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Mergers And Acquisitions

Mergers And Acquisitions: Board of Director Responsibilities

I have written about mergers and acquisitions, including reverse mergers, extensively in the past, but as both traditional mergers and acquisitions and reverse mergers are a large part of my practice, it is a topic worth revisiting and drilling down on regularly.  In fact over the past year, the M&A market has been booming with activity.  A question that often arises involves the obligations of the board of directors during the merger process. 

Board of Directors’ Fiduciary Duties in the Merger Process

State corporate law generally provides that the business and affairs of a corporation shall be managed under the direction of its board of directors.  Members of the board of directors have a fiduciary relationship to the corporation, which requires that they act in the best interest of the corporation, as opposed to their own.  Generally a court will not second-guess directors’ decisions as long as the board has conducted an appropriate process in reaching its decisions. This

Guide to Reverse Merger Transaction

What is a reverse merger?  What is the process?

A reverse merger is the most common alternative to an initial public offering (IPO) or direct public offering (DPO) for a company seeking to go public.  A “reverse merger” allows a privately held company to go public by acquiring a controlling interest in, and merging with, a public operating or public shell company.  The SEC defines a “shell company” as a publically traded company with (1) no or nominal operations and (2) either no or nominal assets or assets consisting solely of any amount of cash and cash equivalents.

In a reverse merger process, the private operating company shareholders exchange their shares of the private company for either new or existing shares of the public company so that

Mergers and Acquisitions; Merger Documents Outlined

An Outline Of the Transaction

The Confidentiality Agreement

Generally the first step in an M&A deal is executing a confidentiality agreement and letter of intent.  These documents can be combined or separate.  If the parties are exchanging information prior to reaching the letter of intent stage of a potential transaction, a confidentiality agreement should be executed first.

In addition to requiring that both parties keep information confidential, a confidentiality agreement sets forth important parameters on the use of information.  For instance, a reporting entity may have disclosure obligations in association with the initial negotiations for a transaction, which would need to be exempted from the confidentiality provisions.  Moreover, a confidentiality agreement may contain other provisions unrelated to confidentiality such as a prohibition against

Board of Directors Obligations as Applied to Mergers and Acquisitions

State corporate law generally provides that the business and affairs of a corporation shall be managed under the direction of its board of directors.  Members of the board of directors have a fiduciary relationship to the corporation, which requires that they act in the best interest of the corporation, as opposed to their own.  Generally a court will not second-guess directors’ decisions as long as the board has conducted an appropriate process in reaching its decision. This is referred to as the “business judgment rule.”  However, in certain instances, such as in a merger and acquisition transaction, where a board may have a conflict of interest (i.e., get the most money for the corporation and its shareholders vs. getting the most for themselves via either cash or job security), the board of directors’ actions face a higher level of scrutiny.  This is referred to as “enhanced scrutiny business judgment rule.”  The same standards apply to officers of a

The ABA Pushes To Allow For The Payment Of Finder’s Fees

In April of this year, the American Bar Association Private Placement Broker Task Force delivered to the SEC and published a recommendation for a limited federal exemption from SEC registration for securities intermediaries that would be able to assist in the private raise of capital for both private and public entities.  The Task Force previously published a lengthy recommendation and even drafted proposed rules, in June 2005, and has been advocating the rules since that time.  The full text of both the April 2012 submission and June 2005 report with proposed rules can be read on the SEC website.

The SEC’s Position and Current Rules on Finder’s Fees

The Securities and Exchange Commission (SEC) strictly prohibits the payments of commissions or other transaction based compensation to individuals or entities that assist in a capital raise, unless that entity is a licensed broker dealer.

Periodically, and most recently in April 2008, the SEC updates its Guide to Broker Dealer Registration explaining

Mergers and Acquisitions – The Acquisition Agreement

Simply stated, the acquisition agreement sets forth the financial terms of the transaction and legal rights and obligations of the parties with respect to the transaction.  It provides the buyer with a detailed description of the business being purchased and provides for rights and remedies in the event this description proves to be materially inaccurate.  The agreement spells out closing procedures, pre-conditions to closing and post-closing obligations.  The agreement provides for representations and warranties and the rights and remedies if these representations and warranties are inaccurate.

The main components of the acquisition agreement and a brief description of each are as follows:

Representations and Warranties

Representations and warranties generally provide the buyer and seller with a snapshot of facts as of the closing date.  In respect to the seller, facts are generally related to the business itself, such as that the seller has title to the assets, there are no undisclosed liabilities, there is no pending litigation or adversarial situation

Merger and Acquisitions – Board of Director Obligations, Part 5

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. This blog focuses on the director’s duty of disclosure. A director’s duty of disclosure is part and parcel with their duty of loyalty. That is, the duty of disclosure primarily focuses on a director’s duty to disclose conflicts of interest he may have with respect to any corporate action. However, the duty also extends to a director’s duty to inform shareholders fully on matters involving a shareholder vote and in making any public disclosures.

Duty to Disclose

The duty to disclose (like other duties) only extends to material facts and circumstances. “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). In the

Merger and Acquisitions – Board of Director Obligations, Part 4

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. The last in the series discussed a director’s duty of loyalty. This blog continues that discussion, focusing on the duty in particular fact circumstances.

Balancing Common and Preferred Shares

A common question I am asked by directors is how to balance the interest of two competing classes of stock (such as common and preferred). In such a case, the entire fairness standard of reviewing a corporate transaction (discussed in last blog) will not automatically be invoked, but first the court will utilize the business judgment rule. Accordingly, a director who is not conflicted and who otherwise takes all measures required (in-depth involvement in the process, review of all documents, advice of outside professionals, seeking highest price for all classes of stock) will be protected from liability.

Directors’ Financial Motivation

Delaware courts have emphasized that involvement by disinterested, independent

Merger and Acquisitions – Board of Director Obligations, Part 3

This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series detailed the directors’ basic duties of care, loyalty and disclosure. The second discussed the availability of indemnification and/or exculpation and the importance of acting in good faith. This third blog in the series will take a more in-depth look at a directors’ duty of loyalty in a merger and acquisition transaction.

Duty of Loyalty

The duty of loyalty demands that there be no conflict between the director’s duty to the company and their own self-interest. A director breaches that duty when he appropriates a corporate asset or opportunity or uses his corporate office to promote, advance or effectuate a transaction between the corporation and himself or a related party which isn’t entirely fair to the corporation.

Business Judgment Rule

The business judgment rule will not protect a director where there is a

Merger and Acquisitions – Board of Director Obligations, Part 2

This blog continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series went over the directors basic duties of care, loyalty and disclosure.

Indemnification of Corporate Officers

Many states’ corporate laws allow entities to include provisions in their corporate charters allowing for the exculpation and/or indemnification of directors. Exculpation refers to a complete elimination of liability whereas indemnification allows for the reimbursement of expenses incurred by an officer or director.

Delaware, for example, allows for the inclusion of a provision in the certificate of incorporation eliminating personal liability for directors in stockholder actions for breaches of fiduciary duty, except for breaches of the duty of loyalty that result in personal benefit for the director to the detriment of the shareholders. Indemnification generally is only available where the director has acted in good faith. Exculpation is generally only available to directors whereas indemnification is available

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