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Presenting a live 90-minute webinar with interactive Q&A

Corporate Governance in M&A Deals:

Protecting Shareholder Interests,

Avoiding Litigation and Investigations Assessing and Managing Governance Issues During

Due Diligence, Deal Execution, and Post-Merger Integration

Today’s faculty features:

THURSDAY, SEPTEMBER 3, 2015

Nicholas O'Keefe, Partner, Kaye Scholer, Silicon Valley, Calif.

George Chin, North America Managing Director, Transaction Services,

Resources Global Professionals, Santa Clara, Calif.

Jeff Barlow, Senior VP - General Counsel, Molina Healthcare, Long Beach, Calif.

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Corporate Governance in M&A Deals: Protecting Shareholder Interests, Avoiding

Litigation and Investigations

September 3, 2015

PRIOR TO THE DEAL

6

Some Drivers for the Increased Importance of Governance in M&A Deals

• Cornerstone Research Review of 2014 M&A Litigation

– In 2014, 93% of M&A deals valued over $100 million were litigated

– The average number of lawsuits per deal was 4.5

• Ratcheting up of governance environment in aftermath of Enron (Sarbanes-Oxley Act of 2002) and financial crisis (Dodd-Frank Wall Street Reform and Consumer Protection Act)

• Increased spotlight on boards and board processes and more vigilant oversight by institutional shareholders

7

DOING THE DEAL: PROCESS

8

Rules of the Road in a Sell-Side Process

• The independent directors need to run the process, not management

– See, e.g. In re: Netsmart Technologies, Inc. S’holders Litig., 924 A.2d 171 (Del. Ch. 2007) (Special Committee not formed until management had sold the board on focusing on private equity acquirors)

• The Board or Board Committee needs its own financial and legal advisors

– They cannot be conscripted by management. See, e.g. Netsmart (court critical of Special Committee’s use of financial advisors that had long-standing relationship with management)

– Need for competent and independent advisors heightened, given potential for management conflict

– Reflects judicial policy underlying Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)

• Procedures should be in place that limit the ability of management to communicate directly with potentially interested parties, except at the direction of the Board/Committee

– In re Dole Food Co., Inc. S’holder Litig., C.A. No. 8703-VCL (Del. Ch. Aug. 27, 2015)

9

• Composition of any Transaction Committee

– Independence from potential bidders and from management

• Disabling conflict has to involve factors that are material to the director. See, e.g. In re: MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013)

– Relevant industry expertise

– M&A expertise

– Director personalities and ability to work together

– Optimal size

– Conflicted directors can still be involved if valuable to the process

– Committee mandate (special committee v. transaction committee)

10

Rules of the Road in a Sell-Side Process (cont’d)

Buy-Side M&A Considerations

• Buy-side M&A process considerations:

• Duty of care; business judgment rule

• Management committee delegated greater authority for small deals, but Board still has important role for raising issues

• Standing team covering major legal and operational areas

• Establish tiered Governance Structure

– Board – monthly, fiduciary responsibility, oversight, deal approval (over threshold)

– Executive Deal Committee – bi-weekly, deal approval, budget, top-level guidance

– Steering Committee – bi-weekly, cross-functional, decision-making, direction

– Execution teams – weekly, due diligence, integration planning & execution

• Clear Roles & Responsibilities

• Use standard reporting templates, checklists, etc.

• Review acquisition integration Value Drivers quarterly over 2-3 year period

11

Sample Buy-Side Deal Governance Schedule

Week Milestone Due Diligence /

Integration Team Steering Committee Executive Committee Board

1 Term Sheet Approval Term Sheet Approval

(if nec.)

