Tuesday, November 4, 2014
In the context of a merger and in the making of other decisions, boards are entitled to rely on advice from experts and advisors. When they do so in good faith, board members are "fully protected" to use the words of 141(e). In the wake of Rural Metro, bankers now seem to feel that the target is on them and that they will forever be liable for bad choices of boards. Not so. Chief Justice Leo Strine has posted a paper that lays out some straightforward advice for legal and financial advisors in the wake of Rural Metro. In short, if you do the right thing by your clients, you won't have anything to fear:
This article addresses what legal and financial advisors can do to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for plaintiffs’ lawyers
Chief Justice Strine sums up the problem facing independent directors in going private transactions in the following way:
The worst of all worlds is for independent directors to wake up one day, and find that they not only cannot rely upon the impartiality of management, but that management has also co-opted the company’s long-standing financial and legal advisors, so all of the
most knowledgeable sources of advice are suspect.
When that happens the independent directors must get the strongest possible outside advisors. But often, this does not happen. Instead of getting the best advisors, they often get second- or third-rate financial and legal advisors, while management (advantaged already by its deep knowledge of the company) arms itself with the best.
This is a DANGER SIGNAL, akin to the one at Niagara about the approaching falls. You don’t guard Dwight Howard with Nate Robinson — however much you enjoyed their teamwork in the NBA slam dunk contest a few years ago. If independent directors get weak advisors, they will screw up. They will not do right by the stockholders, they will get sued, and they may lose or at the very least, get publicly embarrassed.
This paper is well worth reading for a number of reasons, including its forthright advice to directors and their advisors. For example, independent directors are well served by examining red-lined versions of the merger agreement. They are also well served by red-lined versions of the financial advisor's power point presentations where changes can happen, but are often overlooked because they are not highlighted or brought to the attention of independent directors:
I am told that the United States of America’s technology capacity is not sufficient to allow for the production of a legible PowerPoint redline or compare rite version. Count me as patriotic. My law clerks over the years have demonstrated an ability to do a compare rite version of most anything. If this is the only hurdle, I believe our nation is capable of vaulting it. Only someone who does not like hot dogs, hamburgers, cheesesteaks, lobster rolls, clam chowder, shrimp and grits, jambalaya, pit beef sandwiches, brisket, barbecue ribs, Good Humor ice cream bars, spaghetti and meatballs, fish tacos, Kentucky Fried Chicken, or things fried at state fairs could question our nation’s ability to do this; in other words, only someone who despises America itself.
Download it and read it for your clients' sake.