What are directors’ duties and what can they do to protect themselves in a sale of company?
Takeaway: Directors of a startup have a significant role in a company sale, including fiduciary duties of care and loyalty, and can protect themselves from lawsuits through measures such as independent valuations, thorough process, expert advice, fairness opinions, and Directors and Officers (D&O) liability insurance.
When a startup is sold, it's not just the interests of the stockholders or the acquirer that are at stake. The company's board of directors, too, plays a critical role in such transactions, and its members have significant responsibilities. Understanding these duties and what directors can do to protect themselves in a sale can ensure the transaction proceeds smoothly, and legally.
Directors' Fiduciary Duties
Directors owe fiduciary duties to the corporation and its stockholders. These duties, which are well-established in corporate law, are broadly categorized into two: the duty of care and the duty of loyalty.
Duty of Care: This duty requires directors to make informed decisions. They must act in a diligent and careful manner when making decisions that affect the company. In the context of a sale, this means undertaking a diligent review of the proposed deal, understanding its terms, its implications for the company, and how it will affect the stockholders.
Duty of Loyalty: This duty mandates directors to act in the best interests of the corporation and its stockholders, and not in their own personal interests. Directors must avoid conflicts of interest, and if they arise, they must be disclosed and handled appropriately.
Protecting Directors in a Sale
Directors can take several steps to protect themselves during a sale. Here are a few key points:
Independent Valuation: Having an independent third party value the company ensures an unbiased view of what the company is worth. This can be used as a benchmark for considering sale offers.
Process Over Speed: While speed may be desirable in some situations, a rushed sale can often lead to mistakes or omissions. Directors should ensure they're taking the necessary time to understand the details of the sale and make informed decisions.
Legal and Financial Advice: Engaging competent legal and financial advisors early in the sale process can help directors understand the implications of the deal and guide them through the legal and regulatory requirements.
Fairness Opinion: A fairness opinion, typically prepared by a financial advisor, attests that the transaction is fair to the stockholders from a financial perspective. This can provide additional assurance to directors that they are fulfilling their duty of care.
D&O Insurance: Directors and Officers (D&O) liability insurance can protect directors from personal liability arising out of their actions in a sale. However, it is crucial to understand the coverage of any D&O policy, as there can be exclusions.
Conclusion
Selling a startup can be a complex process with numerous legal, financial, and strategic considerations. As stewards of the corporation, directors play a crucial role in this process, with significant duties of care and loyalty to the company and its stockholders. By taking protective measures such as getting independent valuations, following a disciplined process, seeking expert advice, and securing appropriate insurance coverage, directors can better navigate this process and fulfill their responsibilities.