All of us probably know that the board of directors has the power to hire or fire the CEO. However, we might not be too sure of other roles that the board plays in the business. I was recently reading “Mergers & Acquisitions: From A to Z” book by Andrew J. Sherman. In the book, there was a section on the board’s role in Mergers & Acquisitions (M&A). I found all the legal responsibilities and specific board specific responsibilities to be quite interesting. In this week’s blog post, I will talk about the role that the board plays during M&A.
It is the company’s executives who are actively involved in the M&A process, and it is the board of directors who oversee that M&A process. The board of directors has the fiduciary duty to be the gatekeepers of a company’s tangible and intangible assets. The board decides if selling or acquiring a business is the best way to maximize shareholder value. The board also analyzes key risks involved with any transactions. Moreover, it is the board that evaluates the offer and decides if the offer to sell or acquire a company is fair and would drive shareholder value.
According to the M&A book, the board has micro and macro roles. I will list out some of the micro and macro responsibilities that were discussed in the book.
- Confirm compliance regarding a transaction’s timing and scope of disclosure to various constituencies especially keep an eye towards any insider trading;
- Confirm with the executive team about the due diligence process in order to minimize post-closing risks;
- Confirm company has gotten 3rd party approval that are regulatory or contractual;
- Review the allocation of purchase price to confirm that the allocation of risks and rewards of the transaction is fair and reasonable relative to upside.
- Embrace and meet its various fiduciary obligations;
- Oversee the company’s management as it navigates through the M&A process;
- Test and confirm the economic premise of the proposed transaction;
- Analyze the management’s justification of doing the deal;
- Confirm the value proposition that the deal offers to the company’s shareholders;
- Confirm that management has taken the necessary steps to mitigate any risks and minimize changes of litigation later on;
- Assist management with any doubts or fears associated with company employees;
- Confirm that management is planning the post-closing integration adequately.
The book also pointed out that the board has legal responsibilities. The board has 2 overarching fiduciary duties: Duty of Care and Duty of Loyalty.
Duty of Care – When making decision, directors need to actively gather material information regarding company’s affairs, and then act of that information with due diligence and skill necessary to make a rational business decision. The board of directors breach the duty of care when they remain willfully ignorant of material information or they rush to a decision without considering other available options. In regards to selling a company, the board must try to secure the highest price realistically achievable given the current market conditions.
Duty of Loyalty – The directors must act in good faith and put the interest of the company over their own personal interests. The directors must avoid any conflict of interests when dealing with other companies. The directors can not extract personal benefits from a dealing that is not shared by all of the shareholders. During M&A, the board’s duty of loyalty implies that all decisions would be driven to maximize shareholder value. In short, directors can not put their own interests before the company’s.
Andrew J. Sherman claims that CEOs spend 1/3rd of their time thinking about Mergers and Acquisitions rather than focusing on the core operating business. Needless to say that any company is bound to sell, buy, or merge parts of its assets with another company at some point. So, it is crucial to elect board members who have M&A experience and align with the shareholder’s interests, rather than folks who just agree with the company’s executive team. The board of directors are the individuals that you, the shareholder, elect to ensure that your company is run to fill your pockets, not the pockets of the executives. So, the next time your brokerage sends you an email that you need to vote, look up the people that you are electing to be on the board. The board of directors are there to serve you, the shareholder.
Hope you learned a little and found this blog post helpful. We talked the role that the board of directors play during mergers and acquisitions. We also outlined the board’s responsibilities. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
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