Tuesday, November 18, 2025
Executive Summary
Goodwin Procter partners Lisa Haddad and Caroline Bullerjahn examined the fiduciary duties that govern life sciences M&A transactions under Delaware law — from the duty of care and duty of loyalty through the Revlon obligation to maximize stockholder value, the market-check process, and post-signing shareholder litigation — concluding that the procedural steps a board takes throughout a sale process, particularly conflict identification, independent committee formation, and market testing, are the primary determinants of whether breach of fiduciary duty claims will be reviewed under the deferential business judgment rule or the demanding entire fairness standard.
Instructor(s)
Lisa Haddad, Goodwin
Caroline Bullerjahn, Goodwin
Keywords
Delaware fiduciary duties in M&A — duty of care, duty of loyalty, and Revlon obligations • Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. — best price reasonably available standard in cash mergers • business judgment rule vs. entire fairness standard — Delaware judicial review of board decisions • independent committee formation to neutralize director conflicts in life sciences acquisitions • Section 220 of the Delaware General Corporation Law — stockholder books and records demands • market check process in pharma M&A — full auction, limited check, sequential check, and Go-Shop provisions • earnout provisions and contingent value rights in biotech acquisitions • breach of fiduciary duty litigation in public company M&A — post-announcement shareholder claims • what fiduciary duties does a board have when selling a biotech company to Big Pharma? • when does the entire fairness standard apply in a Delaware M&A transaction? • standstill provisions and confidentiality agreements in pharmaceutical acquisition processes
Legal Analysis
Duty of Care and Duty of Loyalty Under Delaware Law: The Foundational Fiduciary Framework for Life Sciences Boards
Directors of Delaware corporations owe two primary fiduciary duties to the company and its stockholders — the duty of care and the duty of loyalty — and both are implicated with heightened intensity when a board confronts a potential acquisition. Bullerjahn characterized the duty of care as fundamentally a process-based obligation: directors must “exercise the same degree of care and prudence in managing the business of the company as would be expected of them . . . managing their own affairs or business,” which operationally requires that they inform themselves of all material information reasonably available, devote sufficient time to deliberation, maintain active access to the company’s financial and legal advisors, and remain engaged throughout the decision-making process rather than delegating their judgment to management. Most Delaware corporations mitigate the personal exposure of directors to duty of care claims through exculpation provisions in their bylaws, which under Delaware law preclude individual directors and officers from personal monetary liability for breach of the duty of care, though the company itself may still bear liability on the directors’ behalf if the duty is not met.
The duty of loyalty, Bullerjahn explained, is substantive rather than procedural: it requires each director to put the interests of the company and its stockholders ahead of the director’s own personal interests and to act in a manner that the director reasonably believes to be in the company’s best interest. Unlike the duty of care, breaches of the duty of loyalty cannot be exculpated under Delaware law as a matter of public policy — a distinction that carries significant practical consequence, because a director found to have breached the duty of loyalty “can be personally liable for money damages for those breaches.” A director is deemed to have a material conflict under Delaware law if she personally receives a benefit not shared with other stockholders, stands on both sides of the transaction — holding a position or financial interest in both the target and the potential buyer — or lacks independence from another director who has such a conflict. Bullerjahn emphasized that the conflict analysis is conducted on a director-by-director basis at the outset of any acquisition discussion, and that the duty of loyalty requires prompt disclosure of all conflicts or potential conflicts to the remaining board, followed by a collective assessment of how to manage or neutralize those conflicts.
The primary mechanism for neutralizing director conflicts is the formation of an independent committee composed only of directors with no financial or personal interest in the buyer or the transaction. Bullerjahn identified independent committee formation as the most reliable procedural tool for preserving access to the deferential business judgment rule of review: “if you do so, you get the benefit and the protection of the business judgment rule.” Where the transaction constitutes a related party transaction — typically where the buyer is an affiliate of one or more directors — Delaware law additionally requires that the audit committee separately and independently review the transaction before the full board votes. Haddad reinforced that the conflict analysis is not merely a legal formality: it shapes the scope of the market-check process, the composition of the negotiating team, and ultimately the standard of judicial review that will apply if shareholders challenge the deal after announcement.
