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In Captain Phillips, a pirate hijacks a ship and turns to the captain and says (in what is an amazing improvised line) “Look at me, I’m the captain now.” While the comparisons between piracy and M&A will take us only so far, let us start with an observation: boards and special committees overseeing M&A transactions — much like ship captains in treacherous waters — need to be wary of other constituencies attempting to overtake their role not only once the transaction has been signed, but through the twists and turns of the entire deal.
Section 141(a) of the Delaware General Corporation Law imbues boards with the unique authority to manage or direct the affairs of a corporation. An important corollary to that statutory authority is the bedrock principle under Delaware law that directors are fiduciaries to the corporation and its stockholders. Two recent Delaware cases  serve as reminders that fiduciaries must continue to exercise care in discharging their duties throughout the life of a deal — that is, as it is often put, directors’ and officers’ fiduciary duties are unremitting. In the M&A context, most breach of fiduciary duty cases assert claims that arise at the time the board approves the entry into the definitive transaction document. In that setting, it is well understood that such decisions require the directors to act with the utmost care, on an informed basis and in the best interests of the corporation and its stockholders. However, the decisions in Fort Myers v. Haley and the Dell Stockholders Litigation involved breach of fiduciary duty claims stemming from actions taken after the initial announcement of the proposed transactions. These opinions show that, in situations where parties renegotiate deal terms in response to stockholder opposition of the original terms, plaintiffs (and thereby the court) will scrutinize the process that led to the board’s decision to approve the revised deal terms. If anything, these cases underscore how critical it is for officers and directors to keep the full board (or the special committee in charge of negotiating the transaction) informed of material developments, engaged in the negotiation of any material deal terms after signing, and ultimately in control of the sales process throughout the pendency of a deal.
Case # 1 (Fort Myers v. Haley): A Target for Scrutiny – Post-Closing Employment Arrangements.
In 2015, Towers Watson and Willis Group announced a “merger of equals.” Certain of Towers Watson’s stockholders were critical of the deal terms and opposed the merger, garnering support of proxy advisors ISS and Glass Lewis and making approval of the deal by Towers Watson’s stockholders unlikely. Around the same time that Towers Watson’s stockholders began to oppose the transaction, ValueAct Capital Management, an activist stockholder that held a significant stake in Willis Group, made a presentation to John Haley, Towers Watson’s Chief Executive Officer and the agreed-upon Chief Executive Officer of the combined company, about what his compensation package could look like in his new role following consummation of the transaction. Mr. Haley did not inform the board of this presentation. Following the presentation, Mr. Haley led the renegotiation of the terms of the definitive agreement to make it more favorable from a financial point of view to Towers Watson’s stockholders, which terms were unanimously approved by Towers Watson’s board. Although Towers Watson’s stockholders approved the transaction, the deal triggered multiple state and federal lawsuits, including a breach of fiduciary duty claim against Mr. Haley. The Delaware Supreme Court, in reversing the Chancery Court’s dismissal of that action, reasoned that Mr. Haley’s failure to disclose the illustrative post-closing compensation package to the full board was a material omission, and that a reasonable board member — as well as a reasonable stockholder — would have regarded the compensation discussion amidst deal completion uncertainty as significant when evaluating the renegotiated deal terms. In particular, the Supreme Court’s opinion suggested that Mr. Haley could have been more concerned with preserving the deal (and securing his lucrative post-closing compensation package) than negotiating harder for the best possible outcome for Towers Watson’s stockholders.
Key takeaways for officers and directors:
- Any discussions regarding post-closing employment arrangements – even though there is a legitimate need for them in many transactions – can raise the specter of a conflict of interest.
- Officers and directors should fully disclose conversations about these potential arrangements to the board (or special committee, if applicable), who should monitor and oversee the discussions.
- Ideally, discussions involving post-closing employment or compensation, particularly of an individual who is negotiating transaction terms, should be deferred until deal economics and other key deal terms are largely finalized.
- If, prior to stockholder approval of a transaction, officers or directors do engage in any discussions regarding post-closing employment or compensation then those discussions, and the details of the potential compensation, should be disclosed to the board or committee (and potentially to the stockholders).
- The board or committee should take the initiative to check in regularly with any individuals tasked with negotiating a transaction to assess whether any potential conflicts have developed, and should not rely on those individuals to self-report.
Case #2 (Dell Stockholders Litigation): Once a Special Committee, Always the Special Committee.
In 2018, Dell Technologies formed a special committee to help facilitate the consolidation of its interest in VMware (which was controlled by Dell) through the redemption of Dell’s Class V common stock — a VMware tracking stock. After the special committee had negotiated the terms of the redemption by Dell, certain large holders of the Class V stock expressed their opposition to the financial terms of the transaction, making approval of the transaction unlikely. Those same Class V stockholders approached Dell about revising the terms of the transaction and, instead of delegating the discussion to the special committee, Dell renegotiated the terms directly with the stockholders. In refusing to apply MFW’s protections to the transaction, the Court of Chancery held that the minority stockholders (i.e., the Class V stockholders) had been deprived of the protection the special committee was intended to provide — i.e., being the negotiating agent for the minority stockholders and the key decision maker in recommending the deal to them. Unlike disaggregated minority stockholders who may have varying objectives and do not owe fiduciary duties to other stockholders, a special committee is uniquely situated to obtain the best value for the minority stockholders as a whole, and the committee’s role in a transaction does not cease just because its initial work is rejected — it’s unremitting throughout the negotiation process. Input from stockholders is not prohibited but, per the Court of Chancery, “[…] the committee must continue as the primary negotiator.” (no hijacking permitted).
Key takeaways for special committees:
- The special committee’s duties do not end with the signing of a definitive agreement. For MFW’s protections to apply, the special committee must remain the primary negotiator throughout the transaction, including any renegotiation of deal terms. Accordingly, after signing, directors and officers should continue to filter material matters related to the deal to the special committee.
- While input from stockholders can be solicited and considered by the special committee, it’s important that the record reflects that the committee was ultimately in control of any negotiations.
- If a special committee does receive input from a minority stockholder (or group of minority stockholders), and that input affected its work, consider disclosing those communications and why the special committee considered the input valuable in obtaining the best value for all stockholders.
 City of Fort Myers General Employees’ Pension Fund v. Haley (Del. June 30, 2020) (“Fort Myers v. Haley”) and In re Dell Technologies Class V Stockholders Litigation (Del. Ch. June 11, 2020) (“Dell Stockholders Litigation”)