As we discussed in our previous post, a special committee established in response to an activist’s approach should be comprised of independent board members with the relevant expertise and the time to participate meaningfully. While we have written about some of the benefits to the company of incorporating a special committee process into its response to the activist, it is understandable that directors may be reluctant to take on the role of committee member in what could become a very public process.
Given the committee’s role in advancing the company’s public response, committee members may be subjected to greater public scrutiny and, potentially, criticism, including from the activist. Among other things, committee members should consider that their actions could be viewed by the activist as obstructionist and could result in the activist targeting those directors for removal if a short slate is proposed. While this enhanced public role and attention may be unusual for directors, committee members should not fear that their role will result in a higher legal standard being used to judge their actions.
Provided the committee is staffed appropriately and acts in good faith and with due care, a director may take comfort from the protections afforded by the business judgment rule which requires a reasoned decision, not necessarily the “right” decision when judged in hindsight. It is true that the committee members take on distinct responsibility not shared by the other board members in discharging the committee’s mandate; however, this responsibility does not heighten the legal standard against which the committee members will be judged.
This is the fourth in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids. For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.