This article continues my series on obligations (and rights and responsibilities) of the board of directors during a merger and acquisition transaction. The last in the series discussed a director’s duty of loyalty. This blog continues that discussion, focusing on the duty in particular fact circumstances.
Balancing Common and Preferred Shares
A common question I am asked by directors is how to balance the interest of two competing classes of stock (such as common and preferred). In such a case, the entire fairness standard of reviewing a corporate transaction (discussed in last blog) will not automatically be invoked, but first the court will utilize the business judgment rule. Accordingly, a director who is not conflicted and who otherwise takes all measures required (in-depth involvement in the process, review of all documents, advice of outside professionals, seeking highest price for all classes of stock) will be protected from liability.
Directors’ Financial Motivation
Delaware courts have emphasized that involvement by disinterested, independent directors increases the probability that a board’s decisions will receive the benefits of the business judgment rule and helps a board justify its action under the more stringent standards of review such as the entire fairness standard. Independence is determined by all the facts and circumstances, however, a director is definitely not independent where they have a personal financial interest in the decision or if they have domination or motive other than the merits of the transaction. Simply stated, the greater the degree of independence the greater the protection. Many companies hire special committees of outside professionals to review and recommend course of action on a transaction as added protection.
Duty of Loyalty
In some circumstances the duty of loyalty requires that a director make a business opportunity available to the corporation before the director may pursue the opportunity personally. Whether such an opportunity must first be offered to the corporation will depend on the following factors: (i) the circumstances in which the director became aware of the opportunity; (ii) the significance of the opportunity to the corporation and the degree of interest of the corporation in the opportunity; (iii) whether the opportunity relates to the corporation’s existing or contemplated business; and (iv) whether there is a reasonable basis for the corporation to expect that the director should make the opportunity available to the corporation.
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.