Laboratories, Amgen, Ebay, PepsiCo &
Shareholder engagement is one of the best defenses against being put in play by
Practical Cyber Security Considerations for
Buy-Side M&A
Diligence Process
Systems and Safeguards Investigation
Practical Threat Analysis (PTA)
Overall protection of Data/Information (collection, encryption, storage,
Actionable FTC items
– Failure to: Designate coordinator, identify risks, implement and test security measures, limit
access to information, encrypt sensitive information (at rest or in transit), limit retention,
provide training, impose security obligations on third parties
Policy/Program Investigation (including implementation)
WISP (Written Information Security Program)
Must be a complete security program – not just individual “policies” or security “controls”
Proves implementation and maintenance of “appropriate measures” to protect information
Assigns responsibility (management buy-in)
IDs information assets (data mapping)
Calls for risk assessment
Diligence Process (cont’d)
Selects, develops, and implements security controls
Addresses third party issues
Incorporates comprehensive training (employees and vendors)
Includes ongoing monitoring to determine effectiveness
IDs legal/regulatory requirements
Responds to changes
Team investigation (Emergency Response Team)
– Intra-corporate, interdisciplinary; authority, mission statement, plan
– Review security team structure
Breach incidents and past legal compliance
Vendor analysis; Outsourcing; Cloud computing
Requests specific to data security and privacy
Secure transfer of information during deal process
Importance of bring-down diligence
Example Value Driver Report Card
Value Driver
 Retention metric % over
xx years
 Achieve target revenue
 Improve overall share by
Increase market share
yy% in 2 years
 Measurable
Sustain product leadership
performance metric
 Customer renewal rate
Customer retention
metric %
Retain and leverage key
Contribute to company
growth initiative
(At Risk or On Track)
Post-Deal Monitoring and Management
Audits (leading to indemnification/purchase price adjustment)
Board counseling
Policy and team management and implementation
Take advantage of vendor management rights
Cyber/intrusion insurance
General coverage (including D&O)
Cyber-specific coverage (first party & third party)
Exclusions & conditions
Best practices
Recent Decisions on Escrows & Indemnities
American Capital Acquisition Partners, LLC v. LPL Holdings, Inc. (Del. Ch. Feb. 3,
– Decision reaffirms that courts will not rewrite earnouts to impose obligations on buyers
to maximize payments. On the other hand, buyers cannot take affirmative action to
impede the acquired company’s ability to generate earnout revenue)
I/MX Info Mgmt. Solutions, Inc. v. Multiplan, Inc. et al. (Del. Ch. Mar. 27, 2014)
– Decision provides guidance to parties on what constitutes a pending or threatened
action by a third party that may for the basis for an indemnifiable claim, and the scope
of notice required to make a claim
Thank You
George Chin
Resources Global Professionals
Jeff Barlow
Molina Healthcare
Nicholas O'Keefe
Kaye Scholer