You may remember when many corporations were involved in internal investigations of stock option backdating. Similar situations arise with respect to the Foreign Corrupt Practices Act, derivative cases where a plaintiff’s lawyer is seeking to sue on behalf of the corporation, and employment matters involving top management. All of these situations require special attention from the independent board members.
The courts have made it clear that the independent board members (as opposed to management) should control and oversee the assessment of mergers, acquisitions and other strategic transactions. Many of the most dramatic criticisms of independent members of boards have been leveled in where the board allowed management to run the strategic transaction process without oversight.
The federal securities laws hold each director liable for inaccurate statements in a registration statement. While the board’s liability may be effectively covered by directors and officers insurance and each of the directors will hopefully have read the registration statement, no independent director is really in a position to perform the due diligence and spend the time in drafting sessions required to provide much direct comfort as to the accuracy of the registration statement. Moreover, most directors are not securities professionals with a full view of what is risky to put in a prospectus. I can provide that expertise and experience.
The courts’ scrutiny of a board’s actions is amplified exponentially where there is an inherent conflict because the transaction involves a controlling stockholder, a management buy-out or a private equity buyout where management rolls equity in the acquired company into equity in the acquirer. These may involve a “special committee” of the board. However, the establishment of a special committee does not solve the situation by itself and participation on special committees can require extensive time and attention.