Ian Nussbaum, Wendy Brenner, and Barbara Mirza are partners at Cooley LLP. This post is based on a Cooley memorandum by Mr. Nussbaum, Ms. Brenner, Ms. Mirza, Barbara Borden, Peter Adams, and Sarah Lightdale, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).
In Captain Phillips, a pirate hijacks a ship and turns to the captain and says (in what is an amazing improvised line) “Look at me, I’m the captain now.” [1] While the comparisons between piracy and M&A will take us only so far, let us start with an observation: boards and special committees overseeing M&A transactions—much like ship captains in treacherous waters—need to be wary of other constituencies attempting to overtake their role not only once the transaction has been signed, but through the twists and turns of the entire deal.
Section 141(a) of the Delaware General Corporation Law imbues boards with the unique authority to manage or direct the affairs of a corporation. An important corollary to that statutory authority is the bedrock principle under Delaware law that directors are fiduciaries to the corporation and its stockholders. Two recent Delaware cases [2] serve as reminders that fiduciaries must continue to exercise care in discharging their duties throughout the life of a deal—that is, as it is often put, directors’ and officers’ fiduciary duties are unremitting. In the M&A context, most breach of fiduciary duty cases assert claims that arise at the time the board approves the entry into the definitive transaction document. In that setting, it is well understood that such decisions require the directors to act with the utmost care, on an informed basis and in the best interests of the corporation and its stockholders. However, the decisions in Fort Myers v. Haley and the Dell Stockholders Litigation involved breach of fiduciary duty claims stemming from actions taken after the initial announcement of the proposed transactions. These opinions show that, in situations where parties renegotiate deal terms in response to stockholder opposition of the original terms, plaintiffs (and thereby the court) will scrutinize the process that led to the board’s decision to approve the revised deal terms. If anything, these cases underscore how critical it is for officers and directors to keep the full board (or the special committee in charge of negotiating the transaction) informed of material developments, engaged in the negotiation of any material deal terms after signing, and ultimately in control of the sales process throughout the pendency of a deal.