What are directors’ duties and what can they do to protect themselves in a sale of company?
Takeaway: In a sale of the company, a director's fiduciary duties are under the most intense scrutiny; they can protect themselves from personal liability by running a diligent, well-documented process designed to achieve the best value reasonably available for all stockholders.
A director's fiduciary duties of care and loyalty exist at all times, but they are never more acute or more heavily scrutinized than during a sale of the company. This is the moment when the decisions of the board will have the greatest financial impact on every stockholder. It is also the moment when directors are at the highest risk of being sued by disgruntled stockholders who feel the sale process was flawed or the price was unfair.
To protect themselves from personal liability, directors must run a process that is not just successful, but is also legally defensible. The key is to create a clear record that demonstrates they have fulfilled their fiduciary duties with diligence and good faith.
The Board's Primary Duty in a Sale
When a sale of the company becomes inevitable, the board's primary duty shifts. Their job is no longer just to manage the long-term growth of the business; their primary obligation is to secure the best value reasonably available for all stockholders. This does not necessarily mean the absolute highest price, but it does mean they must run a process designed to achieve the best possible outcome under the circumstances.
How Directors Can Protect Themselves
Delaware courts have laid out a clear playbook for how a board can protect its decisions under the "business judgment rule" during a sale process.
Run a Deliberate and Informed Process: The board must be able to show that it acted with diligence and care. This means:
Not rushing the decision.
Holding multiple board meetings to discuss the offer.
Engaging outside advisors (an investment banker and M&A legal counsel) to provide expert guidance.
Form a Special Committee of Independent Directors: If there are any potential conflicts of interest on the board (for example, if the CEO has a special employment package with the buyer), it is a strong best practice to form a committee composed solely of the independent, disinterested directors to negotiate the deal.
Consider All Alternatives: The board must be able to show that it considered all reasonable alternatives to the proposed sale, which could include remaining an independent company, seeking a different buyer, or raising another round of financing.
Obtain a "Fairness Opinion": For larger transactions, the board will often hire an investment bank to provide a formal "fairness opinion." This is an independent analysis concluding that the price and terms of the deal are fair to the company's stockholders from a financial point of view.
Document Everything: This is the most critical element. The board must maintain a meticulous written record of the entire sale process. The board meeting minutes should clearly document all the steps the board took, the alternatives it considered, and the reasons for its final decision.
By running a professional, well-documented process that is guided by experienced advisors, the board can create a powerful record that demonstrates it has fulfilled its fiduciary duties, protecting both the integrity of the transaction and the directors themselves.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.