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Katherine Coates, Partner
“Mergers and acquisitions are often fraught with difficulty ... what would you do, as a NED, if your company were involved?” Katherine Coates, Partner 13 June 2016
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Introduction Context Directors’ statutory duties
NED of a listed company The PRA and the FCA Questions for NEDs of a Buyer Questions for NEDs of a Seller Questions for NEDs of a Target “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Context and statutory duties
NED of a Target; Buyer; or Seller Statutory directors’ duties apply to all directors equally Duty to act within powers (section 171 CA 2006) Duty to promote the success of the company (section 172 CA 2006) Duty to exercise independent judgement (section 173 CA 2006) Duty to exercise reasonable care, skill and diligence (section 174 CA 2006) Duty to avoid conflicts of interest (section 175 CA 2006) Duty not to accept benefits from third parties (section 176 CA 2006) Duty to declare interests in proposed transactions or arrangements with the company (section 177 CA 2006) “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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NED of a listed company Corporate Governance Code
All directors (including NEDs) must act in what they consider to be the best interests of the company Chairman responsible for leadership of board NEDs should constructively challenge and scrutinise Listing Rules and DTRs Compliance with Model Code Disclosure of inside information Takeover Code Liability for a prospectus. Also: Liability for knowingly or recklessly providing information which is false or misleading (section 177(4) FSMA 2000) Liability for misleading statements (sections 89 and 90 FSA 2012) “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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The PRA and the FCA Focus is on NEDs (see criticism of governance at Co-op, HBOS and others) PRA Fundamental Rules and FCA Principles for Businesses include: Requirement to deal with regulators in an open and cooperative way Treat customers fairly PRA Supervisory Statement (SS5/16) on board responsibilities NED’s to support and oversee executive management NED’s share the board duty to promote the success of the company and to ensure that the firm continues to meet the “Threshold Conditions” PRA expect to see evidence of effective challenge Chairman’s role is to ensure all views are heard Board meetings should be genuine, open discussions and not stage managed Regulators have become much more intrusive Timetable implications Due diligence reports Access to minutes and board papers Section 166 reports “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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M&A transactions - Key considerations for NEDs
Rationale for transaction Impact on stakeholders Financial impact Risks and mitigation Integration/separation issues Approvals and execution risk Governance Do the NEDs have sufficient information to engage effectively? “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Questions for NEDs of a Buyer (1)
Rationale What is the strategic rationale for the transaction? Consistency with business plan Are synergies realisable? What is the nature of the business being acquired? Does it fit with the Buyers current business? Stakeholders How does the transaction impact the Buyer’s policyholders and shareholders? What is the communication strategy? What is the impact on employees of Target and Buyer including senior management. Financial How does the transaction impact the Buyer’s balance sheet, regulatory capital and forecast profitability? How will the transaction be funded? Will there be a need to provide capital support to the Target? “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Questions for NEDs of a Buyer (2)
Risks What are the key risks in the Target? Are there any mis-selling, other regulatory or conduct issues? What has been the extent of the due diligence? How have the key identified risks been mitigated or otherwise dealt with in the contractual documentation? Integration What integration planning has been done? What is the impact on the capital model and risk management? Approvals What approvals are required (e.g. regulatory, anti-trust)? What is the status of dialogue with the PRA and the FCA? Governance What responsibilities/liabilities is the NED taking on? e.g. Approval of prospectus What impact will the acquisition have on the Board structure and governance? “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Questions for NEDs of a Seller (1)
Strategic rationale What is the strategic rationale for the transaction? What is the proposed disposal strategy, e.g. auction, dual track? Stakeholders How does the transaction impact the Seller’s shareholders, customers and employees? Communication strategy Impact on Target employees and customers How has the purchase price been calculated, when is it paid and how is it funded? Consider exposure to Buyer If the purchase price includes shares in the Buyer, what due diligence has been done on the Buyer? Risks Has the Buyer been given the appropriate opportunity for due diligence? Have the warranties in any sale agreement been properly disclosed against? What other ongoing liabilities might there be under the sale agreement and how are these being reserved against? “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Questions for NEDs of a Seller (2)
Separation How is any pension fund being dealt with? What separation planning has been done? Will there be a need for any transitional service arrangements? Approvals What approvals are required and what are the risks of achieving them? What is the status of dialogue with the PRA and the FCA? Governance Timing of NED involvement in process Do any of the directors have a conflict of interest? “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Questions for NEDs of a Target (1)
NEDs of a public company will have a more active role due to Code requirement regarding recommendation In private company M&A timing and extent of Target NED involvement varies but regulator expects Target directors including NEDs to safeguard policyholder interests Strategic rationale What impact will transaction have on sustainability of Target’s business Stakeholders How does the transaction impact the Target’s policyholders? Security Services How does the transaction impact Target’s employees? Impact on pension schemes Financial How does the transaction impact the Target’s financial position and business plan? Will the Target have access to the necessary capital? “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Questions for NEDs of a Target (2)
Integration/separation What integration/separation planning has been done? Will there be a need for any transitional service arrangements? Approvals What is the status of dialogue with the PRA and the FCA? What is likely impact of transaction on regulatory relationship? Governance Do any of the directors have a conflict of interest? (e.g. in PE deals PE appointed directors may be conflicted) Will the NEDs be required to resign? If so, when? Structure of new Board “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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QUESTIONS Any Questions?
“Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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Contact details Katherine Coates Partner, Financial Institutions Group
Clifford Chance LLP 10 Upper Bank Street London E14 5JJ Tel No: +44(0) Mobile: +44(0) “Mergers and acquisitions are often fraught with difficulty ... what would you do as a NED, if your company were involved?”
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