February 28, 2019

M&A Special Committees: You May Not Need One

Want to drive a CEO crazy?  Tell them that the board needs to establish a special committee.  Despite the problems they create, some lawyers almost reflexively recommend the creation of a special committee if a company is considering a potential sale.  In many instances, that’s because the lawyers believe that a special committee is legally required.

This recent Wachtell memo addressing the use of special committees in the REIT context is a useful reminder that this frequently is not the case – even if there are some potential board or management conflicts. Here’s an excerpt:

Forming a special committee when not required can needlessly hamper the operations of the company and its ability to transact, create rifts in the board and between the board and management, and burden the company with an inefficient decision-making structure that may be difficult to unwind. It is important, therefore, for REITs to carefully consider – when the specter of a real or potential conflict arises – whether a special committee is in fact the best approach, whether it is required at all, and whether recusal of conflicted directors or other safeguards are perhaps the better approach.

REIT management teams often stay the course through an M&A transaction and remain employed by the successor company after the deal. In such cases, it is not unusual for management to negotiate terms of employment with the transaction counterparty at some point during the deal, preferably towards the end when all material deal terms have been agreed. But while such negotiations can raise conflict issues, they do not necessarily mean that the entire transaction and surrounding process must or should be negotiated by a special committee.

The memo distinguishes between special committees and transaction committees – the latter are frequently used to make it easier for the board to provide oversight of the transaction process, but don’t involve the rigidity associated with special committees created to deal with potential conflicts.

John Jenkins