Deals – transactions outside the ordinary course of business – are risky for companies for three reasons: first, many executives have limited deal experience; second, deals generate substantial costs in terms of out-of-pocket expenses and opportunity costs; and third, the future effects of deals are unknowable even if they can be predictable. The goal of the board is to help the company transform risk into uncertainty.

Mergers & Acquisitions

Many companies find that purely organic growth isn’t suitable for many reasons, such as insufficient rate of growth, and elect to grow through merging with or acquiring another business. In other circumstances, companies choose these activities to gain desired employees, to acquire customers, to obtain new products, services, or technologies, to consolidate supply in an industry, or to improve their financial condition and results of operations.

Similarly, companies sometimes find themselves on the receiving end of an offer, which can result in the appointment of a special committee.

Mergers and acquisitions, as well as other types of business combinations, are a standard agenda item for active boards. Boards regularly determine whether a company’s strategy should include a transaction, review target details, approve offers, negotiate terms, approve final agreements, authorize soliciting necessary approvals, and authorize the transaction and its various elements. Target boards are on the other side of each of these for their company.

Most companies will experience 0 or 1 such transactions in their lifetime. If a board is to have independent oversight, rather than merely following the advice of an investment banker with a skewed set of incentives, then directors must have access to an experienced colleague to help frame the incoming information, facilitate information requests, and help ensure that all of the directors and officers follow a process that will help them obtain the information they need to make a well-founded decision – process plus informed decision is the touchstone of fiduciary duty compliance.In a small company, an independent director can help reduce the effect of inevitable conflicts of interest when the CEO is the largest holder.


Companies are much more likely to engage in other non-M&A transactions: equity and debt financing.

The question I use when interviewing CFO candidates is a simple one: should the company raise money? The unsophisticated or inexperienced start to focus on the specifics of the company; those with a deep understanding of corporate finance have a clear answer to that question that is focused on the process like a flowchart and the types of information needed at each step in the workflow. They understand the purpose of raising capital, the pros and cons of different financing structures, the way that each financing structure affects the operation of the business in the short term and the long term, and the effects – known and desired – of the financing on the free cash flows of the company.

I know these structures almost too well to write about them. I can’t count the number of equity and debt financings I’ve negotiated and executed for companies. I’ve seen at least 20-50 of each go sideways, which is where the board needs prescience to avoid the unfavorable outcome or at least have a pre-determined backup plan to deal with that situation. As an independent director, I have a particular ability to help the entire board and management balance the pros and cons of any financing course of action, which is the one part of the decision that is not negotiable: the board has to go through a reasonable decision-making process to avoid liability.

As a side note, some small percentage of companies will consider transactions involving investing (equity and debt) in other businesses. Not only does this activity need to make financial sense for the investing business, but it also needs to make strategic or tactical sense. In other words, unless you’re an investment fund, there had better be something on the table that improves your primary business. Otherwise, the board has to be concerned about dilution of effort. After all, the company has a business model that takes investor money, invests it in operations (reflected on the income statement) and assets (reflected on the balance sheet), to generate free cash flow (as reflected on the statement of cash flows). So any investment made solely for the sake of investment would seem to be outside the company’s mission and its fundamental business model. These kinds of unusual influences have consequences, and I’ve never seen them come out good.

Special Committees

“Special committee” is a term of art used to describe a subcommittee of the board of directors that is used to negotiate with a buyer. Consisting of independent directors, the technical reason that companies choose to use a special committee instead of the full board is that the conflicts of interest involved in the proposed deal would require the company to prove the “entire fairness” of the transaction in court rather than being able to rely on the business judgment rule. These terms come from Delaware, where most of the nation’s largest corporations are formed, and so its law applies to these kinds of major governance issues.

What does the special committee do? And how does it really function? The special committee typically hires its own lawyers to negotiate with the buyer (the company’s counsel typically suffers from similar conflicts as the other board members – close connections with the CEO or major shareholders on the board). They seek to achieve the best deal for the company and are supposed to be immune to the kinds of problems that challengers to a deal often raise: “the CEO was afraid to negotiate harder because she wanted a bigger salary in the new company” or “that director was more focused on reaching a capped payout of his stock and didn’t push for more money that would have gone to other shareholders.”

Most companies approve special compensation for the committee because the volume of work increases rapidly between calls, meetings with the company’s advisors, and negotiations with the proposed buyer.

The problem that some companies face is that their so-called independent directors might not have any deal experience either, and so they’re forced to negotiate through the bankers or lawyers just like the full board; without a lead director for the committee who understands the process and can really participate, some companies won’t get as much value from the special committee has they hope. This is another area where the goal of a defensible process is paramount because measuring the outcome can be difficult without the hindsight of a post-deal challenge.