Special Committees in Conflicted M&A Transactions: Implementing Processes, Negotiating the Deal, Avoiding Pitfalls

Description

Special committees of company boards often play a critical role in M&A transactions that involve conflicts of interest, such as transactions involving controlling stockholders, corporate insiders, or affiliated entities (including "going private" transactions, or purchases or sales of assets or securities from or to a related party). Such "conflict transactions" raise complicated legal issues and, in today's environment, a high likelihood of litigation. Special committees are judicially recognized and encouraged as a way to address director conflicts of interest in deals and mitigate litigation risk.

The special committee process, while highly beneficial if properly executed, is complex and can be expected to be subject to rigorous review in litigation. It is therefore imperative that all special committee interactions be undertaken thoughtfully and with a view to how they may be perceived in hindsight.

Companies must carefully consider in the context of a transaction--when the specter of a real or potential conflict arises--whether a special committee is in fact the best approach, whether it is advisable at all, and whether alternative approaches could be implemented. Equally important is the proper formation and empowerment of the special committee and the execution of its work.

The decision by the Delaware Court of Chancery in the In re Oracle Corporation Derivative Litigation underscores the advantages of a board's use of an independent special committee to lead the process for a potentially conflicted M&A transaction. The case also provides a helpful framework for determining whether the presence of an influential, non-majority shareholder results in a conflicted M&A transaction, and the procedural guardrails to consider implementing in order to have the directors' decisions be subject to the "business judgment rule" and not the more onerous "entire fairness standard."

Listen as our authoritative panel of M&A experts discusses best practices in connection with the establishment and operation of a special committee of disinterested and independent directors to successfully close complex deals and avoid after-the-fact litigation.