The Revlon Obligation to Maximize Stockholder Value: Market Checks, Confidentiality, and the Auction Spectrum in Pharma M&A
When a Delaware corporation’s board decides to sell the company for cash, its foundational fiduciary duties are supplemented by a heightened obligation derived from Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986): the obligation to obtain the best price reasonably available for stockholders. Haddad described the Revlon standard as requiring the board to focus primarily on maximizing value rather than on collateral considerations such as the fate of employees or the relative therapeutic stewardship of competing buyers: “you can’t be in a situation where you’re considering other factors, like what is happening to the employees, or would the drug potentially be in better hands with one of the buyers.” The board always retains the right to decline to sell the company altogether, but if it chooses to sell for cash and two offers are on the table with comparable execution risk, the Revlon standard requires acceptance of the higher one. By contrast, in a stock-for-stock merger, the Revlon duties do not apply, because stockholders receive equity in the surviving entity and retain the opportunity to realize further value on a future sale.
The principal mechanism through which boards discharge the Revlon obligation is the market check — an outreach process, typically conducted with investment bankers, designed to test whether the initial offer represents the best price reasonably available. Haddad described the market check as existing on a spectrum from a full-scale auction, in which bankers contact every plausible strategic and financial buyer, to a single-party negotiation with a Go-Shop provision in the merger agreement that reserves the right to solicit competing offers for a defined period after signing. In biotech, she noted, practice generally lands in the middle: a limited, targeted outreach to a short list of parties with genuine strategic interest and financial capacity, conducted either simultaneously or sequentially depending on the board’s assessment of leak risk and the sensitivity of commercial relationships with potential bidders. Bullerjahn framed the market check as the evidentiary cornerstone of the board’s defense against subsequent shareholder litigation: if the board can demonstrate that it reached out to eight counterparties and no superior offer emerged, that record “confirms that the offer that we accepted was substantively fair to our shareholders.”
Confidentiality agreements are executed at the outset of substantive discussions with any potential acquirer, and in the public company context, they include a standstill provision that prevents the buyer from making unsolicited public proposals, acquiring additional shares in the open market, or otherwise circumventing the board’s control of the process. Haddad observed that the circle of persons with knowledge of a potential transaction is kept intentionally narrow in the early stages — typically limited to the board and senior executive management — to minimize leak risk, and expands only as due diligence proceeds. Fairness opinions, provided by the company’s investment banker, serve both a substantive and a litigation-protective function: in a public company transaction, the opinion is disclosed to stockholders as part of the proxy materials, while in a private company transaction, whether to obtain one depends on the composition of the board and the proportion of stockholders who are not represented in the boardroom. Haddad noted that public company deals always include a fairness opinion as “part of the playbook,” while private company boards have more flexibility, particularly where the major stockholders are directly represented on the board and can make an informed judgment on price without an independent advisor’s confirmation.
Business Judgment Rule vs. Entire Fairness: How Board Process Determines the Standard of Judicial Review in Post-Announcement Shareholder Litigation
Virtually every public company M&A transaction generates shareholder litigation after announcement, Bullerjahn observed, driven by a plaintiff’s bar that represents individual stockholders — some of whom may own as few as one share — who are entitled under Delaware law to challenge the board’s decision making in any breach of fiduciary duty claim. Even a single share confers standing to sue. The litigation standard that applies to those claims is the single most consequential function of the procedural steps the board takes throughout the deal process. Under the business judgment rule — Delaware’s default standard of judicial review — courts “will presume that directors acted on an informed basis and in the good faith belief that the action was in the best interest of the company” and will not substitute their own judgment for that of the board. This highly deferential standard applies when the majority of the board is independent and disinterested in the transaction. Bullerjahn was direct about its value to defending counsel: “it’s a lot easier for us to defend boards of directors and to get breach of fiduciary duty claims dismissed when we have this highly deferential business judgment standard.”