2 Sign Term Sheet Due Diligence Kickoff Kickoff

3

4 Risk Review

5 Deal Approval Deal Approval (if nec.)

6 Sign DA/ Announce Integration Planning Integration Plan Kickoff

7

8 EE Alignment Review EE Alignment Approval

9 Value Driver Approval Value Driver Review

10 Legal Close (Day 1) Integration Execution Integration Kickoff

… GTM Review GTM Review

Value Driver Measurement

… Value Driver Achievement

90 Day Review Post 90 Day Review Post 90 Day Review Post 90 Day Review

…

Quarterly Reporting Quarterly Metrics Quarterly Review Quarterly Review

12

Financial Advisors

13

• Under Delaware law, directors are “fully protected in relying in good faith upon the information, opinion, reports or statements presented to the corporation by any of the corporation’s officers or employees . . . or by any other person as to matters the [directors] reasonably [believe] are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation. DGCL §141(e)

• Inquire at outset into conflicts

– Disabling conflicts v. conflicts that are disclosed and addressed

– In re: El Paso Corp. S’holder Litig. 41 A.3d 432 (Del. Ch. 2012)

• Conflict v. need banker with industry competence and relationships

• Build oversight controls into engagement letter

– In re Rural Metro Corp. S’holders Litig. 88 A.3d 54 (Del. Ch. 2014)

– In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011)

• Typically a small number do bake-off to Board/Committee

Compensation Matters

• Compensation of committee members

– See Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002) (director may be materially interested in a transaction if fees “exceed materially what is commonly understood and accepted to be a usual and customary director’s fee”)

– Southeastern Pa. Transp. Auth. v. Volgenau, 2013 WL 4009193 (Del. Ch. Aug 5, 2013) (a $1.3m bonus payable to charities with which a director is affiliated “raises serious concerns regarding [the special committee member’s] motivation for completing a deal”)

– In re Tele-Comm’ns, Inc. S’holders Litig., 2005 WL 3642727 (Del. Ch. 2005) (where $1m payments to special committee members was not awarded until after the committee members’ duties had ended, court nonetheless held that “the uncertain, contingent, and potentially large nature of the payments, without any objective benchmarks or other measures, could have given [the committee members] additional and undisclosed financial interests in the transaction that might have affected their judgments.”)

14

Compensation Matters (cont’d)

• Note that committee member fees not typically disclosable on Form 8-K, but will need to be disclosed in proxy statement

• Executive compensation matters for buy-side M&A

– Impact of benchmarking

• Buyer packages for target executives

– See, e.g. City of Miami Gen. Empl. and Sanitation Empl. Ret. Trust v. C&J Energy Services, Inc., 2014 WL 7243153 (Del. 2014) (no likely duty of loyalty breach where, among other things, executive negotiated employment terms after all material deal terms had been negotiated, and board was closely involved throughout deal process)

15

CREATING THE RECORD

16

General

• In Revlon proceedings, directors typically have the initial burden of showing reasonable decision-making process. See, e.g. Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986); In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010)

– Higher burden if entire fairness applies, such as a controlling shareholder take private transaction. See, e.g. Kahn v. Lynch Comm’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994); In re Dole Food

• There are typically key points in the deal process for which reasonable board decision-making needs to be clearly supported in the record, e.g. lowering of projections, decision to grant exclusivity, failure to include certain bidders in the process, decision to pursue a sale transaction over stand-alone strategy

– Record should reflect the reasons underlying the Board action including the advice on which it was based

17

General (cont’d)

• Minutes, board material, contemporaneous notes and emails are an important part of the record that is relied on by courts

– See, e.g. In re Dollar Thrifty S’holder Litig. (in denying motion for preliminary injunction, court referred heavily to board meeting minutes and materials presented to the board, in conjunction with deposition testimony); In re Orchid Cellmark, Inc. S’holders Litig., C.A. No. 6373-VCN (Del. Ch. May 12, 2011) (in denying a motion for preliminary injunction, the court looked at meeting minutes and deposition testimony to find that the board was reasonably informed as to the possible paths to value maximization)

• Depositions are also an important part of the record that courts consider. A good documentary record helps directors prepare for depositions, which will enhance the quality of the depositions

