Merger and Acquisitions – Board of Director Obligations, Part 2

by Laura Anthony, Esq. on April 29, 2011 in Mergers And Acquisitions

This blog continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and/or acquisition transaction. The first in the series went over the directors basic duties of care, loyalty and disclosure.

Indemnification of Corporate Officers

Many states’ corporate laws allow entities to include provisions in their corporate charters allowing for the exculpation and/or indemnification of directors. Exculpation refers to a complete elimination of liability whereas indemnification allows for the reimbursement of expenses incurred by an officer or director.

Delaware, for example, allows for the inclusion of a provision in the certificate of incorporation eliminating personal liability for directors in stockholder actions for breaches of fiduciary duty, except for breaches of the duty of loyalty that result in personal benefit for the director to the detriment of the shareholders. Indemnification generally is only available where the director has acted in good faith. Exculpation is generally only available to directors whereas indemnification is available to both officers and directors.

Operating In Good Faith

To demonstrate that a director acted in good faith, the director must meet the same general test of showing that they met their duties of care, loyalty and disclosure. The best way to do this is to be fully informed and to participate in the process, whether that process involves a merger or acquisition or some other corporate transaction. Courts will consider facts such as attendance at meetings; the number and frequency of meetings; knowledge of the subject matter; time spent deliberating; advice and counsel sought by third party experts; requests for information from management; requests for and review of documents and contracts).

Fiduciary Duty and Best Efforts

In advising the board of directors, counsel should stress that the director be actively involved in the business decision making process, review the documents and files, ask questions and become fully informed. The higher the level of diligence, the greater the level of protection.

It is not important whether the decision ultimately turns out to be good or bad. Hindsight is 20/20. The significant factor, in seeking protection (via the business judgment rule, and through exculpation and indemnification) is that best efforts are made. Of course, directors should be careful to document their diligence.

The Author

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.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.


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