Love being a lawyer, but can't stand the paperwork? Here's § 268

The second set of proposed market practice amendments are those in response to the Activision case. In that case, Chancellor McCormick gave the selling board a knuckle-wrapping for failing to adhere to § 251's requirement that "(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation and declaring its advisability." The Chancellor interpreted that to mean that the board must approve an "essentially complete" merger agreement with its material terms. Since the key terms of the merger agreement (including a component of the consideration provision) were still open at the time the board approved the merger agreement, the Chancellor ruled for the plaintiff shareholders on the defendant directors' 12(b)(6) motion. 

In response to this ruling, we get a series of amendments that intend to recognize the reality of deal making - that things move quickly, people are often negotiating up until the very end and that it might not be practical to wait to have the board approve the execution version of the merger agreement. I mean. Ok. I'm sympathetic. 

At first, these proposed amendments to the merger approval process (responsive to Activision) seem like innocuous, ministerial amendments simplifying the paperwork attendant to a merger approval, the kind of technical amendments that used to wander through the legislature without drawing any attention. In fact, the first time I read through them, my eyes glazed over and I skimmed quickly. That was a mistake. These proposed provisions may do more to market practice than one immediately perceives. 

The amendments (§ 268)call for approval of the merger agreement in "substantially final form." Ok, I'm assuming that means at the very least the parties will have settled on consideration.

The amendments also drop the requirement that the merger agreement include "any provision regarding the certificate of incorporation of the surviving corporation in order for the agreement of merger to be considered in final form or substantially final form." Mmkay. Who wrote these amendments? A private equity buyer? I guess if my world of mergers is narrowed entirely down to reverse triangular mergers for cash consideration, I suppose there's no particular reason for selling shareholders to care about the surviving corporation's certificate. Paperwork, who needs it, amiright?

Oh, wait, then there's this: Proposed § 268(b) says "any disclosure letter, disclosure schedules or similar documents ...  shall not be deemed part of the agreement for purposes of any provision of this title but shall have the effects provided in the agreement." Say what now?! Hold on. Do we seriously mean to say that a board can approve a merger agreement that is in "substantially final form" as required by the proposed amendments and literally have no idea what is contained within the disclosure schedule? And that's okay?  

I know disclosure schedules can be a pain and that they usually get delegated to the most junior lawyers on the team, but there is material information the disclosure schedule. I remember the BoA-ML deal that went down during the Financial Crisis where ML buried information about the huge bonuses that were going to be paid to their executives. Seemed material. The boards hid it in the disclosure schedule, no doubt afraid that disclosing it to shareholders might jeopardize the deal. 

I mean, I don't think there is any question that disclosure schedules contain material information. Let's say, the buyer represents the following: "Except as listed in the disclosure schedule, the buyer has sufficient cash to close this transaction."  Would anyone be surprised to see a disclosure saying that the buyer doesn't have a nickel? Or, maybe in response to the environmental rep, there is a list as long as your arm of the seller's toxic waste sites. 

How can it be possible that a board can make an informed decision to buy/sell the company by approving the merger agreement without having knowledge of the disclosure schedule? Sure, these schedules are messy and they can be long, but c'mon. Is there any decision more important than selling the company? Shouldn't the board be under some obligation to know? I really find this disturbing. 

Sure, the bankers and the deal guys hate paperwork. I get that. That's why they hire the lawyers! But, lawyers who can't stand paperwork should find another job.

-bjmq