The importance of context when evaluating the need to establish a special committee
In a recent bench ruling in Re Plains Exploration, the Delaware Court held that a special committee was not required to take the lead in merger negotiations in circumstances where almost all of the members of the board were independent and free from conflict in connection with the transaction.
In Re Plains Exploration, the Delaware Court denied the plaintiff shareholders’ request to enjoin a merger between Plains Exploration & Production Company and Freeport-McMoRan Copper & Gold even though the Plains’ board (a) did not shop Plains before agreeing to merge with Freeport, (b) did not conduct a “pre” and “post” market check, and (c) allowed the Plains’ CEO to lead negotiations with Freeport, who then agreed to retain the CEO post-closing.
Among other things, the plaintiffs argued that the Plains’ board breached its fiduciary duties by not creating a special committee to lead the merger negotiations with Freeport. On the necessity of a special committee in the circumstances, the Court noted that:
“The formation of a special committee can serve as “powerful evidence of fair dealing,” but it is not necessary every time a board makes a decision. … the Plaintiffs have not come close to demonstrating that [the CEO] dominated and controlled the Board. Where, as here, seven of the eight directors on the Board are independent and disinterested, the need to establish a special committee was obviated. Thus, under the circumstances, the Board’s decision not to form a special committee was reasonable.” p. 13 of transcript, Consolidated C.A. No. 8090-VCN (our emphasis)
The holding in Re Plains Exploration seems consistent with Canadian jurisprudence. Although in a different context, in Maple Leaf Foods Inc. v. Schneider Corp., the Ontario Court of Appeal dismissed allegations that the Special Committee failed to consider whether the CEO had any conflict of interest as he conducted negotiations with prospective bidders, noting:
The Special Committee had no prior experience in dealing with a take-over bid and did not have the in-depth knowledge of Schneider that [the CEO] did. It was therefore appropriate for the Special Committee not to conduct the negotiations with potential bidders directly…The evidence supports the conclusion that the members of the Special Committee acted independently in the sense that they were free to deal with the impugned transaction on its merits. 1998 CanLII 5121 at para. 58 (ON CA)
Three quick takeaways
- A court will be reluctant to second-guess strategic decisions made by an independent and disinterested board of directors in good faith.
- A board should consider establishing a special committee to minimize actual or perceived conflicts of interest, particularly in circumstances where shareholders may reasonably expect one.
- Under Delaware law, a special committee may not be necessary if most of the board is independent and disinterested, and there is no evidence that any members of management on the board dominated or controlled the board. It remains to be seen whether Canadian courts will follow this approach but there is little reason to expect a different outcome in Canada on this particular point.