Where director conflicts exist, a related party transaction is involved, or there is a controlling stockholder capable of forcing the decision on minority stockholders, the business judgment rule does not apply. In those circumstances, Delaware courts subject the board’s decision to entire fairness review — the most demanding standard of judicial scrutiny in Delaware corporate law. Under entire fairness, the burden shifts from the plaintiff to the defendant directors and officers to prove that the transaction was fair from both a procedural and a substantive standpoint. Procedural fairness encompasses the timing, initiation, structure, negotiation, and disclosure of the transaction — in effect, whether the board conducted a proper duty of care process. Substantive fairness focuses above all on price: whether the deal consideration was entirely fair to the stockholders. Bullerjahn cautioned that entire fairness litigation is materially more expensive and difficult to resolve on early motions because it “requires a lot of evidence” — depositions, documentary production, and potentially trial testimony by directors — rather than the more straightforward dismissal motion practice available under the business judgment rule.
Shareholders who wish to challenge a deal may first make a demand under Section 220 of the Delaware General Corporation Law, Del. Code Ann. tit. 8, § 220, which entitles any stockholder of a Delaware corporation meeting the statutory requirements to inspect the company’s books and records relevant to a proper purpose. Bullerjahn described the Section 220 demand as a standard pre-litigation tool: stockholders invoke it to obtain all board presentations, financial analyses, minutes, and deliberation records for the relevant period, and then use those materials to construct a complaint alleging breach of the duty of care, the duty of loyalty, or both. Breach of fiduciary duty claims can be brought before closing and can survive closing or be initiated up to three years after a transaction is completed. The practical implication that both speakers emphasized is that the procedural decisions made at the outset of a deal process — identifying and neutralizing conflicts, forming an independent committee where necessary, conducting a rigorous market check, and obtaining a fairness opinion in public company deals — are not merely compliance exercises: they are the evidentiary record on which the board’s decision will be evaluated if and when litigation follows. As Bullerjahn summarized: “all of those steps that are taken throughout the deal process, this is when we are able to utilize them and rely on them in getting any litigation or breach of fiduciary duty claims dismissed.”
Generated by AI based on the Interview/Transcript below.
Key Takeaways
- Conflict identification at deal outset is dispositive. Bullerjahn emphasized that identifying and neutralizing director conflicts at the very beginning of a sale process is the single most important procedural step a board can take, because it determines whether the transaction will receive deferential business judgment review or demanding entire fairness scrutiny if challenged by shareholders.
- Entire fairness review is expensive and hard to dismiss early. Bullerjahn cautioned that when entire fairness applies, defending the board requires extensive documentary discovery, depositions, and potentially trial testimony, because the court will not defer to the board’s judgment: “it’s up to us to prove to the court that the price and the process were entirely fair, and that takes a lot of work and a lot of time and a lot of energy and a lot of money.”
- Revlon requires the highest cash offer if execution risk is equal. Haddad explained that under the Revlon standard, if two cash offers are on the table with comparable antitrust and execution risk, a Delaware board is obligated to accept the higher one and cannot factor in collateral considerations such as employee welfare or therapeutic stewardship of the acquirer.
- The market check is the evidentiary spine of deal defense. Bullerjahn identified the market check process as the primary tool for defending against entire fairness challenges on price: demonstrating that the board reached out to multiple counterparties and received no superior offer “confirms that the offer that we accepted was substantively fair to our shareholders.”
- Section 220 demands precede almost every post-announcement lawsuit. Bullerjahn noted that plaintiff stockholders routinely invoke Section 220 of the Delaware General Corporation Law before filing a complaint, using it to compel production of all board presentations, financial analyses, and meeting minutes — materials that then form the factual basis of a breach of fiduciary duty claim.
