7/30/2019 Secure Your Sale

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© 2012 Smart Business Network Inc. Reprinted from the May 2012 issue of Smart Business Orange County.

Insights Legal Affairs

Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth

Secure your saleHow to protect your company’s merger and acquisition deal from stockholder lawsuits Interviewed by Jessica Hanna

As an executive, you’ve spent a tre-

mendous amount of time building your company. Choosing to enter 

into a sale transaction is a major deci-

sion that will determine the future of 

the company you’ve worked so hard to

grow, as well as your own.

“Because of that, you want to do all

 you can to protect the deal if you con-

clude it’s the best thing for the company,

and also to protect yourself from liabil-

ity,” says Marc Schneider, General Coun-

sel for Stradling Yocca Carlson & Rauth

and a Shareholder in the securities and

business litigation department.

Taking measures to protect the dealand yourself isn’t just a precaution — it’s

a necessity. Schneider warns that these

types of transactions are magnets for 

shareholder challenges, often resulting

in lawsuits.

“But if you take the right steps, you’ll

be in a very good position to either effec-

tively defend the suit or prevent the suit

from ever happening in the first place,”

he says.

 Smart Business spoke with Schneider 

about how businesses should approach

M&A deals to prioritize shareholders

and protect both the transaction andthemselves.

Why are M&A deals at such risk from stock-holder attack?

Shareholders’ positions change funda-

mentally — these deals generally mean

an exit for them. This simply is not an

ordinary transaction, so it receives a lot

of attention from shareholders.

 And just as importantly, these trans-

actions have received more attention

from the plaintiff’s bar over the last few

 years. As with any other business, the

 plaintiff’s bar tends to real locate its re-

sources to more productive uses.

We’ve seen fewer stock price drop cas-

es because recent legislation has made

those cases more expensive and difficult

to bring. So the plaintiff’s bar has been

increasingly focused on M&A activity,

which is not as impacted by this legisla-

tion.

What should management and the boardfocus on when considering a deal?

The No. 1 goal is finding the best deal

for shareholders, because their respon-

sibility is to those shareholders — not to

a deal or their own interests. And the

best deal may be no deal; they should

evaluate whether there are alternatives

to selling that may create more share-holder value. When deciding between

deals, the board may also consider fac-

tors other than price, such as closing

risks and whether the deal includes an

effective fiduciary out or a go-shop pro-

 vision.

What are management and the board’sroles in the M&A process?

Management plays an important role,

but that role is shaped both by the nature

of the deal and the board’s approach to

the deal. The board may decide to havemanagement more involved or less in-

 volved.

The board must consider if there are

any significant conflicts, such as wheth-

er or not members of management will

be continuing with the company after 

the merger and whether their current

compensation packages will be impact-

ed. The board should be very active and

well informed throughout the process,

asking questions of management and the

bankers.

How can businesses proactively protect the

deal and themselves?

The first step is to do a thorough check

of the market for an acquisition, as well

as consider strategic alternatives to an

acquisition. Think about creating a spe-

cial committee of independent directors,

as well as retaining an investment bank-

er, to help with that market check and to

take the lead on negotiations with poten-

tial bidders. When the potential bidders

seek due diligence, consider an electron-

ic data room to give equal access to all

 potential, serious bidders so there can’t

be any allegations of favoritism.For the same reason, when manage-

ment is involved in due diligence or an-

swering questions for potential bidders,

consider a chaperone for management,

which could be one of the independent

directors from the committee or the

banker. And you shouldn’t release man-

agement to negotiate their own deals for 

their post-acquisition roles until after 

the material deal terms are set.

In addition, make sure to do a transpar-

ent, accurate, and thorough job telling

 your story in the preliminary proxy — a 

critical document. Explain that you haveconducted a thorough market check and

had a solid process in place. This can

help protect your deal and even discour-

age lawsuits.

Get a lawyer involved early on in the

 process to help the board and manage-

ment understand their fiduciary duties

and how best to meet them, and to help

 you put together a good, defensible pro-

cess.

If named in a merger litigation, what actionshould a business take?

These types of litigations move really

quickly, so it’s critical that you immedi-

ately retain experienced counsel that’s

used to handling these types of litiga-

tions.

It’s also critical that you contact your 

directors and officers liability insurance

carrier right away. Usually, a company

has D&O insurance to cover these mat-

ters, and you want to act quickly to get

the carrier involved in the potential liti-

gation. <<

MARC SCHNEIDER is General Counsel for Stradling Yocca Carlson & Rauth and a Shareholder in the securities and business litigation

department. Reach him at MSchneider@SYCR.com.

Marc SchneiderGeneral Counsel and

Securities Litigation ShareholderStradling Yocca Carlson & Rauth