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The “Background of the Merger” section of a proxy statement is clearly the most challenging part of drafting that document.  Everyone involved in the deal knows that this is the disclosure that’s going to be most closely scrutinized by the SEC and the plaintiffs’ bar, so a lot of effort typically goes into preparing and refining the disclosure contained in that section.  If you’re called upon to take the lead in drafting this section, check out this Debevoise memo, which offers some practical tips on how to approach that job. This excerpt discusses the importance of a coordinated review of that disclosure by key transaction participants:

A coordinated review by the principal participants in the transaction can help identify factual inaccuracies, resolve inconsistencies, and ensure that the final disclosure fairly reflects the contemporaneous record. This review should include close coordination with financial advisors and their counsel to ensure that the Background section, the summary of the financial advisor’s fairness opinion, and related disclosure elsewhere in the proxy statement consistently describe the transaction process, financial projections, negotiations, and the analyses considered by the board.

It should also confirm that the proxy statement accurately describes each financial advisor’s material relationships with the counterparty and its affiliates, as well as the advisor’s compensation arrangements—generic references to “customary compensation” and undisclosed concurrent engagements for a buyer or its consortium members can render stockholder approval uninformed.

The Background section should also be reviewed by the directors of the company. Directors should carefully review the Background section to confirm that it fairly and accurately reflects the board’s deliberations and the transaction process as a key element of their review of the proxy statement as a whole.

Acquirors and their counsel should likewise carefully review those portions of the Background section describing their interactions with the target, as disclosure claims can create litigation risk for the buyer, either directly through aiding-and-abetting claims or indirectly through the costs, delays and potential liability associated with transaction litigation.

If you’re looking for more guidance on preparing “Background of the Merger” disclosures, I actually wrote an article on the topic that appears on p. 4 of the January-February 2021 issue of our Deal Lawyers newsletter.  One piece of advice from that article that I think is worth sharing here is the importance of sharing your draft disclosure with a litigator:

Ask a Litigator to Read the Draft. I also highly recommend sharing your draft with an experienced litigator. Deal lawyers accustomed to the rough and tumble M&A negotiation process are frequently a bit jaded, and in the hands of a skilled plaintiff’s lawyer, descriptions of aspects of the process that may not have given them pause may be made to look pretty bad to a judge or jury. Having an experienced litigator review your draft can help you identify and address these issues. A good litigator can also provide some more mundane guidance about as areas in which it may be prudent to add – or pare back – draft language.

– John Jenkins