- Duty of loyalty breaches cannot be exculpated. Unlike the duty of care, which can be shielded from personal monetary liability through Delaware exculpation provisions, breaches of the duty of loyalty expose individual directors to personal liability for money damages and cannot be contractually disclaimed.
- Earnouts and CVRs bridge biotech valuation gaps. Haddad identified the earnout (in private transactions) and the contingent value right (in public company deals) as the standard mechanisms for bridging the gap between a buyer’s risk-adjusted offer price and a seller’s view of the program’s full value, typically tied to clinical milestones, regulatory approvals, or post-commercialization revenue thresholds.
- Fiduciary rights of termination preserve optionality after signing. In public company transactions, the merger agreement should include a fiduciary out provision allowing the board to terminate the deal and pay a breakup fee if an unsolicited, superior offer emerges between signing and stockholder approval, reflecting the continuing fiduciary obligations of directors during that interval.
- Private company boards have more process flexibility. Haddad observed that where a private company’s major stockholders are directly represented on the board, the board has greater latitude in structuring the market check and exclusivity period, and may forego a formal fairness opinion, in contrast to public company transactions where the full Revlon playbook — banker fairness opinion, broad market check, public stockholder vote — applies as a matter of course.
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Interview/Transcript
This transcript was the final session of an eight-part BCLT-Oregon Start Up Series. On November 18, 2025, Goodwin experts Lisa Haddad and Caroline Bullerjahn guided participants through M&A Readiness, discussing the key considerations, duties, and processes that ensure organizations are ready when opportunities—or challenges—arise.
Allison Schmitt 00:30
Hi everyone and welcome to today’s startup session. It is my pleasure to welcome two expert lawyers from Goodwin Proctor to speak with you today about a topic that I think many of you may be thinking about, either in the short term or perhaps slightly in the longer term, what happens when Big Pharma comes knocking? What do you need to have in line in order to be ready for a potential merger and acquisition deal? I’m going to turn things over to our speakers to walk us through this very interesting topic.
Lisa Haddad 00:59
Thank you. I’m Lisa Haddad. I’m one of the leaders of the M and A practice at Goodwin Proctor, and I particularly focus on transactions in the life sciences sector. And I’m joined today by my colleague, Caroline Bullerjahn. Caroline, would you like to introduce yourself?
Caroline Bullerjahn 01:17
Hi everybody. As Lisa said, I’m Caroline Bullerjahn. I am a partner in Goodwin’s complex litigation business unit. I co chair that business unit, and I primarily work with our life sciences and biotech clients on all different types of corporate governance matters and disputes.
Lisa Haddad 01:39
And today we’re going to talk to you a bit about what to do when Big Pharma comes knocking. That is always something that may be on the horizon for companies that are starting up and in growth phase. Big Pharma may come knocking for a number of reasons. They may be interested just in your programs and from a business development perspective want to talk to you about potentially collaborating and research development or ultimately commercialization of the drugs. And so what we do see is a lot of M and A discussions actually emanate from other business development discussions, particularly around strategic collaborations. But there may be a point when Big Pharma may come and want to acquire the company outright and purchase the program, and take the employees and all of the other pieces that are important to them in furthering that drug. And so what we’re going to do today is go through a brief reminder of what the fiduciary duties of the directors are because they are implicated particularly in these types of processes. And then talk to you a little bit about how these processes evolve, and then what you can be doing along the way to be ready in case you get that knock on the door. Caroline?
