Corporate Governance

ABA Business Law Section Spring Meeting: The Importance of Process

By Joseph Aguilar

Attending yesterday's session at the ABA Spring Meeting on 'Identifying and Addressing Liability Concerns of Private Company Directors and Officers' was a thorough overview of director and officer duties under Delaware law, an area not unfamiliar to this blog.  The presenters included Tara Dunn (Brownstein Hyatt Fraber Schreck, LLP), John Grossbauer (Potter Anderson & Corroon LLP), Bjorn Honda (RJF Agencies, Inc.), and Gino Maurelli (Holme Roberts & Owen, LLP).  Included in the panel's discussion was the importance of process and 'papering' decisions by officers and boards.  Not only is this practice vital to avoiding the gross negligence standard for breach of the duty of care, but the bigger the paper trail the easier it is for officers and directors to fend off charges of self dealing and conflicts.

One important point came from the Delaware Supreme Court's decision in Gantler v. Stephes, which affirmed the long held notion that officers owe the same duties of care and loyalty as directors.  This case highlighted the issue that an officer may inherently have a conflict whenever he or she is an actor in a merger because selling the company affects the officer's employment, and therefore the officer has a financial interest in the transaction.  In this context, the officer's conflict does not necessarily breach the duty of loyalty, but it may subject the officer to a heightened standard above the normal business judgment in the face of litigation.  This standard, called entire fairness, will require the officer to prove fair dealing and fair price.  Evidence of fair dealing may include how the deal was initiated, structured, negotiated, disclosed to directors, and how approvals were obtained.  In order to supply this information, as the panel noted, the company should make a habit of documenting the process and reasoning of decisions.  

Another reason for extensive process and documentation of decisions came from Trados.  This case involved a merger that resulted in the preferred stock of the target receiving $52 million of the consideration while the common stock received no value.  Since the board owned a substantial amount of the preferred stock and because the common stock received nothing, the court applied the entire fairness standard to the decision to sell.  The panel noted that these types of sales may not be that uncommon in distressed markets.  In advising a company in this situation, the panel suggested heightened process and documentation of the decision making process (including other options explored) in order to prove that the deal meets the entire fairness standard.

Full post as published by The Race to the Bottom on April 23, 2010 (boomark / email).