Assume you sit on the board of a bank that has no present interest in being acquired. Without warning, you receive an unsolicited takeover offer. Much as you may find this an annoying distraction, you cannot dismiss the offer out-of-hand. Rather, you must ensure that the board respects the foundational principle that, as a body, it must make decisions that enhance shareholder value. It must accept its decision-making responsibility, and promptly undertake a financial analysis to determine whether the offer is one that could put the shareholders in a better position than maintaining the status quo. If the board concludes that the offer is legitimate and that, once accepted and consummated after negotiations, it could put the shareholders into a more favorable position than retaining their existing bank shares, then a decision is virtually unavoidable.
If You Are the Target
In most states, following their version of the business judgment rule will protect the board’s decision and courts are reluctant to second-guess that decision as long as:
- The board has adhered to the bank’s documented governance processes and recusal mechanisms that are consistent with peer institutions and designed to eliminate board member self-interest influences.
- The board relied in good faith upon non-conflicted expert advice.
- The board minutes establish that it conducted a thoughtful decision-making process. If the financial analysis makes the ultimate decision too close to call, thereby giving good reason to consider non-economic issues, and the bank’s by-laws permit the board to weigh non-economic factors, it is imperative that negotiations over non-economic concerns be carefully documented to mitigate litigation risk regardless of whether a transaction receives a green or red light.
If You Are the Acquirer
Now assume you are a board member of the acquiring bank. Knowing that your unsolicited offer will gain traction only if the target’s board finds the offer to be legitimate, your first concern should be to make certain that you have assembled a team with the necessary expertise willing to devote the resources to due diligence. The better the acquirer understands the target’s governance and attitude, as well as its customer demographics, competitive position and the potential for regulatory concern over market concentration, the more tailored the offer will be to the interests of the target and the more likely the offer will receive favorable consideration. If later challenged, the board’s due diligence will be judged by the investigative standard of reasonableness, where management decisions were ratified by the board only after independent inquiry. The board must uphold its duty of care, and that obligation will have been met if it has made reasonable examination of the totality of available information, including strategic, operational, management, timing and legal considerations.
Whether you are on the board of the target or the acquirer, you will need to have a level of market, industry and technical expertise that requires engagement of outside advisors, with investment bankers often being the most prominent. The board will need to understand every advisor’s motive. It is essential that the advisors challenge your assumptions, and if their financial incentives depend on closing the deal, you must remain alert to that natural bias. The board must resist investment banker pressure to get a deal done, making sure that board agendas provide adequate time to study implementation progress, to anticipate and mitigate risks and to identify additional and alternative opportunities.
Clarity and open communication among members of the key leadership team and their advisors is imperative, especially with regard to keeping the transaction true to the board’s primary business goals. These factors will drive contract negotiations, elevate the quality of the due diligence effort and ensure that the initiatives and business elements that create value are prioritized in the integration process.
For both acquirer and target, investment bankers in collaboration with legal counsel can be invaluable in guiding the boards towards successful completion of the transaction. Seasoned investment bankers can help set appropriate price terms and conditions and establish critical protocols for communicating with employees, the media, the market and investors. Experienced legal counsel can negotiate a transition services agreement governing consolidation and systems conversion and provide early, active and competent interaction with regulators to ensure unimpeded processing of all necessary filings and approvals.
Above all, it is vital to remember that failing to close the deal may ultimately be in the best interests of the enterprise. Ego, incentive compensation and deal momentum can all too easily distract the board from its paramount responsibility, namely, to constantly vet all pro forma assumptions of the deal.