Don't rely on others to do your work: directors are reminded they must always actively manage the processes that determine significant transactions.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

As readers of DIRECTORS & BOARDS know, litigation around public company sale transactions has become ubiquitous. These lawsuits are typically settled, often by making modest changes in disclosure documents and payment of fees to the plaintiffs' lawyers. Sometimes, however, the litigation discovery process turns up issues that reflect more fundamental problems. One such recent case is In re Rural Metro Stockholders Litigation, decided recently in Delaware.

In Rural the usual suits were brought challenging a 2011 sale of Rural/Metro Corporation to a private equity fund, and raising both disclosure and breaches of fiduciary duty claims against the company's board of directors, as well as claims against the company's financial advisors. The directors and one of the financial advisors settled out of court. The case proceeded to trial against the remaining financial advisor. The opinion makes for an interesting read as the judge reviews some pretty surprising behavior by both bankers and directors, with the court ultimately finding that the directors had breached their duties to the corporation and its stockholders. While there is no single blueprint or formula for board processes, in Rural the court provides several object lessons for other directors and boards.

Mission creep: The board authorized a special committee to analyze several specific strategic alternatives but, without further authorization, the committee converted its mandate into a directive to sell the company. Moreover, none of the directors questioned this expansion of the committee's activities. A board must consider and clearly define the scope of delegation to a special committee. Furthermore, a board must exercise sufficient oversight over committees and advisors to ensure they remain within their mandates.

Know who's on your side: The board must take reasonable steps to learn about and evaluate the potential and actual conflicts of interest faced by directors, management and their advisors. While the special committee was technically independent, each member had personal circumstances that strongly inclined each of them to favor a quick sale of the company. On top of this, undisclosed efforts by the company's bankers to finance the bidders' acquisition of the company also created significant conflicts of interest. The board did not provide any guidance to its bankers on providing buyer financing, and did not make any effort to uncover or manage potentially significant...