Has your board been involved in merger and acquisition (M&A) oversight? With M&A transactions representing opportunities for growth and competitive advantage, boards increasingly need to be prepared to provide oversight associated with either the acquisition of their company or the purchase of another one. As such, you and your board may want to re-examine your board matrix and consider yet another area of experience for which you’ll want to recruit: mergers and acquisitions.
Although it’s management that will develop and execute a company’s M&A strategy, such transactions will impact shareholder value. It’s the board, then, that holds responsibility for independent oversight of potential M&A transactions. It’s also the board and individual directors who may be held accountable – legally, reputationally, or both – should the process or outcome be deemed flawed.
Board Connections and M&A Transactions Oversight
We’re functioning in an era in which scrutiny of a board’s performance is the norm, and oversight of a prospective M&A transaction represents a particularly significant test of a board’s capabilities. In order to govern effectively and withstand M&A transaction scrutiny, directors must understand and act on their duties of both loyalty and care. They must set aside any concerns about whether they will retain their board positions. It’s the shareholders’ and company’s bests interests that are front and centre as directors exercise oversight in the determination of whether a sale or purchase transaction is appropriate.
In overseeing M&A transactions, a board must function in a manner that will withstand scrutiny on the part of shareholders, regulatory bodies and additional parties. Other stakeholders such as employees, clients, creditors and suppliers can also be impacted by the outcome, and the board will consider stakeholders’ interests and ensure their fair treatment. In addition to avoiding personal conflicts of interest, directors also need to ensure there’s no conflict of interest on the part of company officers. Otherwise, directors could be held to account for breaching duty of care.
If an M&A opportunity or approach occurred in the next quarter, how ready would your board be to assess the ramifications of either buying or selling? While M&A transactions are on the rise, they’re not necessarily a routine undertaking for every company, which makes it all the more important for you as a governance professional to assess your board’s level of preparedness.
Directors should already be well versed in their fiduciary duty to shareholders. If your board has developed a solid onboarding and development program, your directors will know that they’re expected to set aside personal interests. They’ll be aware that they must safeguard the business and act in the company’s best interests, but has there been much education relative to M&A transactions?
Board of Director’s Conflict of Interest Policy
Have a look your board’s conflict of interest policy. It may already detail disclosure requirements and procedures, but your board may benefit from the inclusion of language specific to respect to oversight of proposed M&A transactions. Take time to also review your onboarding program and the board’s annual work plan in the context of M&A transactions. Are there any references to education on, or readiness to oversee, potential mergers or acquisitions?
If your onboarding program and board development programs do not already provide specific education on fiduciary duties and avoidance of conflicts of interest in M&A situations, pause a moment to consider the inherent risks. Consider how incredibly connected your directors are; imagine the depth of connections likely to be reflected in their respective contact lists. Some of your directors may serve as (or have served as) an officer of another corporation and they may also serve on more than one board. Given the extent of their connections, individual directors must be aware of the need to assess potential for conflict of interest.
This is yet another area in which corporate secretaries and other governance professionals can add value.
You can support effective oversight of potential M&A transactions even before they unfold, through both policy and education on oversight risks associated with such transactions. Global law firm Norton Rose Fulbright has identified examples of M&A oversight conflicts, including a conflicting duty. That’s what you have when a director serves as an officer or director of another company that’s a counter-party to a material contract or transaction with the company. If a director is a party to a proposed material contract or transaction with the company, that’s a direct conflict of interest. There’s also indirect conflict of interest, which will be the case should a director have a material interest in a proposed material contract or transaction with the company – even if the director isn’t party to the transaction.
It’s critical that a board be proactive in managing any and all conflicts of interest – be it a conflict of interest on the part of a director, a company officer or an advisor. In the case of a director’s conflict, the director is responsible for disclosing the conflict in a timely manner and will abstain from voting associated with the transaction under consideration.
You serve your board well in documenting such disclosures of conflict of interest as they occur. Whether or not the board is challenged at some point on its M&A oversight and decisions, it’s simply good governance for you to create and maintain such company records. Your minutes can serve as one form of documentation. A board can benefit from formal records of a disclosure as well as the time and care the board took in considering and understanding the conflict as part of its oversight obligations.
Oversight Best Practices
Given the requirement for impartial decision making, boards need to ensure the independence of those oversight deliberations. Has your board established a committee, or the framework for a committee, through which only independent directors without any perceived or actual conflict of interest will assess a prospective M&A transaction?
However well informed the independent directors on such a committee may be, the board needs to ensure that it acts prudently and is properly informed. To this end, a board should have documented authority to retain external, independent expertise to support its deliberations. As with directors and management, your legal counsel, financial and other external advisors’ connections are relevant; the board should ensure they have neither a direct nor indirect conflict of interest.
A governance professional’s judgement and recording skills are invaluable throughout the process, as you will also document the advice provided the board by its advisors. You do your board a service in establishing records of why the board made specific M&A decisions and identifying the external parties upon whose advice the board relied in forming such decisions.
Mergers and acquisitions can represent both opportunities and risks. Directors and boards reduce litigation if they exercise their duties of care and loyalty in making informed M&A decisions that are free of conflict of interest.