18

Minute Taking

• Need sufficient detail but not a transcript

– Capture key board discussions and decisions

– Identify the key information that the Board relies on in making its decisions, including input from experts and Board materials

• For example of court frustration at sparse minutes, see In re Ancestry.com Inc. S’holder Litig., C.A. No. 7988-CS (Del. Ch. Dec. 17, 2012)(Transcript)(in enjoining a stockholder vote on a merger, court expressed frustration at lack of detail in board minutes regarding board’s deliberations concerning change in projections); Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., 11 A.3d 1175 (Del. Ch. 2010) (in enjoining stockholder vote on a merger, court noted “no evidence, such as board minutes” in the record showing financial advisor had explained the high discount rate to the special committee)

19

Minute Taking (cont’d)

• Record should show directors were actively engaged and understood their role

– But no attribution

• Make sure style/approach consistent throughout

• Make sure the right person takes the minutes

• Make sure minutes are prepared on a timely basis

– See, e.g. Netsmart (court critical of both inadequacy of board record and delayed approval of 10 sets of special committee minutes one month after the merger agreement was signed)

20

Other Board Materials

• Under Delaware law, directors are entitled to rely in good faith on the corporations’ records and upon information presented by the corporation’s offices and employees. DGCL §141(e)

• Former Vice Chancellor Strine acknowledged the importance of board materials as part of the overall record in Ancestry.com: “”And when there is nothing contemporaneously when you get to write the script in terms of the PowerPoint presentations – PowerPoint is ubiquitous. Doesn’t even have to be in the minutes. Could be a discussion of the banker’s process. There are all ways to do it. But when none of it is in there, it makes you wonder.”

– See also In re MFW (extensive citation to discussion materials prepared by financial advisor)

• Bankers books

– Lawyers/Boards need to understand the reasons bankers have made the selections they have, e.g. selection of comparable companies, reason for a discount rate, change in underlying projections, changes made between initial and final board books

21

Other Board Materials (cont’d)

– Inquire as to whether financial approach is consistent with its general practice/policies

– Document Board discussion in the minutes

– See, e.g. Netsmart (court critical of financial advisor who “dumped omnibus lists of possible financial and strategic buyers on the board”); Maric Capital Master Fund, (court noting failure of minutes to show financial advisor had explained the high discount rate to the special committee)

– If any financial analysis is of less importance than the others, or has been intentionally omitted, make sure that disclosure of that to the Board is documented

• Redlining

– Run redlines on board docs

– In a recent article, Chief Justice Strine also advocated making redlines available to the board

• Need timely delivery to the Board.

– See, e.g. Rural Metro (court critical of financial advisor’s delivery of board book 80 minutes before the meeting)

22

Notes & Emails

• Can be helpful. See, e.g. In re Dollar Thrifty (court cites approvingly to several notes and emails in the record)

• Can also be harmful. See, e.g. New Jersey Carpenters Pension Fund v. Infogroup, Inc., C.a. No. 5334-VCN (Del. Ch. Oct. 6, 2011)(court cites to email exchanges among board members regarding board frustration with founder as evidence of lack of board member independence in sale of control transaction); See also In re Dollar Thrifty (court notes to several examples where plaintiffs attempt to use emails to bolster their case)

• Often prepared hastily, in undisciplined fashion, without oversight, and can be interpreted in unintended way

• But judges can view instructions to directors not to take notes suspiciously and as counterproductive

• Directors should at least be cautioned of the risks

• Don’t forget antitrust!

