May 27, 2008
Independent Boards, SEC Intervention in M&A Transactions, and Yahoo!
Posted by Lisa Fairfax

Perhaps I should have mentioned at the outset that my posts on the Georgetown's Williams Act conference would be part of a series!  So here is another installment.  Professor Sam Thompson gave a thought-provoking presentation, based on an article published in the Business Lawyer, concerning the creation of what he calls a "Change of Control Board ("COCB")”.  His presentation not only emphasized the importance of enabling the SEC to appoint an independent board to oversee mergers and acquisitions, but also pinpointed how the appointment of such a board likely would have generated a different outcome in the context of Microsoft's offer for Yahoo!

Under his proposal, if a public corporation becomes the target of a bona fide M&A offer, the SEC would appoint a three person independent board--the Change of Control Board--to respond to the offer.  The COCB (whose members would be paid by the target corporation) would have the authority to hire counsel, investment bankers, and other advisors to help accurately and independently evaluate the offer.  In addition, the COCB would have complete authority over the acquisition process.  Moreover, a federal uniform business judgment rule standard of review would be applied in determining if the board acted appropriately, thereby preempting state law in the area of takeovers.   Professor Thompson emphasized that his proposal was designed to respond to the many conflicts of interests that arise in the takeover context.  Professor Thompson also argued that his proposal would reduce litigation involving fiduciary duties, replace confusing state law standards of review in this area, and enhance the efficiency of the M&A market, which he argued was too often inefficient because of the sometimes unlimited ability of boards to block hostile acquisitions.

Applying this concept to Yahoo!, Professor Thompson essentially pointed out that, under the current regime, Yahoo!'s decision to avoid an acquisition by Microsoft would be protected despite the premium being offered and shareholder litigation challenging the decision (and hence suggesting shareholder desire for the acquisition).  Moreover, he noted that the decision would be protected even though there were potential of conflicts of interests by the Yahoo! CEO.   However, under his proposal, a COCB would have been appointed, essentially avoiding those conflicts.  Moreover, the Yahoo! board would only have been able to enter into transactions in the ordinary course of business, thereby prohibiting extraordinary actions such as Yahoo!'s proposed arrangement with Google.  Professor Thompson concludes that, after evaluating the Microsoft offer, a COCB most likely would have found the offer to be financially beneficial to shareholders, and thus would have let shareholders make a decision on the transaction.  Instead, Yahoo!’s stock price has fallen and shareholders apparently were left dissatisfied.

Professor Thompson’s presentation provoked many comments.  On the other hand, there was recognition that state law may allow boards too much discretion in this area, and hence may prevent potentially advantageous acquisitions. Moreover, as Professor Thompson points out, federal and state law have come to rely heavily on independent boards, and hence his proposal may be viewed as an extension of that reliance.  On the other hand, there was concern about whether and to what extent a corporation and its shareholders really could put their faith and fate in the hands of an SEC created independent board.  As I mentioned, an interesting discussion all around.

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