What is the Role of the Board in an M&A Transaction?

The board of directors of a company has a key role in the implementation of an M&A transaction. This blog post-series asses the general role of the board of a private limited liability company in a one-to-one M&A transaction. This blog post is not intended to cover all possible aspects of the subject matter but rather to give a general overview of the board’s role while preparing for an M&A transaction.

Part I – Preparing for an M&A transaction

The board’s role in an M&A transaction builds on the board’s general duty to act with due care and promote the interests of the company. If the M&A transaction turns out later not to achieve the expectations of the shareholders, or in case of any subsequent disputes relating to the transaction, the possible liability of the board is more often than not assessed in the light of this general rule. Questions that may, in such case, be raised include:

Has the board made sufficient background work and understood the strategic rationale behind the contemplated transaction?
Has the board selected the company’s strategic advisors carefully and assessed the valuation issues with sufficient prudency?
Has the board understood the risks identified during the due diligence and their implications?
Has the board ensured the proper protection of confidential information?
Has the board taken all required steps to ensure proper exchange of sensitive information between competitors?
And perhaps most importantly, has the board properly evaluated whether the transaction is in the best interests of the company and its shareholders?

These are questions that the board should always ask itself before and during an M&A transaction. The board’s duty of care, which stems from the Finnish Companies Act (624/2006, as amended), does not require the board to always make the right decisions but it requires the board to, for example, ask the right questions and to become acquainted with the issues raised by the advisors in order to make an informed decision (the “business judgement rule”). The level of involvement by the board in a transaction naturally depends, but as a rule of thumb, it can be argued that the more significant the transaction is for the company, the higher the involvement of the board should be. For example, the board should be highly involved in a major acquisition or in the sale of a company or all its assets but, in particular when it comes to the board of a large corporation, it can have a smaller role in the divestment of a minor business line.

How should the board, then, prepare for an M&A transaction in practice in order to have acted with due care?

The actions the board may need to take in the early stages are vast but to name a few examples, the board may need to evaluate:

how the transaction fits into the company’s strategy and whether the timing is right;
the compatibility of different cultures and related integration risks;
the need to contact other potential buyer candidates to get competitive offers;
the need to include a financial advisor promptly after receiving the indicative offer in order to assess the offer’s market conformity and the intrinsic value of the company;
the need to ensure that the company’s confidential information is appropriately protected by NDAs before sharing any numbers or other sensitive information with the other party; and/or
deciding on accepting or declining the offer.

In addition, one of the important decisions the board shall address early on is selecting the deal team carefully. The transaction is typically kept secret from most personnel of the involved parties until the definitive purchase agreement has been signed, and, therefore, the deal team usually includes only certain key persons of the relevant party, such as the CEO, CFO and chair of the board, in addition to the financial advisors and lawyers. The seller’s deal team should also include some key employees of the target company as they usually play a large role in collecting the due diligence material and assessing the accuracy of the representations and warranties of the purchase agreement. Furthermore, as the timelines agreed by the parties in M&A transactions are usually tight, a disciplined process should be strived for which is why the deal team should not be too large as it could affect the overall effectiveness of the process.

Another important aspect to consider already while preparing for the transaction process is whether or not the transaction will exceed the turnover thresholds for merger control in any applicable country and whether or not a merger control filing obligation will be triggered. If a merger control filing will be required, it will affect the overall time schedule for the transaction. A transaction has to be notified in Finland with the Finnish Competition and Consumer Authority where (i) the parties’ combined turnover in Finland exceeds EUR 100 million; and (ii) the Finnish turnover of each of at least two of the parties exceeds EUR 10 million. If the thresholds will be exceeded, it is also important to assess already beforehand whether the transaction would most probably be approved or not. If the approval seems unlikely, it may not be feasible to use resources on the transaction in the first place.

To summarize, there is a lot to consider already before the transaction process even is properly under way. The old saying “well begun is half done” also applies here, as diligent preparation saves time and efforts in later stages of the process and ensures the board’s compliance with its duty of care. When all of the measures taken by the board are aligned with the aim of achieving the best deal (including even the possibility to abort the deal) possible for the shareholders, it can generally be argued that the board has acted with due care.

The board’s role in the later stages of an M&A transaction is further assessed in a subsequent Part II.