- Deal negotiators should take care not to negotiate their own post-closing compensation before finalizing deal terms. In general, we do not recommend that officers negotiate their own compensation without the involvement of the board.
- Discussions occurring before stockholder approval of the deal should be disclosed to the board of directors and, when appropriate, to stockholders.
- Directors should (1) ensure that they remain apprised and actively engaged throughout the negotiation of any significant transaction and (2) affirmatively question those involved in the negotiation of the transaction about conflicts of interest rather than relying on such persons’ obligation to self-disclose.
Overview
In City of Fort Myers Gen. Emps.’ Pension Fund v. Haley, C.A. 2018-0132-KSJM (Del. 2020), the Delaware Supreme Court reversed the Delaware Court of Chancery’s dismissal of a complaint challenging the $18 billion merger of Towers Watson & Co. and Willis Group Holdings PLC. The Court held that the plaintiffs, stockholders of Towers, had adequately pled a claim that the CEO and chairman of Towers had breached his fiduciary duty of loyalty when he failed to disclose to the Towers board his compensation discussions with the second largest Willis shareholder.1 Contrary to the Court of Chancery’s decision, the Delaware Supreme Court held that the allegations sufficed to rebut the presumption of the business judgment rule and invoke the entire fairness standard of review.
The business judgment rule is a standard of judicial review that gives deference to corporate decision-making by protecting “well-meaning directors who are misinformed, misguided and honestly mistaken” from judicial second guessing. (See FDIC v. Castetter, 184 F.3d 1040 (9th Cir. 1999), Aronson v. Lewis, 473 A.2d 805 (Del. 1984).) Entire fairness is a heightened standard of review that applies in certain instances where one or more directors has an interest in a transaction different from the corporation’s stockholders generally. Under this standard, a defendant—here, the CEO and chairman of Towers—must prove that the transaction was entirely fair to the corporation with respect to both price and process.2
Directors, officers and dealmakers alike should pay attention to this reversal. The entire fairness standard of review is a difficult burden to overcome for a defendant and can lead to a costly trial. If a defendant is found to have breached the duty of loyalty, the defendant will not be entitled to the exculpation protection provided in the corporation’s governing documents, and may not be entitled to the indemnification, resulting in substantial personal liability.
The Allegations of the Complaint
In June 2016, Towers, a Delaware corporation and publicly traded professional services firm, and Willis, a publicly traded global advisory corporation chartered in Ireland, agreed to merge. After Towers’ board and both companies’ stockholders approved the merger, the plaintiffs sued, alleging that neither the approval of the Towers’ board nor that of its stockholders was adequately informed.
According to the plaintiffs, Willis’ second largest shareholder, ValueAct Capital Management, L.P., and ValueAct’s CIO, Jeffrey Ubben, urged Willis to explore strategic alternatives, including a potential business combination with Towers. Late in 2014, the CEO of Willis, Dominic Casserley, and the CEO and chairman of Towers, John J. Haley, began discussions, signed non-disclosure agreements, and retained financial advisors. For the first five months, only one Towers board member, Linda D. Rabbitt, knew of their discussions. In May 2015, Haley finally disclosed the discussions to the entire Towers board.
The Towers board formed a special committee but disbanded it after 11 days. During that time, (i) Haley met with Casserley and Willis’ chairman, James McCann, to discuss terms, including Haley’s proposal that Towers own the larger stake of the post-merger company, and (ii) Rabbitt contacted McCann to propose that Haley serve as CEO of the post-merger entity. Following the disbanding of the special committee, the board delegated the negotiations to Haley. Shortly thereafter, McCann agreed to make Haley CEO of the...