Caroline Bullerjahn 02:55
Thanks, Lisa. So as Lisa said, we’re going to start out today with kind of a foundation of what the duties are of your members and your board of directors, generally. And then this, of course, applies in any M and A context. It really applies to any decision making by your board of directors, but in particular decision making around significant decisions like whether or not to enter into a transaction, it’s particularly important in those circumstances that your board of directors complies with their fiduciary duties. And we’re going to talk through the fiduciary duties that exist under Delaware law. Delaware law is, as you probably know, is kind of the premier corporate governance law for many, many entities in the United States. And so we’re going to anchor our discussion around Delaware law. Many other states have fiduciary duty statutes as well in their corporate laws, but they typically are pretty aligned with Delaware. So Delaware is a good baseline. So the first duty that directors have to both the company and its stockholders is the duty of care. And the duty of care is really a process based claim that requires directors to exercise the same degree of care and prudence in managing the business of the company as would be expected of them, and managing their own affairs or business. So directors have to inform themselves of all material information that’s reasonably available to them, and making any decisions on behalf of the company, they have to devote the time needed to consider that information and to have fulsome discussion and deliberation over those decisions. Many Delaware corporations have bylaws that govern the companies, and those typically include what’s called an exculpation provision, and that provision says that directors and officers of Delaware corporations cannot be personally liable for monetary damages for breaches of the duty of care. You can be liable — the company — can be liable on your behalf if the directors don’t comply with their duty of care, but the individual directors and officers cannot be personally liable for money damages. So that’s a protective measure for Delaware directors and officers. To comply with the duty of care, directors must take sufficient time, as I said, to consider the matter that’s up for decision and keep informed throughout the decision making process. These M and A transactions can typically involve a fairly lengthy deliberation process, and directors really need to keep informed throughout that process and provide their input along the way to comply with their duty of care. They have to have direct access to receive advice from the company’s financial, legal and other advisors, and they have to actively participate in discussions and decision making and critically evaluate information as it becomes available to them. The second primary duty under Delaware law is the duty of loyalty, and this, I would say, is probably the more so the duty of care, as I said, is a process based duty. The duty of loyalty is more of a substantive duty that requires a director to put the interests of the company ahead of his or her own personal interests. So directors under Delaware law owe a duty of undivided loyalty to the company and its stockholders, and that requires directors to act in a manner that the directors reasonably believe to be in the best interest of the company. So reasonably believe is kind of a subjective standard, and it depends on the facts and circumstances of each decision making process and decision that’s undertaken by the board. And so when we are faced with a potential offer or an M and A transaction, we assess the potential conflicts of interest of all of the directors to ensure that they can adhere to their undivided duty of loyalty. So what that means is a director under Delaware law is deemed to have a material conflict if he or she personally receives a benefit that’s not shared with the other stockholders, if they stand on both sides of the transaction, so the director is affiliated both with the target who is being approached and the potential purchaser of the company, or they lack independence from another person who has material conflict. So if, for example, Director A has a material conflict and that they have an interest in both, they sit on the board of the target company and they have an ownership interest in the potential buyer, that conflict can impact others on the board who may be affiliated with that director. And so we do a case by case analysis when a potential buyer emerges to see whether each of the directors on the board can fulfill their duty of loyalty, meaning that each of them is independent and disinterested from the particular buyer at issue or the transaction at issue. Importantly, the breaches of duty of loyalty cannot be exculpated under Delaware law as a matter of public policy. So what that means is, if you breach your duty of loyalty, you as a director, can be personally liable for money damages for those breaches. So to comply with the duty of loyalty, directors must promptly disclose any conflicts or potential conflicts. So, for example, relationships with people who are affiliated with the potential buyer, as I said, financial interests or ownership interests and a potential buyer counterparty, those need to be identified by the director who’s implicated to impromptly disclose to the remainder of the board. The board then, together, typically with outside advisorsm including Council, evaluate those conflicts, taking all facts and circumstances into account to make a determination as to whether or not a conflict actually exists, and if so, how to manage that conflict. If there is a director who is conflicted in a particular transaction, then the board has to take steps to neutralize that conflict. And so depending on the circumstances, that can be done in a number of ways, including formation of an independent committee of board members to navigate or review a transaction. And where transaction constitutes a related party transaction, the audit committee of the board typically is required to separately and independently review the transaction prior to the full boards vote on that transaction. So there’s an additional kind of procedural safeguard when the buyer in the seller are potentially related parties. And now I’m going to turn it to Lisa.
