The M&A Litmus Test: Part 4

Today is the penultimate day of your M&A Litmus Test, so we’ll continue by testing your board’s…

…Info Flow.

How good is your information flow? For the board, knowledge is not merely a source of power; it is the very key to effectiveness. The following wisdom is adapted almost verbatim from the Report of the NACD Blue Ribbon Commission on Director Liability.

When it comes to M&A information, flow is critical.  The type, quantity, format, timing, and source of the information that fuels board knowledge will vary from board to board and will also change over time for a particular board. It will also vary among board members, who have different levels of experience and expertise with different topics.

Information flow is critical for directors with respect to capital allocation decisions—in particular, mergers and acquisitions. This area requires special attention to the long-term interests of the corporation and the ways in which management’s interests may affect transactions. As the report noted, the board and management need to regularly discuss the opportunities for and threats to the company, even in the absence of any planned or foreseen transactions, so that directors have an understanding of the business context in which these issues may arise.

Depending on the size and business context of the company, notes the report, directors should periodically receive information related to, and discuss with management, the following:

• Comparative studies and analysis concerning whether the company would be more viable by merging with, or entering into alliances with, another candidate, or standing alone;
• Possible acquisition candidates. When discussing the fulfillment of certain of the company’s business strategies, such as entering into new lines of business, directors should receive information on possible alternatives, such as an acquisition or strategic alliance, to achieve the same objectives; and
• The merger activity of competitors, including the impact of recent activities on the company’s market share. Competitive analysis as to other suitors for the same potential acquisition candidates might also be warranted.

Maintaining an up-to-date understanding of these issues will help directors to remain prepared for the time when management actually proposes a transaction. This is particularly critical for directors of public companies, who should understand the company’s plans and legal options for responding to unsolicited takeover offers.

In evaluating a particular transaction, notes the Report, directors should seek specific information about the price, timing, and certainty of the transaction, and should be proactive in overseeing negotiations. Directors should understand how the transaction will be financed, and the projected financial impact on the company under reasonably likely scenarios. Where the sale of the transaction warrants it, directors should seek independent financial advice from outside experts to consider together with management’s financial assessment.

Directors should also obtain a high-level analysis of the merger documentation, including an understanding of the most important representations, covenants, and indemnities contained therein and their application to the company and the transaction. In addition, directors should receive input from market and investor relations experts about the best manner in which to position the transaction and the likely reception from investors and creditors. As with any other matter before them, directors should crucially evaluate all the information they have obtained and arrive at an independent assessment instead of relying exclusively on management’s views.

Directors should also be alert to differences between management and shareholder interests in negotiating a particular transaction. For example, shareholders will be far less interested than managers in knowing who will continue to work for the merged company and with what responsibilities. These employment issues are important but they should not override concerns about long-term returns to shareholders.

Shout Out to Sources

• NACD Key Agreed Principles to Strengthen Corporate Governance for U.S.Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.
• Report of the NACD Blue Ribbon Commission on the Role of the Board in Corporate Strategy
• Art of M&A Series, McGraw-Hill
• Report of the NACD Blue Ribbon Commission on Director Liability