Directors must be attentive to risk and be unafraid to say no in order to protect both themselves and their companies from potentially devastating legal actions, agreed a group of legal experts, including moderator Weil Gotshal & Manges Managing Partner E. Norman Veasey, gathered at NACD’s Board Leadership Conference 2011 this morning.
“M&A will always pose conflict of interest possibilities,” said newly-appointed Delaware Chancery Court Chancellor Leo E. Strine, Jr., advising companies to put into place “policies on M&A in advance of any activity, and policies on when the CEO can decide to sell the company.” He also noted that boards need more than the CEO as the sole executive member. “They need more people at the adult table.”
“The Chancellor regularly has asked why,” said Randall J. Baron, Partner at Robbins, Geller Rudman & Dowd. “If you don’t answer that well, you’re not going to do well.” He advised the over 800 directors present at the annual conference, held in Washington, D.C., that “your job is skepticism,” citing Kinder Morgan and Del Monte Foods’ private equity deals as key examples of boards under-prepared to face a lawsuit where they would be required to defend their choices.
In today’s litigation environment, virtually every company entering into a merger or acquisition must be prepared to face a lawsuit, with the possibility of director depositions to defend their approval decision. “When the deal is announced, we don’t know all the details, and there is a rush to file suits,” explained Rachelle Silverberg, Partner at Wachtell, Lipton, Rosen & Katz. “As a board, the best you can do is prepare for inevitable litigation. Do what chancery judges will expect of you: Make sure your board is informed, retained adequate advisors and has been informed before the transaction was approved and announced.”