Lisa Haddad 10:39
So one of the first things that happens when a offer comes in from big pharma, and there may be some early discussions where you would get a sense that they may have some interest in buying the company, is that that offer would be brought to the board. It’s a board decision as to whether to sell the company and at what price? And so the key considerations for the board, in addition to price, which is generally what people tend to focus on, is really to ask themselves, is this the right time to start a process to potentially sell the company? And in biotech, there can be a number of cards that are going to be turned over in the near term. Maybe you have some data coming out, maybe there’s a regulatory event coming up, or some other sort of catalyst for value, where you may not want to sell at that point in time, but may want to wait to see how that plays out. Conversely, some of those events may present some risk to the company, and so you may think that this is a good time to consider a sale. So that is one of the initial questions that the Board should be asking themselves as it deliberates about that initial offer. The Board also needs to think through whether there’s any execution risk, and that would primarily relate to whether there’s any anti trust risk in getting a transaction completed. And the regulators, both in the US and outside, look very closely at transactions in this space, and so doing kind of a preliminary anti trust analysis with your council would be important. The board will typically inform itself around a potential transaction by looking at the company’s long range plan with input from an investment banker around the valuation for the company. And so what that entails is the management team putting together a set of projections for the company around what you expect to happen in terms of the financial aspects of the program over some period of time in the future, those will get pressure tests with your investment banker and generally, in all of these transactions, you would bring in a set of advisors, including an investment banker and Council. And the board would then review that long range plan make sure they were comfortable with it, and then the bankers would use that to prepare a financial valuation analysis of the company, giving you some range of value of the company. That range is not telling you the answer as to whether you should sell the company or not. It’s just a touchstone for the board to use in their deliberations and sort of thinking about whether the price being offered is fair. As I mentioned, you should also consider the company’s clinical programs and pipeline, including the timing of data and regulatory approvals, and whether there’s any catalyst or other event coming up that may dictate the timing for these discussions. How fast, how slow you may want to go if you decide to engage. Caroline talked generally about the fiduciary duties of the board, but there’s some specific rules in the context of a sale of the company, and these, again, are based on the Delaware legal requirements, but state other states have often have similar requirements. So in Delaware, if the board does decide to embark on a sale process and you’re selling the company for cash, which is how most of these transactions are structured, then the board has an obligation, in addition to their basic, foundational fiduciary duties, to obtain the best price reasonably available for the stockholders, and the focus of the board really should be on maximizing value for stockholders. In a stock for stock merger, so if you’re just combining the companies and all of the investors are just taking stock in the combined entity, these heightened fiduciary duties don’t apply, and the reason for that is that the investors get another bite at the apple, right? The company could get sold later down the road, and they’ll be able to get their premium at that point. So one of the things that the board needs to think about is, how do they maximize value in one of these transaction if it is for cash? And there is no single blueprint for doing that. It’s in the business judgment of the board to decide, but often what that will entail is that the board will decide to do what we call a market check, and they’ll make some phone calls to other big pharma or other potential acquirers that they think may have interest in the asset, and those calls are made, and the idea is to try to potentially drum up some competition with your initial party that expressed interest, and then kind of use that to maximize value. It’s also a good way to just test the value of the of the company, like getting third party input on valuation in addition to the banker input can help the board triangulate about whether they’re getting a fair price. Generally, once you embark on these types of discussions, you will enter into a confidentiality agreement with Big Pharma. That confidentiality agreement will have some M and A tailored provisions, so it’s a little bit longer and more detailed than an NDA that you would do for just typical BD activities. And the idea is to try to keep these discussions as confidential as possible and generally absent some exigent circumstances, if there’s a leak, or sometimes if the company wants to actually drum up some additional interest, potentially by doing a public announcement, the sale process typically are confidential until the deal gets signed for public companies. At that point, they’ll have an obligation to do an announcement to the market and their shareholders that they’ve entered into the transaction agreement. In private companies, there also will generally be some announcement so that will enable both the buyer to talk about the transaction with their investors and also for the target to speak more freely with their shareholders, partners and other constituencies. The confidentiality agreements don’t always work 100% because the circle of people that start to know about the transaction will expand over time, and sometimes there will be a leak, and at that point, there will be discussion with the board about what, if any, response that you might want to make to a leak. Generally, for a public company, they will not respond and just say that they don’t speculate on market rumors. But these are decisions that ultimately go to the board.
