BOARD%20OF%20DIRECTORS%20RESPONSIBILITIES%20Presentation%20To%20Ironwood%20Advisory%20Conference%20Buying%20and%20Selling%20a%20Company%20in%20a%20Tough%20Economy%20How%20to%20Optimize%20Price%20and%20Liquidity%20in%20a%20Buyer

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BOARD OF DIRECTORS RESPONSIBILITIESPresentation
To Ironwood Advisory ConferenceBuying and
Selling a Company in a Tough EconomyHow to
Optimize Price and Liquidity in a Buyers
MarketRobert A. Miller, Jr.July 17, 2002UCLA
Anderson School of Business
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Responsibilities of Directors Generally

• Duty of Care.
• In general, the duty of care is the obligation of
  the directors to act on an informed basis after
  due consideration of the relevant materials and
  appropriate deliberation, including the input of
  legal and financial advisors.
• Duty to maximize value of assets and not commit
  waste.

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Responsibilities of Directors Generally - Duty of
Care (cont)

• Duty of attention, i.e., requires Board to make
  reasonable inquiry cannot abdicate
  responsibility or ignore facts.
• Duty of Loyalty.
• In order to prove that the board has not met its
  duty of loyalty, a plaintiff must show that
  members of the board have engaged in
  self-dealing transactions however, a
  transaction between the company and a director is
  not automatically a breach of this duty.

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Responsibilities of Directors Generally (cont)

• Business Judgment Rule.
• The business judgment rule is a deferential
  standard of review with regard to decisions made
  by a companys board of directors. Under the
  traditional business judgment rule, directors
  decisions are presumed to have been made on an
  informed basis, in good faith and in the honest
  belief that the action taken was in the best
  interests of the company.

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Responsibilities of Directors Generally -
Business Judgment Rule (cont)

• In instances where the business judgment rule
  applies, the decisions of the directors are
  protected unless the plaintiff shows that the
  Board did not meet its duty of care or duty of
  loyalty.

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Duties of Directors in Sale-Related Transactions

• Enhanced Level of Scrutiny. Rather than applying
  the business judgment rule, courts may apply an
  enhanced level of scrutiny to the procedures
  followed and decisions made by a Board involved
  in a sale-related transaction. The courts
  require the Board to act in the manner that
  permits the members to receive the maximum
  immediate value for their stock.

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Duties of Directors in Sale-Related Transactions
(cont)

• Unsolicited Proposals. When confronted with an
  unsolicited offer to purchase any or all of the
  shares or assets of a company, the Board can
  either reject the offer, or take action and enter
  into negotiations in response to the offer.
• Rejection. Directors have the right to reject
  unsolicited offers, subject to the duties of care
  and loyalty however, the right to reject the

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Duties of Directors in Sale-Related Transactions
- Unsolicited Proposals (cont)

• offer may be impacted by the value and
  composition of the offer.
• Acceptance/Negotiations. If the directors decide
  to take action with respect to an unsolicited
  offer, they will be held to a different standard
  of care.
• Placing a company in play results in the loss
  of the protections afforded by the business
  judgment rule.

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Duties of Directors in Sale-Related Transactions
- Acceptance/Negotiations (cont)

• Directors must take an active role in ensuring
  that proper procedures are followed with respect
  to the offer, including proper notice and
  discussion of the transaction, advice from
  outside advisors, and arms-length negotiations.

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Duties of Directors if the Company is In Play

• Triggering Events. Following are typical
  situations that will cause the corporation to be
  considered in play, thereby triggering
  additional duties of the directors.
• Inevitability of Break-Up. Where the break-up or
  sale of a corporation is inevitable, such as the
  announcement of an anticipated merger or sale,
  such an event will be deemed to put the
  corporation in play.

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Duties of Directors if the Company is In Play -
Triggering Events (cont)

• Change of Control. The transfer of a majority of
  the shares of the corporation to an individual,
  an entity or a cohesive group, none of whom were
  in control prior to the transfer, places the
  corporation in play because the corporate
  strategy of independence has changed, and the
  shareholders have suffered a reduction in voting
  power.

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Duties of Directors if the Company is In Play
(cont)

• One or Few Bidders. In one bidder situations,
  the duty of the Board of Directors is to
  determine whether the proposed offer represents
  the highest value, or best reasonably available
  value, the members could likely receive.

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Duties of Directors if the Company is In Play -
One or Few Bidders (cont)

• If the Board cannot make this determination, it
  should at least conduct a survey of the market,
  and possibly an auction to solicit other bids.
• In the case of a single bidder, the Board will be
  required to make a recommendation as to the
  desirability of accepting the proposed
  transaction.

