Explore a case study involving a CEO’s potential liability for withholding critical financial information in a merger proxy. Learn about the legal implications and the court’s ruling in this M&A legal blog.
M&A Stories
December 24, 2020
Introduction:
In mergers, officers have a responsibility to shareholders, especially during shareholder votes. This duty is crucial when a company’s CEO is involved. They must ensure shareholders have enough information to assess the merger properly.
The Deal:
A $23 billion merger took place between a public oil and field service company (seller) and a public conglomerate’s oil and gas unit (buyer). The merger offered the seller’s shareholders cash and stock in a new entity combining both businesses. The new entity’s ownership would be split between buyer and seller shareholders.
Key Issue:
Only buyer’s unaudited financials were provided to the seller board before the merger agreement was signed. The merger agreement required audited financials later. The merger deal had an “escape clause” if audited financials differed significantly. The audited financials showed large impairments not in the unaudited ones.
Proxy Statement and Lawsuit:
The proxy statement given to seller shareholders included audited financials but omitted unaudited ones. Shareholders approved the deal. Later, the combined entity’s performance worsened, and shareholders sued the buyer, seller board, and CEO/CFO in Delaware Court.
Legal Standpoint:
The court dismissed most defendants but kept the seller’s CEO for trial. The court ruled that the proxy statement should have included unaudited financials, as they were “material” information. The CEO’s duty of care is evaluated under Delaware law, which considers gross negligence.
CEO’s Involvement:
The CEO’s multiple roles in negotiation and post-merger made their actions significant. Allegations claimed the CEO signed the proxy and Form S-4, both vital documents. Shareholders alleged the CEO breached their duty of care by not including unaudited financials.
Court’s Verdict:
The court acknowledged that the CEO’s alleged involvement could indicate a breach of duty. As unaudited financials were important historical data, their absence from the proxy was crucial, especially since the merger agreement required the unaudited financials to be attached to the merger agreement. The court suggested that further investigation might reveal reasons for the omission, but these questions couldn’t be resolved without more evidence.
This case is referred to as In Re Baker Hughes Incorporated Merger Litigation., C.A. No. 2019-0638-AGB, Court of Chancery of Delaware, (Submitted: July 16, 2020. Decided: October 27, 2020)
Final Thoughts:
While the outcome remains uncertain, this case highlights the need for CEOs to provide full material information during mergers. Officers can’t rely on certain legal protections when it comes to breaches of duty of care that are available to Delaware board of directors.
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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