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© 2012 Smart Business Network Inc. Reprinted from the May 2012 issue of Smart Business Orange County.
Insights Legal Affairs
Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth
Secure your saleHow to protect your company’s merger and acquisition deal from stockholder lawsuits Interviewed by Jessica Hanna
As an executive, you’ve spent a tre-
mendous amount of time building your company. Choosing to enter
into a sale transaction is a major deci-
sion that will determine the future of
the company you’ve worked so hard to
grow, as well as your own.
“Because of that, you want to do all
you can to protect the deal if you con-
clude it’s the best thing for the company,
and also to protect yourself from liabil-
ity,” says Marc Schneider, General Coun-
sel for Stradling Yocca Carlson & Rauth
and a Shareholder in the securities and
business litigation department.
Taking measures to protect the dealand yourself isn’t just a precaution — it’s
a necessity. Schneider warns that these
types of transactions are magnets for
shareholder challenges, often resulting
in lawsuits.
“But if you take the right steps, you’ll
be in a very good position to either effec-
tively defend the suit or prevent the suit
from ever happening in the first place,”
he says.
Smart Business spoke with Schneider
about how businesses should approach
M&A deals to prioritize shareholders
and protect both the transaction andthemselves.
Why are M&A deals at such risk from stock-holder attack?
Shareholders’ positions change funda-
mentally — these deals generally mean
an exit for them. This simply is not an
ordinary transaction, so it receives a lot
of attention from shareholders.
And just as importantly, these trans-
actions have received more attention
from the plaintiff’s bar over the last few
years. As with any other business, the
plaintiff’s bar tends to real locate its re-
sources to more productive uses.
We’ve seen fewer stock price drop cas-
es because recent legislation has made
those cases more expensive and difficult
to bring. So the plaintiff’s bar has been
increasingly focused on M&A activity,
which is not as impacted by this legisla-
tion.
What should management and the boardfocus on when considering a deal?
The No. 1 goal is finding the best deal
for shareholders, because their respon-
sibility is to those shareholders — not to
a deal or their own interests. And the
best deal may be no deal; they should
evaluate whether there are alternatives
to selling that may create more share-holder value. When deciding between
deals, the board may also consider fac-
tors other than price, such as closing
risks and whether the deal includes an
effective fiduciary out or a go-shop pro-
vision.
What are management and the board’sroles in the M&A process?
Management plays an important role,
but that role is shaped both by the nature
of the deal and the board’s approach to
the deal. The board may decide to havemanagement more involved or less in-
volved.
The board must consider if there are
any significant conflicts, such as wheth-
er or not members of management will
be continuing with the company after
the merger and whether their current
compensation packages will be impact-
ed. The board should be very active and
well informed throughout the process,
asking questions of management and the
bankers.
How can businesses proactively protect the
deal and themselves?
The first step is to do a thorough check
of the market for an acquisition, as well
as consider strategic alternatives to an
acquisition. Think about creating a spe-
cial committee of independent directors,
as well as retaining an investment bank-
er, to help with that market check and to
take the lead on negotiations with poten-
tial bidders. When the potential bidders
seek due diligence, consider an electron-
ic data room to give equal access to all
potential, serious bidders so there can’t
be any allegations of favoritism.For the same reason, when manage-
ment is involved in due diligence or an-
swering questions for potential bidders,
consider a chaperone for management,
which could be one of the independent
directors from the committee or the
banker. And you shouldn’t release man-
agement to negotiate their own deals for
their post-acquisition roles until after
the material deal terms are set.
In addition, make sure to do a transpar-
ent, accurate, and thorough job telling
your story in the preliminary proxy — a
critical document. Explain that you haveconducted a thorough market check and
had a solid process in place. This can
help protect your deal and even discour-
age lawsuits.
Get a lawyer involved early on in the
process to help the board and manage-
ment understand their fiduciary duties
and how best to meet them, and to help
you put together a good, defensible pro-
cess.
If named in a merger litigation, what actionshould a business take?
These types of litigations move really
quickly, so it’s critical that you immedi-
ately retain experienced counsel that’s
used to handling these types of litiga-
tions.
It’s also critical that you contact your
directors and officers liability insurance
carrier right away. Usually, a company
has D&O insurance to cover these mat-
ters, and you want to act quickly to get
the carrier involved in the potential liti-
gation. <<
MARC SCHNEIDER is General Counsel for Stradling Yocca Carlson & Rauth and a Shareholder in the securities and business litigation
department. Reach him at [email protected].
Marc SchneiderGeneral Counsel and
Securities Litigation ShareholderStradling Yocca Carlson & Rauth