What pitfalls do buyers, sellers and intermediaries commonly encounter during M&A transactions?
Dubow: Virtually every deal today is subject to shareholder litigation seeking to block the transaction from closing. There is little a board can do about it except to support management in minimizing the effect.
Plaintiff lawyers representing shareholders complain about the price but also about the process employed and the sufficiency of disclosure. What should boards do to anticipate this inevitability?
Dubow: The seller's board wants to ensure that the best price possible is obtained. It is equally important that board members follow a well-informed process to consider the transaction and satisfy their fiduciary obligations. Boards also should engage knowledgeable legal and financial advisors and obtain an objective fairness opinion.
What should the board look for in a fairness option?
Creamer: The firm supplying the opinion must be independent. The fairness opinion must stand up to close scrutiny. It should demonstrate that the valuation expert thoroughly understands the industry and has carefully studied the specific factors that influence the company's future prospects and value. If performed diligently and thoroughly, the fairness opinion can be a verification of management's mettle in negotiating the best possible deal.
Shareholder disputes are frequently resolved before closing the transaction only after agreeing to expanded disclosure (and covering legal fees). By this point, shouldn't there be well-established disclosure standards for deal background and terms?
Dubow: Yes, of course, but these complaints always seek something more. While the expanded disclosure in a settlement might be interesting, in most cases it is not material to an investor's decision to vote or tender their shares. In most of these cases, a plaintiff is not going to be successful in arguing unfair price or process, so all that remains in a settlement (to justify legal fees) is some additional disclosure.
In post-closing, what can be addressed proactively?
Creamer: Putting aside issues specific to a "material adverse change," two things generally: balance sheet adjustments as provided in the agreement and alleged misrepresentations leading to a purchase price adjustment. On balance sheet adjustments, it is not uncommon to find a buyer adjusting the balance sheet in a manner not consistent with the principles used historically, arguing that adjustments are needed to ensure compliance with GAAP. In instances where there is a balance sheet true up, there should be a clear understanding before closing about ac- counting conventions and methodologies used (GAAP and non-GAAP), and ample financial disclosure. On misrepresentations, evaluate disclosures made or information available pre-closing. When warranted, a purchase price adjustment might be determined based on salient factors the parties used to price the deal. In making the assessment, it is important to isolate any strategic or synergistic premium assigned. There are myriad ways to evaluate purchase price adjustments when warranted. In terms of preventing problems post-closing, always err on the side of full and complete financial disclosure.
Dubow: Board members should rely on counsel and financial advisors as well as management as they work through consideration of a merger transaction. It is important to document all actions taken and to disclose such in the proxy statement or other public filing describing the transaction. Always act in good faith, disclose all actual or potential conflicts, and consider the business judgment rule. If the company is a Delaware corporation, then courts will expect boards to maximize shareholder value. In other states, such as Pennsylvania, the statutory scheme provides that board members can consider the transaction's impact on other constituencies, not just the shareholders, in carrying out their fiduciary duties.
Creamer: Engaging a skilled CPA during the due diligence phase can pay significant dividends. If problems are discovered post-closing, do not proceed without a skilled forensic accountant.
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