406 12 Acquisition of Shares in a Privately-owned Company for Cash
The management of information belongs to the most important duties of the ac-
quirer’s board of directors deciding on the acquisition. Members of the board can
benefit from the business judgment rule only provided that they make an informed
decision in good faith.
In Smith v. Van Gorkom,^1 the Delaware Supreme Court decided that the board of directors
of Trans Union Corporation, while acting in good faith, had nonetheless been grossly neg-
ligent in recommending a merger offer, in part, because the board had not made an “in-
formed” decision. For the business judgment rule, see Volume I.
The acquirer’s board members should therefore ensure that: there is reason for the
acquirer to buy; the acquirer knows about the characteristics and quality of the
target; the price is not too high; and the terms are acceptable.
In an asset deal, the vendor’s board members should ensure that: there is reason
for the vendor to sell; the vendor’s confidential information is protected; the ven-
dor obtains a high enough price; and the terms are acceptable.
In a share deal, the target’s board members should ensure that: it is in the inter-
ests of the company to provide information to one or more of the parties; it is per-
mitted to provide information; and the terms of disclosure are acceptable.
Management of when the contract becomes binding (signing and closing). The
separation of signing and closing belongs to the most popular ways to ensure that:
the target gives the prospective acquirer access to confidential information only
after the acquirer has confirmed that it is prepared to close the deal on certain con-
ditions; the prospective acquirer is entitled to verify the statements of the seller
and the target before the contract becomes binding; the parties do not conclude a
contract before it is clear that the commercial purpose of the contract can be
achieved.
Management of counterparty corporate risk (representations). Counterparty
corporate risk is typically mitigated in three main ways (Volume II). First, each
party will deal with the other party through its “organs”.^2 Second, contractual rep-
resentations will deal with typical counterparty corporate risks. Third, a legal
opinion will typically state that the contract is legal and enforceable according to
its terms.
The specifications of the shares, the target company, and its business (warran-
ties). In both share deals and asset deals, the caveat emptor principle typically ap-
plies. However, the interpretation of contracts is flexible (Volume II) and influ-
enced by information exchanged by the parties or by various people on the behalf
of each party (for information management generally, see Volume I; for contrac-
tual information duties, see Volume II). Both parties will therefore find it impor-
tant to regulate the specifications of the target. In an asset deal, it is necessary to
identify the assets in detail.
Management of counterparty commercial risk. Both parties want to ensure that
the other will fulfil its obligations. The acquirer mitigates counterparty commer-
cial risk through: due diligence and information in general (transparency); detailed
(^1) Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
(^2) Article 9(1) of Directive 68/151/EEC (First Company Law Directive).