Documenting the M&A Process: How Quality Control and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target Zone

Leo E. Strine Jr.

Government of the State of Delaware – Supreme Court of Delaware; Harvard Law School; University of Pennsylvania Law School

Forthcoming, The Business Lawyer

Harvard Law School John M. Olin Center Discussion Paper No. 794

Abstract:

This article addresses what legal and financial advisors can do to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for plaintiffs’ lawyers.

Documenting the M&A Process

If you take to heart my remarks today, you will upset some of my good friends in the plaintiffs’ bar. In other words, if you want to make the lives of plaintiffs’ lawyers more difficult, listen up. If you don’t, then disregard what I’m about to say. That will make them happy.

That is because the focus of my remarks is on what you can do as legal and financial advisors to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) more accurately records what happened so that you and your clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for your favorite plaintiffs’ lawyers.

My discussion of these topics will be illustrative, not exhaustive. But, I will attempt to focus on aspects of typical M&A processes that give rise to litigable issues that could be defanged or avoided altogether by taking a more thoughtful approach.

To do so, I ground the discussion in certain fundamental principles of corporate law that are too often slighted. Put succinctly, those principles give credit to impartial fiduciaries who make rational business judgments, and entitle those fiduciaries to rely upon the advice of impartial experts as a defense.

With those fundamentals in mind, I then examine some of the foundational stages of the deal process, including those involving the identification of managerial and board conflicts, the selection of advisors and the management of any conflicts, and the reasons why such advisors are hired.

Once I have discussed why impartial decision-making is so fundamental to our system, what that means for outside advisors in typical M&A deals when management has conflicts, and why directors are entitled to rely upon the advice of those advisors, I will address certain recurring issues in documenting the M&A process. Despite having the ability to write the play, too many advisors leave out critical parts of the story line, depriving their clients of reliable memory aids in situations where they may be unable to accurately recollect the reasons for decisions they made. This contributes to the possibility that directors, managers and advisors will have different recollections of material events when they testify in litigation. Not only that, the record often fails to document the most important advice given by outside advisors, because the record is sanitized of their actual business advice, and leaves the impression that independent directors made all kinds of difficult strategic and tactical decisions in a context fraught with managerial self-interest, based on their own acumen and intuition, and with only the backstop of a caveat laden, liability insulating fairness opinion in which the financial advisor disclaims having done any independent thinking and professes to have relied exclusively upon information it was provided by management.

A credibility problem emerges with stockholders when the financial advisor and the directors remember the M&A process differently. Differences in memory also arm plaintiffs’ lawyers with powerful arguments, and put the fact finder in a judicial proceeding in the difficult position of determining who to believe, in a context when many defendants will have had powerful economic incentives that the plaintiffs can plausibly argue skewed their thinking.

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Documenting the M&A Process: How Quality Control and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target Zone