Caroline Bullerjahn 17:38
Which is why, right? Lisa, I mean, typically, particularly earlier on in deal process, the tent containing people who actually know about the transaction is usually pretty small. That circle is pretty tight, specifically to try to prevent any leaks to the market.
Lisa Haddad 17:57
Yeah, that’s right. So it’s generally the board and the the real executive management team that will be in the know at the outset, and then that circle will expand over time, as you need to bring more people in potentially to do due diligence as the due diligence process moves forward. So talking a little bit about the the market check that I mentioned, there’s sort of different permutations of that on a spectrum, going from a full scale auction when you basically reach out to anybody through, generally, an investment banker, anybody that may have potential interest in the company, to a single party negotiation where for some reasons, that the board determines, potentially losing the bird in the hand, that they want to just have a bilateral negotiation and maybe deal with checking the market after the transaction is signed through something we call a Go-Shop provision. In biotech, you generally do not have the extremes of a full scale auction or a single party negotiation. Often it’s somewhere in the middle, which is a more limited market check, where the board and banker together with the management team are discussing the short list of parties that they think may have real interest and have the financial wherewithal to do a transaction, and then you may decide to go to those parties all at once. You may decide to go to those parties sequentially, in what we call a sequential market check. Obviously, there will be some concerns from the Board and management about the leak risk of going to more parties, or if you have existing commercial relationships with those parties, there may be some hesitancy to let them know what is going on at the outset. So part of the discussion around the market check will be the scope, what parties will you be going to and the timing of that? Do you want to wait so you’re a little farther along with the first party before you reach out to other parties, and then weighing that against making sure that all parties have a fair shot to consider the potential transaction before you enter into a merger agreement with one of the parties. So this is kind of a big area of discussion with the board.
Caroline Bullerjahn 20:14
Yeah, I was just going to say, Lisa, that this really goes back to the initial point that I made about duty of care, right? This is essentially how the board kicks the tires on any offer that they have in hand, right, to see whether or not they can get a potentially better offer. Lisa, could you address — so if you do a market check and you have more than one offer, does the board automatically have to take the highest offer?
Lisa Haddad 20:44
Yeah, so if you are in a situation where you have two cash deals on the table, one is higher than the other, and you’ve done an assessment of the execution risk, and you’ve determined that both of the transactions should be able to be completed. There isn’t any significant anti trust risk for for instance, then if you’re a Delaware corporation, under the Revlon standard that I mentioned, you would have to take the highest offer if you want to transact. You can always say no. You can say no at any time. You can say no at the beginning, when the offer comes in, you can say no up until you sign the merger agreement, but because of the Revlon duties, as we call them, to try to get the highest price reasonably available, you can’t be in a situation where you’re considering other factors, like what is happening to the employees, or would would the drug potentially be in better hands with one of the buyers versus the other. So that is always something that is little bit of a point of anxiety sometimes with the board and the management team and thinking about where kind of their baby is going to end up after all the work that you’ve put in and growing the company, but you do always have the right not to transact. And I find sort of practically that the parties that are willing to pay the most are generally the best home for the asset and the best home for the employees. So it tends to all work out in the end.
