The Director’s Dilemma – May 2019 Edition
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The Director’s Dilemma - May 2019
This month we look at the role of the chair in a merger that is not proceeding to plan.
A good board adds value in a variety of ways. That includes having all directors think independently and diligently about the possible courses of action and their potential outcomes. Clearly the board in the case study failed the foresight test.
Kalinda chairs a small disability-sector not for profit company. For almost a year the company has been in friendly merger discussions with a similar company operating in an adjacent geographic area.
Kalinda’s CEO and CFO were elected to the board of the neighbouring company in advance of the merger. Everyone expected the merger to proceed. Kalinda’s CEO and CFO reported that the merger was a major topic of that board’s discussions, but they could not give details as it would be a conflict of interest and they were excluded from most of the discussions.
Now Kalinda has received a letter from the chair of the other board saying the merger is not going ahead because due diligence uncovered some ‘worrying information’. The letter also said the CEO and CFO must resign immediately as it was ‘no longer appropriate’ for them to be directors. Kalinda immediately called the executives who said they had no idea what had happened: They had not been made aware of any issues.
Kalinda’s executives called the CEO of the other company but she refused to talk to them and said the other directors had voted them off in a special meeting three days ago. Kalinda tried calling the other chair but her calls were all declined.
She wants to know what has been found and if there is any possibility of getting the merger discussions back on course. Her company has deferred several strategic projects, incurred legal costs, and refrained from bidding for a government contract so as not to compete against the other company.
What should Kalinda do?
Julia Zdrahal-Urbanek’s Answer
Kalinda should identify the actual reasons for the merger failing and analyse whether the show stoppers are on her side, the partner’s side, or connected to a third-party.
What if the problem is in her company and not evident to her? It could possibly be known or even invented (?) by the partner company – but they don’t seem to be open to providing any information. They could even think she is involved herself. It could be fraud, financial problems or any other major issues they consider as deal breaking. Kalinda needs to do her homework in her own company, carefully prioritising, and usually with external support. Her aim is to eliminate any potential time bombs quickly and efficiently.
Step two – analysing third party show stoppers on the partner’s side: The partner has been offered more attractive merger conditions by another company – Kalinda should identify the competitor and consider adapting her conditions, or they decided not to merge anymore, e.g. due to changing market circumstances or new, promising chances for business growth without a partner – Kalinda should find out what these could be and what they mean for her. The partner could also think that his and Kalinda’s executives are not a good match in general. In this case Kalinda needs to evaluate the consequences of a future with a merger but without her CEO and CFO.
Kalinda also needs to consider a completely new strategy starting from scratch – without the original target partner, possibly with a different partner or a business model and growth strategy her executive team drives alone. In each case Kalinda should evaluate whether her executive team is capable of delivering the future target performance and adds value with regards to the option/s she finally chooses and whether alternative executives would add more value.
Julie Garland-McLellan’s Answer
What a mess!
Kalinda is too far removed from the negotiations. She needs to talk with whoever has been handling the merger discussions from her company’s side and find out what are the issues that have led to this decision. If these are a concern to the prospective merger partner they should be a concern to the board.
She then needs to decide how she is going to move forwards when her two most senior executives are on the other party’s board and thus bound to act in the other party’s interests. Kalinda is in no position to instruct her CEO and/or CFO on whether they should resign; that is a personal decision for them to make. Whilst they are on the other board they cannot act for Kalinda’s board on the merger.
It is the members, rather than the directors, who can vote directors off a board and, until there is a properly constituted members’ meeting they remain on the board unless they resign; they are not off the board simply because the other directors said so!
There should be a draft heads of agreement setting out how the parties will treat each other. Kalinda should reread it and see what it says about the costs of the deal, non-compete on tendering, deferral of projects, and other issues, that have now harmed her company. She needs to consult her company’s legal adviser and find out if they can recover costs or claim damages.
Most important, she needs to schedule a board meeting and build consensus on a way forward. That is a board decision and not hers, as chair, to make. With any merger, acquisition, or divestment, a good board should always have a contingency plan. It is now time to implement it.