TABLED: Keeping control – a board’s role in M&A

The buoyancy of the current market (seemingly unaffected by the recent ‘credit crunch’), combined with changing deal dynamics, make the current M&A market challenging space for all participants. When you consider that more than half of M&A transactions reportedly fail to deliver the expected benefits, together with the media’s increased scrutiny of corporate performance, the board’s role in maintaining good governance and ‘control’ of such transactions has never been more important.
Whilst differing levels of ‘control’ may arise, boards carry ultimate responsibility for all decisions, and are required to fully assess for each transaction their level of involvement, the processes to be followed and parameters within which management must operate.
Factors influencing the level of ‘control’ exercised by the board include: the size of the transaction relative to the business; whether the opportunity is within market or industry familiar to the business; and the experience of the deal team in such transactions.
A well-balanced board with range of skills can add significant value to transaction through its guidance and experience. Businesses embarking on an acquisition programme should assess whether they have the required skill and experience on the board to assist with making the necessary decisions, and any skill-gap should be remedied, either through the appointment of external advisers or by new appointment to the board.
The board also fulfils an important role as the objective counterbalance to the deal team who have invested often large amounts of time, effort and reputation in pursuing particular transaction. Naturally, acquisitions also involve considerable risks, and the board must be confident that each transaction is demonstrably in the best interests of the company and its stakeholders, and that relevant protections are put in place to identify and address risks.

The board’s contribution
Increasingly, boards are required to take more active approach than may previously have been the case. However, there is natural tension between the board becoming too heavily involved, and usurping the role of management, and the desire for the board’s involvement and expertise to be utilised in constructive manner. Accordingly, good governance requires boards and management to clearly understand their respective roles and (in management’s case) levels of authority.
The board’s role should include:
• Focusing on the rationale for the transaction and ensuring it is consistent with the company’s strategic objectives;
• Establishing robust, but flexible, processes and controls to ensure it receives the right information in timely manner to make fully informed decisions;
• Ensuring due diligence has been carried out and all material risks are identified and managed appropriately;
• Reviewing all information and challenging and questioning management’s decisions, while still following management’s leadership;
• Verifying and reaching its own conclusions on key issues and decisions, such as price and, if necessary, seeking independent advice;
• Ensuring detailed integration plan is in place to implement the transaction and unlock identified synergies and savings and then monitoring the integration.
The board may delegate its involvement to commitee but this does not abrogate responsibility.
Too often management can see the board as hurdle to implementing transaction. This attitude seems to develop where board sits aloof of the initial decisions and process and is not seen to support management’s efforts or engage in the transaction. Those deals where the board is kept in regular contact, and key decisions are communicated and shared, seem to work best. Such deals are also often characterised by boards that have clearly set out their expectations to management as to levels of authority and reporting and sign-off procedures.
The board can also be used strategically by management during negotiations. For instance, where deadlock occurs the external objectivity of the board may provide useful means for breaking that deadlock. Management may be able to use the board’s ‘directions’ as means for delivering difficult decisions to the other side, whilst still maintaining working relationship between the deal teams. This can be particularly useful where an ongoing business relationship must be preserved.

Duties and obligations
Good corporate governance requires the board to always consider its obligations and duties at law. At the forefront of the board’s decision making must be its overriding duty of care to the company, shareholders and other stakeholders. All directors also owe basic fiduciary duties. In the M&A context this means making all necessary enquiries and obtaining all information necessary to fully analyse proposed transaction. In this case the Companies Act allows directors to rely on reports and information prepared and supplied, and on professional or expert advice given, by:
• Employees, to the extent directors believe on reasonable grounds to be reliable and competent in relation to the matter;
• Professional advisers and experts, on matters the director reasonably believes to be within the person’s area of competence; or
• Other directors or committees in respect of matters within their designated authority.
However, this protection only applies if the director acts in good faith, makes proper inquiry where the need for inquiry is indicated, and has no knowledge such reliance is unwarranted.

What about conflicts of interest?
It is inevitable that conflicts of interest will arise during transaction. One area this can arise is during sale to private equity interests. As board relies on senior management to provide it with full and accurate information, it must be aware of the conflicts that arise where senior management become part of the deal if being ‘courted’ by bidders to take an equity stake in the business. This may result in management, whether consciously or not, favouring particular bid which personally benefits management more than another. When these situations arise, boards have positive obligation to become more involved in the key decisions, and should also consider carefully whether to take independent advice.
The independence of the board itself must also be considered. Directors themselves must fully disclose any conflict of interest, and the director’s level of involvement be given further consideration. Conflicts can also arise with advisers, and it is legitimate avenue of enquiry for boards to consider the means by which advisers are remunerated, and whether the presence of success-fees may directly or indirectly affect the veracity of advice provided.

Independent advice
In certain situations it is becoming increasingly desirable for board to seek its own advice on transaction, independent of senior management and the company’s usual advisers. This is not new and, as mentioned above, directors’ information defences for breach of duty specifically require consideration of the reliability and competence of advice provided. Independent advice acts as another level of justification for the board and shows it has exercised proper care and diligence in analysing the transaction.
Not all transactions will be successful, and in the event of failure the board’s decision-making process may be called into question. To protect from potential exposure, the board should:
• Be able to show how the transaction fits with the company’s strategic plan;
• Ensure its deliberations and analysis of the transaction is well documented;
• Be able to demonstrate deliberate and critical decision-making process; and
• Seek independent advice or involve third party experts where appropriate.

A well-balanced board can provide significant value to particular deal. However, to maintain effective control, the board must:

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