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Duties of Directors if the Company is In Play
(cont)

• Multiple Bidders. If additional bidders come
  forth, the duty of the Board is to achieve the
  highest share price reasonably available.
• The Board will still be required to make a
  recommendation.

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Procedural Considerations Involved in
Sale-Related Transactions

• Good Corporate Governance. In considering a
  sale-related transaction, the Board must make
  every effort to exercise prudence and follow good
  governance procedures, including seeking advice
  from outside advisors, reviewing all pertinent
  documents, engaging in adequate discussions
  regarding

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Procedural Considerations Involved in
Sale-Related Transactions - Good Corporate
Governance (cont)

• the transaction, and documenting all Board
  procedures and meetings in the minutes.
• The rationale for the Boards ultimate decisions
  should be clearly reflected in the minutes. The
  Board should request an opinion from a qualified
  independent advisor regarding the fairness of the
  transaction to the company and the stockholders,
  from a financial point of view.

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Procedural Considerations Involved in
Sale-Related Transactions (cont)

• Disinterested Directors. The Board should make
  every effort to ensure that its members have no
  personal pecuniary interest in the transaction at
  hand. In the event that one or more directors
  have an unavoidable personal interest in the
  matter, the Board should follow the procedures
  set forth for approving interested director
  transactions.

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Special Committees

• Authorization of Special Committees.
• The board may, by resolution, authorize and
  appoint various committees to serve the board,
  including a special committee to consider a sale
  transaction.

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Special Committees (cont)

• Use of Special Committees.
• Use Special Committees to protect the interests
  of shareholders when interests of the directors
  differ substantially from those of the
  shareholders, or when practical issues dictate.
• Although Special Committees are not legally
  required except in limited circumstances, it is
  helpful to have such a committee in order to more
  clearly establish that the Board acted in

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Special Committees - Use of Special Committees
(cont)

• good faith with regard to the immediate
  transaction.
• Role of Special Committees.
• Special Committees should play an active role and
  have real negotiating power, and be prepared to
  make a reasonable recommendation to the Board
  regarding the transaction after evaluating all
  the alternatives.

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Special Committees (cont)

• Characteristics of Special Committee Members.
• The members of the Special Committee should be
  disinterested, and have the power to choose legal
  and financial advisors.

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Special Situation The Insolvent Corporation

• To Whom do Directors Duties run? In a solvent
  corporation, duty and value are at the same level
  and run to the same constituency. Recent case
  law has tried to make duty follow value.
• Duty to Creditors. There is clearly some duty
  owed to creditors, at least duty of care, subject
  to the business judgment rule.

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Mitigation of Directors Liability

• Certificate of Incorporation. The elimination of
  monetary damages against Directors to the maximum
  extent permitted by law.
• Bylaws. Indemnification and advancement of
  expenses, mandatory or discretionary, to the
  maximum extent permitted by law.

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Mitigation of Directors Liability (cont)

• Indemnification Agreements.
• Directors and Officers Liability Insurance.

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Recent Government and Exchange Initiatives
Relating to Corporate Governance, Disclosure and
Accounting

• 1. Form 8-K Disclosure of Certain Management
  Transactions (SEC Release Nos. 33-8090 34-45742
  April 12, 2002)

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Recent Government and Exchange Initiatives
Relating to Corporate Governance, Disclosure and
Accounting (cont)

• 2. Acceleration of Periodic Report Filing Dates
  and Disclosure Concerning Website Access to
  Reports (SEC Release Nos. 33-8089 34-45741
  April 12, 2002)
• 3. Disclosure in MDA about the Application of
  Critical Accounting Policies (SEC Release Nos.
  33-8098 34-45907 May 10, 2002)

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Recent Government and Exchange Initiatives
Relating to Corporate Governance, Disclosure and
Accounting (cont)

• 4. Additional Form 8-K Disclosure Requirements
  and Acceleration of Filing Date (SEC Release Nos.
  33-8106 34-46084 June 17, 2002)
• 5. Certification of Disclosure in Companies
  Quarterly and Annual Reports (SEC Release No.
  34-46079 June 17, 2002)

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Recent Government and Exchange Initiatives
Relating to Corporate Governance, Disclosure and
Accounting (cont)

• 6. SEC Press Release 2002-91 on Proposal to
  Establish the Framework for a Public
  Accountability Board June 20, 2002
• 7. Nasdaq Corporate Governance Rulemaking
  Proposals June 5, 2002

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Recent Government and Exchange Initiatives
Relating to Corporate Governance, Disclosure and
Accounting (cont)

• 8. New York Stock Exchange Board Report of the
  Corporate Accountability and Listing Standards
  Committee June 6, 2002
• 9. President Bushs New Enforcement Initiatives
  July 9, 2002