21: Mergers, Acquisitions and Corporate Controlcurrent share price? Does the target board legally have to agree to a bidder’s offer, especially when it is
extremely generous? The board has fiduciary duties – legal obligations – to shareholders in this context.
The duty of loyalty requires the board to make decisions that are in the best interests of the company and
its shareholders, not in their own personal interests. The duty of care requires the board to fully inform
themselves, and follow a reasonable decision process, when making business decisions. As discussed in
footnote 22, the business judgement rule usually offers protection for the board in terms of defending its
decisions, as long as there is no evidence of fraud, negligence, or illegality, and the board performs these
basic duties.
If there is chance of a conflict of interest, in which the personal interest of board members
might conflict with the best interests of the company or shareholders, a special committee is formed
to handle merger negotiations. This special committee includes independent board members who
are at arm’s length, and can make objective decisions about the proposed merger (because the
personal jobs of inside board members, who also work at the company, may be affected by the
merger outcome).
When a company that has no plans to sell itself receives an outside bid, the board should carefully
consider the bid. Is the premium offered large enough that it appears to maximise the wealth of
shareholders? For example, is it likely that the target share price will at any time in the foreseeable future
exceed the offer price in a present value sense? If not, then it may be sensible for the target to accept the
bid at this time, or attempt to negotiate an even higher bid. However, as long as the board satisfies the
duties laid out above, it is not under obligation to recommend accepting an outside bid. One important
exception occurs when the target is deemed to be in play and the sale of the company is inevitable. In
this case, Revlon duties may apply, and the target board’s obligation is to secure the highest offer price
available, and takeover defences cannot be used to thwart such an offer.^29 Note that the valuation of an
offer price can still be subjective. For example, if one bidder offers $50 in cash and another bidder offers
high-risk securities that it argues are worth $51 (but the target does not feel are worth $51), the lower
cash bid is at times accepted by the board.
There are other interesting aspects of acquisition negotiations. Who will be the CEO of the new,
combined company? The bidder CEO, the target CEO or someone entirely different? Often the bidder
CEO becomes the new CEO, though it is not unusual for there to be a planned transition to another
CEO within a couple years, and it is not uncommon for this new CEO to be the target’s current CEO.
Likewise, the new board of directors of the combined company often consists of majority representation
of the bidder board, along with target representation. This is one reason that boards often increase in size
following mergers. The determination of the chairman of the new board often follows a transition like
that just described for CEOs.
18 What does the term corporate governance mean? Can you think of any examples of deficient
corporate governance during the technology bubble and the financial crisis?CONCEPT REVIEW QUESTIONS 21-7
29 ‘Revlon’ refers to a famous takeover contest involving Revlon Corp. In that case, two firms were competing to acquire Revlon, and courts
ultimately ruled that Revlon’s board was obliged to sell the company to the highest bidder.