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I’m attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate
securities and business transactions law firm. Today is the continuation of a LawCast series
discussing mergers and acquisitions. In the last three LawCasts in this series, I discussed
the responsibilities of the board of directors and in particular their fiduciary duties related
to merger and acquisition transactions. In the last LawCast I highlighted Delaware case
law on directors duties. Today I will drill down on directors’ duties when faced with
the heightened entire fairness standard of responsibility in a transaction. The entire
fairness standard is invoked when a director has a conflict. Delaware’s General Corporations
Law provides that a contract or transaction in which a director has an interest is neither
void nor voidable if: 1. A director discloses any personal interest
in a timely matter; 2. A majority of the shareholders approve
the transaction after being made aware of the director’s involvement; or
3. The transaction is entirely fair to the corporation and was approved by the disinterested
board members. The third element listed by the Delaware statute
has become the crux of review by courts. In determining whether a transaction is fair,
courts consider both the process, i.e., fair dealing, and the price of the transaction.
Courts look at all aspects of the transaction and the transaction as a whole in determining
fairness, not just the portion or portions of the transaction involving a conflict. The
entire fairness standard can be a difficult hurdle and is often used by minority shareholders
to challenge a transaction where they think there may be a potential breach of loyalty,
or where they think the transaction is not fair to them, or where controlling shareholders
have received a premium. To protect a transaction involving an interested director, it is vital
that all directors take a very active role in the transaction—that the interested director
inform both the directors—the other directors and, ultimately, the shareholders of the conflict;
that the transaction resemble an arm’s-length transaction; that it be entirely fair; and
that negotiations are diligent and active and that the advice and counsel of independent
third parties, including attorneys and accountants, be actively sought. Delaware courts have emphasized
that involvement by disinterested, independent directors increases the probability that a
board’s decisions will receive the benefit of the business judgment rule and will help
a board justify its actions under the more stringent entire fairness standard. Independence
is determined by all facts and circumstances; however, a director is definitely not independent
where they have a personal financial interest in the transaction. Where conflict exists
most companies obtain third-party fairness opinions. The first element of the statute,
i.e. proper disclosure to shareholders, is also of the utmost importance. In the case
of a merger or acquisition requiring shareholder vote, it is incumbent upon the directors to
provide shareholders with material information necessary to make an informed decision. I’m
securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer
of LawCast. Should you want to know more about today’s topic, please visit LawCast.com
and Securitieslawblog.com. Also feel free to contact me directly. Inquiries of a technical
nature are always encouraged.