Question
What corporate governance changes can drive shareholder value?
Answer
To set the context of my answer, many lower mid-market companies have a Board of Directors, but the board is made up of someone's mother and brother who have never done anything except vote in his favor. Test 1 for corporate governance is: do they have a board? Do they have governance best practices in place? Test 2: are those governance and board best practices really working, and do they work in the context of an M&A deal? You could have a very good board that is doing its job but lacks any transactional experience.
So, you’re opening up a huge can of worms here. You may know this, you may not. There is a very big debate across North America and around the world about how engaged boards are around strategy. Do they really understand the strategy and business models of the companies to which they govern? So when we think about mitigating risk as a board, you typically think about things like fairness opinions and secondary due diligence reports, but really what the board needs to do to drive shareholder value is to be more engaged in the strategy discussions of the company so that by the time the deal is being presented to the board, the board knows where it fits into the acquisition strategy. The board knows that the M&A acquisition criteria and screens and filters that were built and presented to them six months ago that this deal meets those screens and filters.
So I would say that being more engaged as a matter of governance, putting the right board together. A middle market business owner could have a really great board that knows their industry really well but has no M&A experience. So the CEO presents the deal to the board and the board is like, "Well, that looks good, okay. Yeah, I guess so." You want the board engaged in real substance to make sure that your other value is driven and to just go get a third party fairness opinion is kind of lazy. Yes are there still value in those fairness opinions. Of course there are, but it’s lazy. The real robust board, the engaged boards, they are asking all the hard questions before we even get to the fairness opinion.
So, you’re opening up a huge can of worms here. You may know this, you may not. There is a very big debate across North America and around the world about how engaged boards are around strategy. Do they really understand the strategy and business models of the companies to which they govern? So when we think about mitigating risk as a board, you typically think about things like fairness opinions and secondary due diligence reports, but really what the board needs to do to drive shareholder value is to be more engaged in the strategy discussions of the company so that by the time the deal is being presented to the board, the board knows where it fits into the acquisition strategy. The board knows that the M&A acquisition criteria and screens and filters that were built and presented to them six months ago that this deal meets those screens and filters.
So I would say that being more engaged as a matter of governance, putting the right board together. A middle market business owner could have a really great board that knows their industry really well but has no M&A experience. So the CEO presents the deal to the board and the board is like, "Well, that looks good, okay. Yeah, I guess so." You want the board engaged in real substance to make sure that your other value is driven and to just go get a third party fairness opinion is kind of lazy. Yes are there still value in those fairness opinions. Of course there are, but it’s lazy. The real robust board, the engaged boards, they are asking all the hard questions before we even get to the fairness opinion.
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Written by Andrew J. Sherman
Andrew J. Sherman is a Partner in the Corporate Department of Seyfarth Shaw LLP
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Resources
- Purchase and Sale Agreement Considerations for Acquirers - Handouts
- Seyfarth Shaw LLP - Survey of Key M&A Middle Market Deal Terms
- Firmex’s M&A Fee Guide 2021 - 2022
- Your Guide to VC Funding
- Financial Services M&A: Consolidation & Innovation January 2021
- SS&C Intralinks® 2021 Corporate Restructuring Report
- SS&C Intralinks Deal Flow Predictor for Q1 2021
