When deals go sour II.

• Author: KABACK, HOFFER
• Position: Brief Article

Remembering, at voting time, those 'wonderful folks' on the board who gave shareholders a bum acquisition.

MY LAST COLUMN, "When Deals Go Sour" (DIRECTORS & BOARDS, Summer 2000), focused on board accountability for acquisitions that, shortly after closing, went south spectacularly. Examples included First Union/Money Store, Mattel/Learning Co., and Quaker Oats/Snapple.

The "accountability" I had in mind was a combination of (a) business press coverage that might, if appropriate, apportion blame for these blow-ups rather tan ascribing it wholly to the CEO and (b) shareholder discontent with the business judgment and stewardship of the acquirer's board. More of the first (if accurately and fairly reported) would tend to lead to more of the second.

From Those Wonderful Folks Who Gave You Pearl Harbor was the title chosen for Jerry Della Femina's hilarious 1970 book about the advertising industry. The notion of board accountability for having approved horrendous acquisitions is, at bottom, a variation on the theme embedded in that tide.

My earlier column revealed why legal accountability -- seeking to hold directors personally liable because they approved a stinky deal -- is neither a practical nor fair part of the mix. The business judgment rule does and, to a large extent, must protect directors in these decisions. Secondly, directors do and, to a large extent, must rely on professionals to perform due diligence.

It is exceedingly difficult to demonstrate that the acquirer's board breached its fiduciary duties in approving an acquisition. That is why lawsuits that, in an M&A context, seek to hold directors personally liable almost always name as defendants the boards of the sellers, not the boards of the buyers.

A rare example of an exception is a case decided in mid-September by the Delaware Chancellor. Ash v. McCall involved shareholder derivative claims arising out of McKesson's disastrous acquisition of HBOC, which within months led to material restatements of results for prior years.

Chancellor Chandler quickly disposed of plaintiffs' "corporate waste" claim. (Such a claim is almost always unmeritorious; even in cases with sympathetic facts, it is virtually impossible to sustain. See "Waste Not," DIRECTORS & BOARDS, Winter 1999.)

The Chancellor emphasized that Delaware has no substantive due care standard for boards; "due care in the decision making context is process due care -- whether the board was reasonably informed of all material...