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.
The author writes:
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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