Both “deal” and “governance” counsel will enjoy sharing with corporate clients the highly practical guidance provided by Chief Justice Leo E. Strine, Jr. in a newly published article in The Business Lawyer.[1] In his article, the Chief Justice identifies several actions lawyers can recommend to improve the process by which boards review merger/acquisition proposals. These include promoting more effective decision making, mitigating the potential for conflicts of interest and more accurately recording the exercise of board judgment – all for the purpose of reducing transaction exposure to future litigation challenge. More broadly, these recommendations serve to underscore the various critical elements that support informed board decision-making and sustainable transactions.

Reducing the Potential for Conflicts

“Deal” and “board” lawyers will appreciate the Chief Justice’s emphasis on reducing the process risks associated with management-level conflicts of interest. Part of this relates to the important role that independent financial advisors can play in terms of providing the board with substantive business advice when concerns arise about the disparate incentives of management. Counsel can play an important role in assuring the engagement of the strongest possible independent financial advisor, and structuring the engagement to confirm the provision of the full breadth of deal-related financial advice to the board; not simply the delivery of a fairness opinion or similar document.

Concerns with process-related conflicts also prompt the Chief Justice to recommend the implementation of protocols that would reduce risks that may otherwise arise when senior management may be biased or has “co-opted” the organization’s traditional legal and financial advisors. Particular protocol elements might include an active effort to identify and review possible conflicts (of individuals and potential advisors) through an impartial board-led process. Other elements would serve to limit the ability of the management team to interact with potential buyers without board approval. A primary goal of these protocols is to assure the availability of business judgment rule protection for the board (which protection may not be available when there is evidence of biased decision making).

Approach to Minute-Taking

Corporate lawyers and in-house counsel are always getting questions about the best approach to minute taking. Is it the “long form” method that seeks to fully document the elements of the board’s decision making process, or is it the “short form” method that focuses more on accuracy and seek to avoid “transcript” status? Chief Justice Strine doesn’t necessarily pick sides, articulating the benefits of both processes.[2] Rather, his point is that in the M&A process, it is critical to be clear in the minutes themselves about what method is being used, and why. This is particularly important if the decision is to change from a short form method to a long form method based on the specific agenda of the meeting. According to the Chief Justice, the goal is to avoid having the form of minute taking be a subject of after-the-fact skepticism and criticism.

Effective Use of Redlining

The supposed limitations of technology notwithstanding, the Chief Justice calls for a more sensible use of “redlining” by financial advisors in their presentations to the board—in the same way as do transaction counsel. The ability to reflect changes in “pitch books” and other financial presentations as they are made to the board over time enhances the reliability of the advice and the integrity of the process. It also helps to reduce the suspicion of plaintiffs’ lawyers as to the nature of those changes (e.g., to present the proposal in a fairer light). The use of redlined documents will help directors identify the reasons why changes were made, when called upon to do so in an adversarial proceeding. Steps to document material changes in board presentations will ultimately better position directors to make good decisions. In that regard, the Chief Justice acknowledges the practical difficulty associated with reading the same formatted document over and over again with a consistent level of attentiveness. “Redlining” enables the director to focus with accuracy on those portions of a presentation he/she has not seen before.

It’s Not “CYA”

Lawyers and governance support personnel should be particularly attentive to documenting in meeting minutes the advice provided by financial advisors about critical fairness considerations or other transaction terms, and the directors’ reaction to that advice. The Chief Justice recommends making the necessary documentation efforts to assure written clarity on the advice given in a particular situation and on which the directors ultimately relied. In other words, the documentation should be sufficient to eliminate the risk of dispute concerning whether the directors’ judgment in a particular circumstance was based upon specific advice from the financial advisors.

The Board Portal

Chief Justice Strine adds his voice to the growing number of legal commentators who have begun to raise concerns with the governance effectiveness of the beloved (at least by some) and near-ubiquitous electronic board portal.[3] These concerns generally fall into two key areas: First, that the electronic option (without an accompanying paper copy) may impair the ability of some directors to fully absorb the information. Electronic documents limit a director’s ability to notate and edit those documents for decision-making purposes, especially if the director lacks the technical skills to electronically “mark up” a document. Second, plaintiffs’ lawyers are showing an increasing interest in seeking discovery of electronic information that may evidence the attentiveness of individual directors to materials posted on the board portal. Clearly, circumstances that suggest that a board member spent limited time reviewing deal documents could have negative implications for the board process, and the Chief Justice predicts that such cases are on the horizon. His overarching concern is that excessive reliance by directors on board portals process may limit their ability to be fully attentive to their document review obligations.

Conclusion

The central theme of Chief Justice Strine’s article is that a more thoughtful approach to the fundamental elements of the M&A process will enhance exercise of business judgment by disinterested board members, and their ability to rely on the advice of impartial experts. Such an emphasis on process could also reduce or eliminate many of the process-related issues that subsequently become the focus of litigation. Improving the documentation of the M&A process will also, the Chief Justice suggests, create a “reliable memory aid” for directors in subsequent controversy.

These and other recommendations on improving the quality of the deliberative process are intended to “reduce the litigation target zone” for transactions, and are thus likely to be appealing to many transactional and governance lawyers. Indeed, the practical nature of the Chief Justice’s recommendations should have broad appeal, regardless of the type of decision the board is called to make, and regardless of the type of legal entity involved (e.g., for profit; nonprofit; joint venture).

ENDNOTES

[1] “Documenting The Deal: How Quality Control and Candor Can Improve Boardroom Decision-making and Reduce the Litigation Target Zone”, The Business Lawyer, Vol. 70, Summer 2015 (henceforth, “Documenting the Deal”).

[2] (He does, however, persuasively suggest that documenting the range of factors considered by the board can help diminish subsequent disputes dealing with what the board did, and why it did it.)

[3] See e.g., Sullivan & Cromwell LLP, “Considerations on the Use of Electronic Board Portals”, Harvard Law School Form on Corporate Governance and Financial Regulation, February 28, 2015.

The preceding post comes to us from Michael W. Peregrine, Partner at McDermott Will & Emery LLP.