23

Delivering Information to Directors

• Board portals and other electronic devices

– Security

– Ease of Access and User Friendliness

– Intuitive Interface & Director Familiarity

– Ability to review and mark-up lengthy documents

– Ease of Administration

– Cost

• Director Training

• Technical Support and Internal Support

• Records of Director Usage and Evidentiary Risks

• Paper Copies

• Posting in advance of meeting

24

CERTAIN SHAREHOLDER MATTERS

25

Shareholder Engagement

• Institutional shareholders are increasingly engaged in oversight of Boards

• Boards need to have an understanding of shareholder base in order to have a sense as to whether there will be fundamental objections to an M&A strategy

• Boards also need to effectively communicate their long term strategies to shareholders, in order to facilitate messaging regarding M&A programs

– Proactively avoid the charge of pursuing wasteful M&A

– Standard refrain of activists

– Even very large companies have come under attack for their long term strategies, such as Motorola, Qualcomm, DuPont, P&G, Forest Laboratories, Amgen, Ebay, PepsiCo & Yahoo!

• Shareholder engagement is one of the best defenses against being put in play by activists

26

Practical Cyber Security Considerations for Buy-Side M&A

27

Diligence Process

28

• Systems and Safeguards Investigation

• Practical Threat Analysis (PTA)

• Overall protection of Data/Information (collection, encryption, storage, destruction)

• Actionable FTC items – Failure to: Designate coordinator, identify risks, implement and test security measures, limit

access to information, encrypt sensitive information (at rest or in transit), limit retention, provide training, impose security obligations on third parties

• Policy/Program Investigation (including implementation)

• WISP (Written Information Security Program) – Must be a complete security program – not just individual “policies” or security “controls”

– Proves implementation and maintenance of “appropriate measures” to protect information

– Assigns responsibility (management buy-in)

– IDs information assets (data mapping)

– Calls for risk assessment

Diligence Process (cont’d)

29

– Selects, develops, and implements security controls

– Addresses third party issues

– Incorporates comprehensive training (employees and vendors)

– Includes ongoing monitoring to determine effectiveness

– IDs legal/regulatory requirements

– Responds to changes

• Team investigation (Emergency Response Team)

– Intra-corporate, interdisciplinary; authority, mission statement, plan

– Review security team structure

• Breach incidents and past legal compliance

• Audits

• Vendor analysis; Outsourcing; Cloud computing

• Requests specific to data security and privacy

• Secure transfer of information during deal process

• Importance of bring-down diligence

CERTAIN POST-CLOSING CONSIDERATIONS

30

Example Value Driver Report Card

Value Driver Measurable Deliverable

Exec Owner

Status (At Risk or On Track) Update

Retain and leverage key talent

Retention metric % over xx years

Contribute to company growth initiative

Achieve target revenue plan

Increase market share Improve overall share by

yy% in 2 years

Sustain product leadership Measurable

performance metric

Customer retention Customer renewal rate

metric %

31

Post-Deal Monitoring and Management

• Buy-side

– Audits (leading to indemnification/purchase price adjustment)

– Board counseling

– Policy and team management and implementation

– Take advantage of vendor management rights

– Cyber/intrusion insurance

• General coverage (including D&O)

• Cyber-specific coverage (first party & third party)

• Exclusions & conditions

• Best practices

32

Recent Decisions on Escrows & Indemnities

• American Capital Acquisition Partners, LLC v. LPL Holdings, Inc. (Del. Ch. Feb. 3, 2014)

– Decision reaffirms that courts will not rewrite earnouts to impose obligations on buyers to maximize payments. On the other hand, buyers cannot take affirmative action to impede the acquired company’s ability to generate earnout revenue)

• I/MX Info Mgmt. Solutions, Inc. v. Multiplan, Inc. et al. (Del. Ch. Mar. 27, 2014)

– Decision provides guidance to parties on what constitutes a pending or threatened action by a third party that may for the basis for an indemnifiable claim, and the scope of notice required to make a claim

33

Thank You

George Chin Resources Global Professionals george.chin@rgp.com

Jeff Barlow Molina Healthcare jeff.barlow@molinahealthcare.com

Nicholas O'Keefe Kaye Scholer nicholas.okeefe@kayescholer.com