Caveat Emptor: The Accountabilities and Required Actions of Directors in Securing Value When Merging or Acquiring Companies. Paper 1 of 4: Review of Commercial or Practitioner M&A Literature to See What Guidance this Provides Directors Involved in Transactions

Mergers and acquisitions (M&A) are critical mechanisms for corporate growth and potentially for increased shareholder returns. The reality, however, often does not live up to the promise, as is borne out by empirical data on the high incidence rates of M&A under-performance. At present in Australia, directors and executive management, particularly of the acquiring company, have considerable latitude to put at-risk shareholder value via M&A without any meaningful pre-event restraints or post-event sanctions (and with the benefit of the Business Judgment Rule defence). The old adage caveat emptor (‘let the buyer beware’) still holds true for buyers, but when it comes to ensuring that their own shareholders’ interests and capital are properly protected, there are few formally imposed ‘checks and balances’. Additionally, in terms of voluntary controls, there is little clarity on what are the acceptable, key activities and behaviours of the directors of the acquiring company, that represent responsible standards of conduct. The initial question to be considered is whether there is a discernible set of ‘right practices’ that provide a reference set of benchmarks for non-executive directors to know whether they are exercising the necessary care, diligence and skill in selecting and overseeing transactions. Looking from the ‘outside in’, the corollary is ‘How do shareholders in the acquiring company have some visibility and assurance that their executive management team and board are exercising (or have exercised) sufficient due diligence (in the broadest sense of the word)? ’ The challenge thus arises as to how to describe the ‘right practice’ stewardship that should be exercised by ‘reasonable directors’ of the acquiring entity to manage the risks and performance of transactions – before, during and after acquisition. This article is the first of a series of four that focus on identifying and describing ‘right governance’ i.e. the required level and mix of actions and responsibilities of directors of the acquiring company, necessary for protecting the interests of their shareholders. To carry out this research, and to shed light on these gaps in knowledge and required practices, the extant commercial, governance and legal literature relating to M&A practice has been studied to understand what level of clarity it provides to non-executive directors. (This has been described in shorthand form as the t-ought for ‘theoretical ought’). Subsequently, opinions and experiences have been elicited from a cross-section of non-executive directors and Chairmen, via targeted interviews (‘grounded research’) to capture their views on good board oversight of M&A practice. (This has been described in shorthand form as the d-ought for ‘directors’ ought’). What has emerged as the board-level themes from seasoned directors have been compared to the extant literature to examine how these align and whether there are any key gaps or contradictions. In most cases, there is alignment, although the interviewed directors’ views have crystallised what in the literature could best be described as ‘un-consolidated ideas’ based on ‘an extrapolation of managerial practices’, as the body of documented knowledge is generally not targeted at board members. From these comparison has arisen an emergent theory regarding ‘right practice’. The emergent theory points to six key themes that those directors interviewed believe make a difference to deal performance: (1) the Board’s degree of strategic thinking (‘Clear strategy upfront’); (2) planning and preparation (‘Early preparation and planning’); (3) the extent of board members’ cultural due-diligence (‘Proper understanding of culture’); (4) robust business-case scrutiny and investment assessment (‘Rigorous testing of the investment business case and funding strategy’); (5) their focus on tracking the delivery of the targeted benefits (‘Effective monitoring post transaction’); and (6) the quality of their mutual challenge and critical debate (‘Well-chaired board with constructive challenge’). This process of comparison of ‘t-ought’ versus ‘d-ought’ has indicated that these initial findings have merit and should be regarded as an emergent theory. The paper that follows is the first of a four-part series: • Paper 1 covers the commercial or practitioner M&A literature to seek what guidance this provides directors involved in transactions and to uncover any material gaps • Paper 2 in similar fashion covers governance literature, again to seek guidance and to uncover any material gaps • Paper 3 covers the findings of director interviews flowing from PhD research, regarding right M&A governance • Paper 4 covers conclusions. Paper 2 available at https://ssrn.com/abstract=2880427