M&A Deal Points | Navigating Unsolicited Offers
Many founders are surprised to learn that once outside investors are involved, selling the company is no longer solely their decision. Boards play a pivotal role in responding to unsolicited M&A offers, and their responsibilities are guided by key legal principles. Here’s an overview of the rules boards must follow when evaluating offers:
The Board’s Legal Framework
Under Delaware law, where most U.S. corporations are incorporated, the board's actions are governed by two fundamental duties:
1. Duty of Care
Directors are required to make well-informed decisions. This means thoroughly reviewing any unsolicited offer and relying on expert advice from professionals like investment bankers and legal counsel. Informed decision-making ensures that the board acts responsibly on behalf of the company and its shareholders.
2. Duty of Loyalty
Directors must act in good faith, putting the company’s and shareholders’ interests above their own. If any board members face conflicts of interest, they may need to recuse themselves or establish a special committee of independent directors to evaluate the offer objectively.
Key Legal Principles
The Business Judgment Rule
As long as the board makes decisions that are informed, in good faith, and believed to be in the company’s best interests, courts generally defer to their judgment. This principle provides boards with significant discretion when handling M&A offers.
Revlon Duties
When the company is actively up for sale, the board has a duty to maximize shareholder value. This often involves conducting an auction process or otherwise ensuring that the highest possible value is obtained for shareholders.
The Unocal Test
If the board takes defensive measures to block an unsolicited offer, it must demonstrate that the offer posed a legitimate threat to the company’s future. Additionally, the board’s response must be proportional and reasonable.
Key Takeaways for Founders
Boards Have Wide Discretion: While boards have significant freedom in evaluating offers, they must adhere to proper processes and act in the company’s best interests.
Expert Guidance Is Essential: To navigate these responsibilities effectively, involve your corporate attorney early and ensure the board is informed by qualified experts.
Plan Ahead: If you’re considering an M&A process, reach out to experienced advisors like Sierra Pacific Partners to guide you through the complexities.
Responding to an unsolicited offer is a high-stakes decision. By understanding these legal principles and preparing your board to act responsibly, you can position your company for the best possible outcome.