To sell or not to sell? Considerations for directors
Michigan’s slow but steady economic recovery from the Great Recession has caused an increase in merger and acquisition activity. In the face of increased profitability and higher share prices, more and more companies are considering whether to continue to grow or to sell while the timing is favorable.
These considerations can involve more risk for directors of companies that have more than just a handful of like-minded shareholders. Local community banks are good examples of such businesses. Often, the directors of these companies are as concerned about how a sale would affect the employees and the community as they are about price.
This concern often leads directors to ask an important question: Is it ever appropriate to consider factors other than price when evaluating a potential acquisition proposal?
In Michigan, directors of a corporation have two primary fiduciary duties they must fulfill in making any business decision:
- Duty of care, which means directors have to exercise the same degree of care an ordinarily prudent person in a like position would exercise under similar circumstances.
- Duty of loyalty, which prohibits self-dealing and essentially requires directors to take special precautions in connection with transactions in which they have an interest.
Directors are protected by the business judgment rule, which creates a presumption that — absent self-dealing — they acted in a manner that satisfied these duties and will not be held liable for making a decision that, in hindsight, turned out to be a bad deal.
There’s no Michigan case law that defines the fiduciary duties of directors more specifically in connection with the consideration of a sale of a corporation. In the absence of case law, Michigan courts often look to Delaware law, which is more developed because it is the state where the most corporations in the country are incorporated.
Delaware courts have held that if a board decides to put a corporation up for sale, the board has a duty to auction — in other words, to survey the market and try to get the best possible price. There is an exception to this requirement for certain strategic transactions where the combined companies will not have a controlling shareholder.
So, what happens if a board hasn’t decided it wants to sell but is hit with an unsolicited offer to sell?
Delaware courts have also held that a company that receives an unsolicited offer does not have a duty to auction as long as the board exercises reasonable business judgment and determines that executing its business strategy to maximize long-term shareholder value is better than an extraordinary transaction that maximizes short-term shareholder value.
In other words, directors can “just say no” as long as they appropriately evaluate the offer and determine that remaining independent will best maximize shareholder value.
The common thread in these cases is they focus on maximizing value — or price. But price alone is often not the most burning issue in the minds of directors. So, what can be done to address the desire to consider issues other than price?
Directors can take into consideration factors other than price if the company’s articles of incorporation permit or require the board to do so. Other appropriate factors will vary from company to company but may include:
- Social and economic impact of the offer on the company’s employees, customers and suppliers, such as potential down-sizing of staff to achieve “cost saves” as part of a transaction.
- Social and economic impact of the offer on the communities in which the company operates, such as reduced charitable commitments or the potential closing of facilities.
- Business and financial conditions, such as the earnings prospects of the offering party or the intent to heavily leverage the transaction.
- Products offered and fees charged for products or services by the offering party.
Many directors will find these issues as compelling as price when evaluating a potential acquisition proposal. Because of this, it makes sense for corporations to review their articles of incorporation and consider adding such a provision that would give the board more flexibility and protection if approached by a potential acquisition partner or if confronted by an unsolicited advance.
Jeffrey A. Ott is a partner at Warner Norcross & Judd LLP. He concentrates his practice on mergers and acquisitions, compliance with securities laws and general corporate matters for businesses and financial institutions. He can be reached at email@example.com.