The strength of a board often lies in the manner in which it approaches significant corporate decisions. Some boards will go through the lengthy process of reaching consensus before making a significant change; other will find themselves presented with significant decision points before reaching consensus. In general vigorous debate among board members before a significant decision must be made can be healthy and productive in the process of reaching the best decision for a company and its shareholders.
This is nowhere as true as in the context of a merger. A decision to sell a company may be one of the two most important decisions that a board addresses (the other being selection of a new CEO as part of succession planning).
Regardless of the circumstances in which a potential sale or merger of a company is being considered, it is critical that all board members have access to the same level of information and be able to provide input throughout the process. When board members believe they have been kept out of the loop on information flow, or they haven’t been adequately involved in considering a course of action, the strength of a board is undercut. Decision making is often adversely impacted as a result. This is particularly true in connection with consideration of the sale of a company. Throughout the process of a board investigating options and considering strategic alternatives, the board members should have confidence that they are privy to all communications of importance with both professional advisers and potential merger partners.
For example, we have seen far too many instances in which a director, on his or her own initiative and without authorization from the board as a whole, embarks on private outreach to potential merger partners. These directors usually feel justified in such action as a result of frustration with the pace at which the full board is moving or a sense that the CEO is resistant to the idea of selling the company. Whatever the driving force, independent action by a director can result in a breakdown in trust among the board and rarely results in a successful merger transaction.
In order to prevent such independent action, we recommend that board members consider making the following two simple and straightforward written commitments to each other:
- An agreement to only act in a unified manner in exploring potential merger opportunities.
- An agreement to share with the full board any information regarding contact by a potential merger partner or its professional advisors.