November 10, 2014

CJ Strine Speaks: Documenting the Deal

Here’s a speech recently delivered by Delaware Chief Justice Leo Strine at a recent ABA meeting. The speech addresses conducting an M&A process in a manner that would promote making better decisions; reduce conflicts of interests and addresses those that exist more effectively; and accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way. Here’s an excerpt:

The Power Of Red-Lining
One of the most powerful error-preventing tools in modern technology is the ability to generate drafts that can be accurately compared with their predecessors. No responsible transactional attorney fails to obtain a redline, blackline, compare rite or what you wish to call it when she receives a draft back from her negotiating adversary. But this standard practice is not used in a sensible way by the advisors of boards of directors. And this standard practice would be helpful as to materials that are core evidence in every M & A litigation: the presentations made to the directors by the financial advisors.

Changes made to board books that make the deal look fairer are often viewed with suspicion by plaintiffs’ lawyers. They will argue that the changes, rather than being a principled application of corporate valuation theory to updated facts, are an attempt by the financial advisor to justify a suboptimal economic result, such as an auction process that has yielded a price less than was initially hoped. When the changes are shown to directors in cross-examination and the directors cannot identify why the changes were made, the directors are embarrassed and fumble through the moment. When the senior banker himself is less than certain about the why, as is not infrequently the case, particularly when a junior banker made the change, only one side of the v. benefits— and it’s not the one where the defendants’ names reside.

The deployment of a redline version minimizes this risk. Producing a redline will help the banking team itself focus on the changes being proposed and make sure they are correct, including making sure that it made the change (e.g., cost of debt) in all valuation methods to which it is applicable.

An accomplished corporate lawyer indicated to me the following after reading a draft of this essay: “Far too often the bankers go through their books too quickly. Perhaps someone has told them they have 30 minutes. Perhaps they want to catch the 5 o’clock plane. Whatever the reason, they go through the books so quickly that, as to any given slide, if someone stopped and gave the directors a short quiz about the most important information reflected in that slide, far too many of the directors would fail or receive a gentleman’s C. It seems to me that bankers literally should stop after discussing key slides and ask ‘does everyone get that?’ ‘Everyone understand why we’ve narrowed the focus to these 3 potential bidders and excluded those 3?’ ‘If not, please speak up and we’ll do a better job of explaining.’ I think this approach would really help lots of boards. I can tell you from first-hand experience, it is very difficult to teach a director something she never knew when preparing her for her deposition. It is so much easier to remind her of something she once understood.”