A company decided to put itself on the market. They hired an investment-banking firm to solicit offers. Two offers came in: one from a competitor, and a lower offer from a foreign company. The six-person board voted to accept the lower offer. Incidentally, four board members were officers of the company. The board argued that the lower bidder offered greater synergy for growth. However, that deal would also ensure that the management team would remain intact. The minority shareholder alleged breach of fiduciary duty against the management team for accepting a valuation that was $3.5 million lower than an alternative, which put their own interests first to the detriment of shareholders.
Defense costs: $175,000
Total cost: $1,575,000
- Improve communications with shareholders. Materials concerning any major decision should be sent out for review in advance.
- Seek an attorney’s advice before making significant decisions that will impact shareholder value.
- Justify decisions in writing based on facts with shareholders.
- Prepare legal documents to complete transactions in advance, and have them reviewed by the board. In the case of any major transaction, the board should review all basic legal documents and all analysis by experts in connection with that transaction.