Liability for failed M&A

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    Generally directors are exempt from having to take responsibility for failed M&A activity, In the US this protection is afforded by the Caremark ruling that states that a director does not have to assume liability for basically any business judgment provided that he or she acted in good faith a was reasonably informed about the activities of the firm. However, the Marchant case opened the door to lifting directors’ immunity from liability if it can be proved that the board failed to implement controls and systems that relate to mission-critical activities of the business (e.g. if you manufacture foods then you better be sure to have controls in place to ensure safety of consumers; similarly if you make airplanes like Boeing you need to ensure that the aircraft is safe – unlike the MAX line with 2 high profile crashes). The question is, isn’t a merger of acquisition mission critical to a business, and therefore shouldn’t directors put in place stronger controls and monitoring systems to better assure that these are value accretive. In Germany there is a term called “Veruntreuung” that states that management (and boards) are liable if their irresponsible and negligent actions lead to significant loss of shareholder value. Isn’t it time that there is higher scrutiny ex post given the high failure rates of most M&A.

    Yeonlin Leonard Lee

    I agree with your point Gerhard, there are a lot of failed M&A cases out there where ultimately its the company taking the hardest hit by suffering financial losses. To put it this way when shares are diluted and everyone is only holding a small portion especially for public listed companies, even if there is a loss how can the small shareholders pursue anything, and when the board of directors are also just salaryman, ultimately as long as everyone is still making money from their job the high failing rates of M&A will just continue to happen.

    Craig Hasler

    Hi Gerhard,

    Thanks for the prompt.

    I totally agree with your concept of “tighter controls”, as there should be some form of “skin in the game” for directors who are involved with transactions. However, in practicality this be very challenging to monitor, especially in cases where a large multinational has purchased a much smaller company (where impact on the overall business is quite small). There’s also the question of defining what constitutes as a bad deal (in many cases there can be arguments both ways). Employees move on, and industry dynamics/drivers change which can also add complexity in determining whether a deal was a failure or not.

    All the best!



    Gerhard, I appreciate you saying that, and I agree with you. Yet, who will judge whether the outcome is good or bad? When Motorola bought Google, it was a complete failure for the maximum of shareholder profits notion. But, someone might say Google has won in terms of intellectual property and IP since, for example, it compelled Microsoft and Apple to reach a settlement. Moreover, some of these transactions may take longer to exhibit results; others might be easy to judge possibly the Twitter situation?

    Chengzhi (Roy) Chen

    Shareholders: losing money
    M&A manager: risk of losing job.

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