United States: Preparing For An M&A Exit

Last Updated: May 24 2019
Article by Kimberly Petillo-Décossard

Deal volumes are expected to be at or near record levels in 2019. Prepare for the process with this checklist.

Mergers and acquisitions (M&A) are a fact of life for most companies and, consequently, for directors who oversee value creation and other corporate activities. According to data from Dealogic, 2018 saw international deal volume revenue rival 2007, itself a watershed year for M&A volume. The market is hot. Consequently, directors are increasingly likely to face an M&A exit opportunity.

Evaluating the decision to exit is a complex undertaking that cannot be managed extemporaneously. Whether the sale of the company is self-initiated or the offer is uninvited, assessing the deal and ensuring a successful transaction require both advanced planning and sustained leadership from directors, matched by detail-oriented execution from the C-suite and outside advisors. Through it all, boards must be engaged in the proceedings and ready to protect themselves from unforeseen liability. Boards that master best practices and their associated action items are significantly more likely to achieve their goals on behalf of shareholders while minimizing personal legal exposure that could emerge from the deal.


Before exploring M&A activity, directors must be clear on the strategic imperative driving its consideration. Too often, boards are presented with a transformative transaction only to find they have not defined a successful exit. It is in the best interest of the board and shareholders alike to understand and actively oversee an ongoing M&A strategy that guides both solicited and unsolicited deals.

ACTION ITEM: Review strategic goals regularly and build a deal evaluation framework. Directors should not allow an uninvited deal proposal to influence their definition of success. Instead, before considering any exit, directors, management, and the company's advisors should set goalposts, asking: Under what circumstances do we sell, and are they present? Boards should engage management and outside advisors on a regular basis—at least once a year—to review strategy, examine the changing M&A landscape, and update deal evaluation frameworks. This will help the board assess uninvited, inbound offers and ensure no one is caught flat-footed if a hot market or better-than-expected results create an opportunity for a proactive exit. Initiating a sale takes time, and companies that are slow to organize can miss their optimal window if a key customer leaves, the market turns, or the company is put in play by an inbound offer.


Once agreement is reached between the board and management on the benchmarks for deal success, directors need to review their duties and vulnerabilities. Deal-making is a period of heightened legal risk, and uninformed directors are more likely to expose themselves to liability.

ACTION ITEM: Seek briefings on fiduciary duties and directors and officers (D&O) liability insurance coverage. When an exit opportunity arises, boards should quickly prioritize a briefing with counsel to review their fiduciary duties and potential liability. The board should request that counsel highlight any specific dynamics of the proposal as it relates to management, the company (including its financial condition), the shareholders, and other constituencies. These relationships could impact directors' fiduciary duties. For example, board seats may be held by shareholders with preferred shares, creating tension between the best deal for preferred shareholders and the best deal for all shareholders.

Even when the board properly fulfills its fiduciary duties, litigation may follow—whether the deal is successful or not. Therefore, board members should also ask counsel to report on (a) the adequacy of the board's D&O coverage; (b) the indemnification and other protections provided by the company's organizational documents; and (c) any separate agreements with directors.

The most effective boards ask counsel to review these routinely, ensuring that director protections are state of the art and that necessary changes are made before an exit is imminent.


Every exit—whether inbound or self-initiated—will be shaped by key legal documents that govern the flexibility of the sale process. These documents could include confidentiality agreements, exclusivity agreements, and acquisition agreements. Directors should understand the constraints and opportunities in these various documents, as missteps can result in legal jeopardy.

ACTION ITEM: Understand and prepare to live by the confidentiality, exclusivity, and acquisition agreements, which may limit director activity. Confidentiality, exclusivity, and acquisition agreements may include clauses that could limit the board's ability to share information or consider other offers. For example, subject to limited exceptions, a "no-shop" clause can restrict a company from entertaining approaches from additional buyers. The no-shop clause may require the company to stop all discussions with third-party bidders. It may forbid the company from providing information to third parties regarding possible competing bids. Or it may obligate the company to notify the buyer if any unsolicited bids arrive from a third party. Confidentiality agreements may contain a standstill provision. This enables the company to control the deal process and prevent additional (and oftentimes hostile) bids after a bidder has had the benefit of access to the company's confidential information and the opportunity to put in a bid. Yet companies often include an exception that allows spurned bidders to confidentially approach the sell-side board with a better offer. Such an exception may help maximize shareholder value and enable directors to comply with their fiduciary duties.

But be warned: not everyone involved in the process will see eye to eye on these post-announcement approaches being in the best interest of the sell-side company. After all, if bidders know a later bite at the apple is possible, they may not be incentivized to give their best and final offer early in the process. Every opportunity is likely to require a different mix of complicated agreements and clauses to manage the sale process.

Directors must be fully briefed on these legal documents in order to understand their roles, responsibilities, and restrictions, as well as their liabilities.


Too often, directors consider signing day the end of the process. Yet in most cases, deal-threatening dangers continue to lurk until closing day. The best-prepared boards will remain involved in oversight of the deal until all conditions are met.

ACTION ITEM: Carefully weigh and monitor conditions to closing with sound economic and legal analysis, and allocate those risks appropriately among buyer and seller. Every transaction has conditions to closing. Some are common, such as those ensuring covenants are not breached between signing and closing. And some are deal specific, such as the approval of a particular regulatory authority.

After a deal is publicly announced, other players may begin to assert their influence and new risks can emerge, increasing uncertainty and potentially adding delays. Expect competitors to try to steal customers, poach management, or hire away key employees. Even employees who wish to stay may slow the process if their employment agreements are not buttoned up before signing.

Savvy boards also should expect regulators to start paying closer attention. And expect the market to price-in both the formal announcement and these other, outside developments. Now imagine that six months after announcement day, the company's primary regulator rejects the deal. It happens, and it can leave sell-side directors and the company rudderless. Therefore, before signing, a wise board will insist that outside experts provide an independent assessment of the conditions to closing so that all such risks are well understood. Next, those risks and responsibilities need to be addressed and properly allocated in the contract between the buyer and the company. The contract may include covenants like "hell or high water" provisions or break-up fees if certain conditions are not met, such as regulatory approval.

Finally, directors must remain mindful that an exit may not be in the personal self-interest of every employee and manager, yet those individuals will be on the front lines, driving the closing process and interacting with the buyers on the transition of operations. An engaged board can help ensure everyone remains committed to a timely closing.

While no checklist is comprehensive, these strategic best practices and associated action items can be used by directors to jumpstart the many conversations with management and advisors that, if left unaddressed, could scuttle a deal or expose board members to legal jeopardy.

Originally published in NACD Directorship May/June 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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