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
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
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
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. As such, directors owe a corporation a duty of loyalty, honesty and good faith. 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”.
Mergers and Acquisitions
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