State corporate law generally provides that the business and affairs of a corporation shall be managed under the direction of its board of directors. Members of the board of directors have a fiduciary relationship to the corporation, which requires that they act in the best interest of the corporation, as opposed to their own. As such, directors owe a corporation a duty of loyalty, honesty and good faith. Generally a court will not second-guess directors’ decisions as long as the board has conducted an appropriate process in reaching its decision. This is referred to as the “business judgment rule”.
Mergers and Acquisitions
However, in certain instances, such as in a merger and acquisition transaction, where a board may have a conflict of interest (i.e. get the most money for the corporation and its shareholders vs. getting the most for themselves via either cash or job security), the board of directors actions face a higher level of scrutiny. This is referred to as “enhanced scrutiny business judgment rule.” The same standards apply to officers of a corporation.
A director’s fiduciary duties to a corporation include the duty of care, duty of loyalty and a duty of disclosure. In short the duty of care requires the director to perform their duty with the same care a reasonable person would use, to further the best interest of the corporation and to exercise good faith, under the facts and circumstances of that particular corporation. The duty of loyalty requires that there be no conflict between duty and self interest. The duty of disclosure requires the director to provide complete and materially accurate information to a corporation.
In the seminal case of Smith vs. Van Gorkom, 488 A.2d 858 (Del. 1985), the Court found that the board was grossly negligent where it approved the sale of the company after only a few hours of deliberation, failed to inform itself of the Chairman’s role and benefits in the sale and did not seek the advice of outside counsel. Similarly in Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) found that the board was negligent in approving the sale of a company where it did not search for real alternatives, did not attempt to find a better offer and had insufficient knowledge of the terms of the proposed merger agreement.
On the other hand, the court in In re CompuCom Sys., Inc. Shareholders Litigation., 2005 Del. Ch. LEXIS 145 (Del. Ch. Sept. 29, 2005) upheld the board of directors business judgment even though the transaction price per share was less than market value as the board showed it was adequately informed, acted rationally and sought better deals.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
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