The Fiduciary Duties of Acquiring Directors

Relatively few cases address the fiduciary duties of an acquiring board. These cases indicate that, absent a conflict of interest, courts will generally apply the deferential standard of the business judgment rule to a board's acquisition decision. Nonetheless, recent highly publicized failed acquisitions--and the subsequent shareholder lawsuits generated by these failed acquisitions--indicate that an acquisition decision is not without risk.

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Although numerous cases address the fiduciary duties of the directors of a company being acquired, there is a relative paucity of authority regarding the duties of an acquiring board of directors. Generally, courts apply the deferential standard of the business judgment rule to a board's acquisition decision. This deference contrasts sharply with the heightened level of scrutiny courts apply to decisions involving defensive measures taken by a takeover target's board of directors. In light of the deference accorded to an acquiring board's decision, there is less incentive for shareholders to launch a derivative suit against the acquiring board. Nonetheless, acquiring directors should be mindful of their fiduciary duties when reviewing a proposed acquisition, as the decision acquiring directors must make is not without significant risk.

Numerous corporate unions fail to generate value for shareholders or, worse yet, destroy shareholder value. Recent high-profile examples of failed corporate marriages include AOL and Time Warner, Daimler-Benz and Chrysler, and, most recently, EBay and Skype. Following the 2001 AOL Time Warner merger, for example, the combined company's stock price plummeted, and more than $100 billion in shareholder value was ultimately lost. This ill-fated marriage eventually ended in divorce: in 2009, AOL spun off from Time Warner. Likewise, in 2007, private-equity group Cerberus Capital Management purchased a majority interest in Chrysler from its parent company, thereby unwinding the unsuccessful 1998 merger of Daimler-Benz and Chrysler. Recently, EBay similarly shed its own acquisition albatross upon completion of the sale of a majority interest in internet communications company Skype, which it acquired in 2005. Ill-advised acquisitions may have even more dramatic consequences: a poorly executed "acquisition binge" has been cited as a contributing factor to the demise of WorldCom, the telecommunications firm riddled by scandal in the early 2000s.

Significantly, failed mergers often generate lawsuits. For example, in the wake of Time Warner's unsuccessful merger with AOL, the combined company faced over 100 shareholder lawsuits, which cost the company an aggregate of roughly $3.75 billion. A number of these lawsuits alleged, among other things, that AOL Time Warner directors and officers breached their fiduciary duties by issuing materially false and misleading statements concerning the financial condition of AOL prior to the merger, the expected synergies of the merger and the combined company's business prospects and earnings projections. In addition to such derivative lawsuits, AOL Time Warner faced myriad class action lawsuits alleging state law claims of fraud and misrepresentation, as well as violations of the federal securities laws and ERISA. Numerous shareholder lawsuits similarly plagued DaimlerChrysler as the combined automaker's stock price steadily declined following the merger. These lawsuits generally alleged that the company and certain members of its supervisory board and board of management violated federal securities laws by describing the transaction as a "merger of equals" in its proxy statement/prospectus and in other communications.

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