CHAPTER 01 Special Committees: Governance Safeguards for Conflict of Interest Transactions and High-Stakes Situations
Second, an appropriately composed special committee may ensure that the board’s consideration of the issues is not influenced by any interest that a director may have in a particular transaction or any relationship a director may have with other parties involved in the matter. This reduces the risk of a conflict, whether actual or perceived. Finally, establishing a special committee of directors who are not distracted in their deliberations by interests other than those of the corporation and its key stakeholders will assist the board in demonstrating that it has followed the appropriate processes in discharging the legal duties and stewardship obligations placed on it.
In the event of a potentially contentious transaction, courts and securities regulators will likely look favourably upon a board that forms a special committee early in the process leading up to a transaction, before the proposed transaction is negotiated and before important decisions are made (or rights are given up).
TIPS FOR STRIKING A SPECIAL COMMITTEE IN THE TRANSACTIONAL CONTEXT
As discussed above, court cases and decisions by securities regulators provide a patchwork of important guidelines for companies to follow in striking a special committee. Drawing on these decisions and our expertise in advising boards in these situations, we provide below best practices for boards to consider when striking a special committee to oversee a significant transaction. These tips will help protect the integrity of a board’s decision-making process and, importantly, may also protect the board in the event that a dispute lands before a judge or a panel of a securities commission. – Strike it early. In the event of a potentially contentious transaction, courts and securities regulators will likely look favourably upon a board that forms a special committee early in the process leading up to a transaction, before the proposed transaction is negotiated and before important decisions are made (or rights are given up). > Although each case differs and the exact nature of the special committee’s involvement in negotiations will depend on the surrounding context, evidence of a special committee playing an active role in negotiations from the outset, either directly or through advisers, is important. > Early involvement of the special committee provides the greatest protection to a board. If preliminary negotiations are carried out by interested parties such as a conflicted CEO or conflicted directors before a special committee assumes control, there should be evidence that these negotiations were non-binding and subject to robust review; in those cases, the board should ensure that the special committee is empowered
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