As part of meeting their fiduciary duties to the corporation, directors and officers are required to avoid a conflict of interest in the context of a M&A transaction. A conflict of interest is defined quite broadly by the law and contemplates situations where there is:
- a direct conflict of interest (i.e., where a director or officer of the corporation is a party himself/herself to a proposed material contract or transaction with the corporation);
- an indirect conflict of interest (i.e., where a director or officer has a material interest in a proposed material contract or transaction with the corporation even though he/she is not a party to the transaction); or
- a conflicting duty (i.e., where a director or officer of the corporation acts as a director or officer for another corporation that is a counterparty to a material contract or transaction with the corporation).
When any of the above conflict scenarios exist in the context of a proposed M&A transaction, corporate law requires the conflicted director or officer to disclose the nature and extent of the conflict of interest to the board and to refrain from voting on the impugned M&A transaction (the Transaction). Timely disclosure is required – in the case of a director, the director must disclose of the conflict at the meeting at which the Transaction is first proposed, and in the case of an officer, immediately after the officer becomes aware of the proposed Transaction. Failure to comply with these procedures permits a court, on application by the corporation or any of its shareholders, to set aside the Transaction and/or require the conflicted director or officer to account to the corporation for any personal profit or gain realized from the Transaction, unless the court finds the Transaction to nevertheless be “reasonable and fair” to the corporation.
There are concrete steps a corporation can take to increase the likelihood that a Transaction is viewed as “reasonable and fair” to the corporation, such as:
- have a “Conflicts of Interest and Disclosure Policy” that requires directors and officers to disclose of their other offices or directorships and material shareholdings and that prescribes certain procedures/protocols be followed in the event of a Transaction (or any other conflict of interest);
- engage legal advisors early in the process;
- have accurate and complete records (including meeting minutes) that show the board devoted sufficient time and attention to considering the nature and extent of the conflict and ultimately made a well-informed decision when deciding to approve the Transaction;
- have a special committee of (or simply designate) independent and disinterested directors to consider the Transaction and to negotiate on behalf of the corporation; or
- have shareholders approve the Transaction by way of a special resolution on the basis of full and frank disclosure of the nature and extent of the conflict.
Deciding which (or whether any) of these steps are worth taking will be cost and context dependent. What is clear, however, is that in the rush of a potential deal, it is crucial that directors and officers consider and continuously monitor its conflicts procedure in order to avoid subsequent litigation that could result in the invalidation of a deal.
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