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Board role in M&A transactions: practical implications of directors’ duties

July 2021  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2021 Issue

The M&A market has been ramping up since mid-2020 following the initial slowdown triggered by the coronavirus (COVID-19) pandemic. It is a trend which the majority of commentators expect to continue through 2021, driven by significant cash reserves accumulated during the first half of 2020 and anticipated economic recovery as vaccination efforts take effect.

For the boards of those companies that are either considering M&A transactions or may be the target of an M&A transaction, the economic landscape may still appear risky and directors may reasonably expect decisions made in the current climate to be subject to increased scrutiny. The role of the board in an M&A transaction therefore bears consideration, in particular for the directors of those companies that are not routinely involved in M&A.

Under a company’s constitutional documents, subject to any matters reserved to shareholders, it is usual for the board to have the authority to exercise all the powers of the company. Board approval of a transaction will comprise both approval of the transaction itself and approval of the terms of the transaction documents. A contract entered into on behalf of a company without due authority risks being set aside by the company, rendering it invalid. For this reason, it is usual for the seller and buyer in an M&A transaction to review each other’s board approvals prior to entering into an M&A transaction to ensure that the proper authorities are in place. It is also worth considering the flexibility which those board approvals confer to authorise the inevitable last-minute changes to transaction documents.

Particularly in the case of complex or risky M&A transactions, the board should expect to be involved at some level throughout the M&A process, from the due diligence stage to the final board approval. Board involvement is likely to take the form of regular updates from management and advisers and the board may wish to consider forming a sub-committee for the purposes of the transaction; this may be particularly practical if the transaction is on an expedited timetable. The board should also be cognisant of any divergence between the interests of the company and the interests of management (for example, the position of a manager whose division is the subject of a disposal).

In deciding whether or not to approve an M&A transaction, the directors must consider their duty to promote the success of the company for the benefit of its members as a whole. The requirement to consider the success of the company includes: (i) the likely consequences of any decision in the long term; (ii) the interests of the company’s employees; (iii) the need to foster the company’s business relationships with suppliers, customers and others; (iv) the impact of the company’s operations on the community and the environment; (v) the desirably of the company maintaining a reputation for high standards of business conduct; and (vi) the need to act fairly as between members of the company. Each of these factors is likely to be relevant in the context of an M&A transaction.

The board must make decisions for the benefit of the company’s members as a whole. If the company has a key shareholder, or shareholders, it may be that their interests are aligned with the company’s interests, but this is not necessarily the case. For example, if a key shareholder is pushing an M&A transaction to resolve their own liquidity issues, the board should not press ahead with an otherwise undesirable transaction to the detriment of other shareholders.

Equally, directors should consider whether there are any potential director conflicts. There are two types of conflict – situational conflicts of interest and transactional conflicts of interest (although these terms are not defined in statute). The focus here is on a transactional conflict of interest, arising as a result of the M&A transaction in question. A director’s conflict of interest may take the form of a personal financial interest in the transaction, having an interest in the counterparty to the transaction or lacking independence.

Provided that any conflicted directors declare their interest in a proposed transaction or arrangement, the relevant transaction or arrangement is not liable to be set aside. However, in circumstances in which directors have actual or potential conflicts of interest, the company may wish to consider appointing a committee of disinterested directors to ensure that the process of negotiating and approving the transaction and the terms of the transaction documents is robust.

The directors must also consider their other statutory duties: the two most relevant duties when approving a company’s entry into an M&A transaction are the duty to exercise independent judgement and the duty to exercise reasonable care, skill and diligence.

In the context of an M&A transaction, the board may, and often needs to, rely on the professional expertise of advisers. The degree of attention that an individual director should give to the company’s affairs will vary according to the role of the director, for example the role of a non-executive director will be different to that of a chief executive. In practice, non-executive directors may also rely on the advice and expertise of executive directors who are involved in the day-to-day management of the company. The discretion to rely on the advice or expertise of others is not unlimited. All directors must remain informed about the affairs of the company and may not abdicate all responsibility to an adviser.

The extent to which external or internal advice is relied upon should be reasonable in the circumstances and directors should exercise independent judgement in deciding whether or not to follow the advice. Relevant factors when considering whether a director acted reasonably in relying on advice include whether: (i) the director has any reason to doubt the correctness of the advice; (ii) advice was sought on the specific issue in question, as opposed to more generally; (iii) the adviser was competent to advise on the issue in question; (iv) the advice was on a technical point on which the director could not have reasonably been expected to form a view; and (v) the director asked all reasonable questions of the professional adviser.

While the directors are required to approve the transaction documents, a director is not obliged to read the entirety of a transaction document (or suite of documents) when determining whether or not to approve them. He or she is required to understand the transaction, as documented, and its implications, and consider with reasonable care, skill and judgement whether the transaction is in the best interests of the company.

It is often the case that individual directors (usually those signing the transaction documents) are given authority to approve last-minute amendments to the transaction documents. It should be noted that those directors do have increased liability to the extent that they approve amendments to the transaction documents. However, it does not impose any additional requirements on such directors in terms of what they are required to read or review. It would usually be appropriate to ensure that the directors in question are executive directors, such as the chief executive or chief financial officer.

In addition to ensuring that a proper process is followed throughout an M&A transaction, the board must also ensure that the process is properly documented in board minutes and broader correspondence between the board and the management team, in case any part of the process is subject to question.

 

Oliver Stacey is a partner, Victoria Scopes is a senior associate and Rebecca Lander is an associate at Norton Rose Fulbright. Mr Stacey can be contacted on +44 (0)20 7444 5038 or by email: oliver.stacey@nortonrosefulbright.com. Ms Scopes can be contacted on +44 (0)20 7444 2494 or by email: victoria.scopes@nortonrosefulbright.com. Ms Lander can be contacted on +44 (0)20 7444 3772 or by email: rebecca.lander@nortonrosefulbright.com.

© Financier Worldwide

BY

Oliver Stacey, Victoria Scopes and Rebecca Lander

Norton Rose Fulbright

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