Success fees for special committee work: caution is required as contingent payments may create a potential conflict of interest.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

PERHAPS THE most common route that boards take to protect against a conflict of interest challenge is to assign issues involving potential conflicts to a special committee comprised entirely of directors who are free of any conflict. However, the directors on the special committees need to be truly free of conflicts or the committee will not provide any protection.

The recent case, In re MFW, provided insights into how to assess conflicts of interest that arise from the financial and personal relationships directors and committee members share with conflicted parties. The alleged conflict of interest in MFW arose in a challenge to the acquisition of a company by its controlling stockholder and was premised on various "business and social ties" that special committee members shared with the controlling 0 stockholder. In this case, Chancellor Leo Strine found that independence is not a hard and fast rule, but of necessity is a relative concept. It requires determining whether the financial compensation or the social relationships involved would be likely to influence the member's independent judgment. In MFW, the court found neither the financial compensation nor the social relationships were sufficiently material, in light of the facts about the members, to affect the committee's independence.

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The recent case of Southeastern Pennsylvania Transportation Authority v. Volgenau builds on this analysis. In SEPTA, a third party acquired a publicly traded company with a majority stockholder. This case is significant in part because it applied the conflict of interest analysis to this "going private" transaction although the controlling stockholder was not initially part of the buying group. However, the controlling shareholder did in fact receive different consideration from the other stockholders in that he had agreed to roll over a substantial portion of his equity into the buying entity A minority stockholder sued the former directors of the company, alleging among other things a breach of fiduciary duties by the directors for engaging in self-dealing during the sale process and failing to disclose material information. At the core of the discussion was whether the special committee that had approved the transaction was in fact disinterested and independent.

After the merger agreement had been signed, the chairman of the special committee expressed dissatisfaction over the "meager compensation" offered him for his special...