Stiffening Rules for Special Committees

The Cox Communications court believes special committees should be the norm for going- private deals involving controlling stockholders, regardless of whether they are structured as mergers or tender offers. Therefore, practitioners are advised to ensure that their special committees are properly constructed in order to avoid challenges of impropriety. The Delaware Chancery in the recently decided Gesoff v. IIC Industries Inc. touched on some important factors that should be considered in crafting special committees: Composition – Members must be truly independent and willing to perform their assigned duties. Whenever possible, a multi-member committee is preferable to a single person. Powers and responsibilities – Members must be given clear mandates specifically setting out their powers and responsibilities in negotiating deals. The mandate should contain the “critical power” to say “no” to a deal. Advisers – The committee must have access to “knowledgeable and independent advisers”- both legal and financial. Structural issues – Special committees should press for non-waivable “majority of the minority” approval conditions to counter the influence of controlling stockholders. Arm’s-length discussions – Talks between the board and the special committee must be conducted in a manner “consistent with arm’s length negotiations.” These types of procedural safeguards not only help to shift the burden of persuasion to the plaintiff, but are highly intertwined with establishing fair dealing in the entire test of whether a price is fair to all shareholders – C.H. and G.P. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com