Lisa Haddad 22:21
So this just kind of goes through the typical stages of the transaction, and I’ll kind of hit this at a high level, just as kind of a preview of coming attractions if you find yourself in this situation. So as we talked about, there’s kind of this preliminary period where, if you’re a public company, or there’s other information publicly available about your company and programs, the buyer may do some of their due diligence just reviewing publicly available information. And then there’s typically some high level business discussions about a potential transaction, and that, as I said, may emanate from other business development discussions that you may be having with the big pharma that then morph into their interest in doing a whole company acquisition. There’ll be engagement of financial advisors, and then, if the board decides that they want to continue to move forward with the discussions, the execution of a confidentiality agreement for public companies will include a provision in the confidentiality agreement, which we call a standstill. The standstill basically prevents the buyer from being able to make public proposals going hostile, not kind of running the process through the board and its advisors, so it allows the board to sort of maintain some control around the process. It also would prohibit the buyer from purchasing additional securities in the market for publicly traded companies and thereby sort of preventing them from continuing to accumulate a position when they’ve already expressed an interest in buying the company. If the board, after this initial phase, decides that they want to move forward, and usually that’s after they have some initial indication of interest on price, there will be a due diligence and negotiation period. This will involve some management presentations and due diligence around the company. And one of the things that a company can do to be prepared for when Big Pharma comes knocking is to always be ready. Have a plan for preparing a data room and getting due diligence materials together relatively quickly. Often, you’ll already have a data room that you may be using for business development discussions that’s related to specific programs that can be leveraged, but the buyers will want to do a more of a deep dive, both on that information, but also general corporate information. They’ll want to look at your organizational documents, any agreements with shareholders, board minutes. They’ll want to look at employee information. Look at all of your material contracts. So good record keeping — knowing who owns what parts of that due diligence throughout the organization can be very helpful when you have to put that due diligence room together relatively quickly. If the buyer needs financing for the transaction, which is generally not the case with Big Pharma, but maybe with some other buyers that have interest, they’ll be doing their work around getting the financing at this point, that will be another area where you’ll want to have some control, because once they start reaching out to financing sources that can increase the people that know about a potential transaction and the potential leak risk. And you may, if you engender competition through the market check, which would generally be happening while this due diligence process is going on, you may decide to bifurcate this process, so you may have some initial due diligence, and then ask the parties to do a rebid, and then maybe whittle it down to a couple or one, and then do more confirmatory due diligence once you have that party selected. So this period of time can extend depending upon how many parties are involved, how much due diligence they want to do, and how quickly you are able to put together the due diligence materials for them, and then there’ll be a series of due diligence calls where they’ll have follow up and questions and getting all through that process, so they’ve checked the boxes on their due diligence. You’re probably familiar that in collaboration discussions, or even in M and A discussions, there may be what we call an exclusivity period, where the buyer will ask for an exclusive period to negotiate with you with respect to a potential transaction. Exclusivity periods tend to be rare if the company is a public company, because they will be doing that full scale market check that we discussed, and have the Revlon duties. You do see some short exclusivity periods in public M and A, once you get toward the finish line, and you’re just finishing out the confirmatory due diligence, and then the agreement negotiations. In a private company, you actually will see exclusive negotiation periods more frequently. We often get the question, does a private company, a public company, the directors have the same fiduciary duties? They do, but there’s a different focus with respect to them. If your company has all of the major shareholders having directors sitting in the boardroom, then they’re making the decisions real time. And they may decide they want to do a smaller market check. They may decide they’re okay with the price. They may decide that they’re okay giving a longer period of exclusivity, so you have more degrees of freedom in how you implement those fiduciary duties than you do if you have a board that is mostly independent directors, and you’re answering to the public markets, where there’ll be more of a focus on, how did you run the market check? Did you get the best price reasonably available? Which goes to the subsequent litigation risk, Caroline.
Caroline Bullerjahn 28:04
Before we move on to that, Lisa, can you just talk a little bit about the fairness opinion piece? You know, are fairness opinions always obtained? When do you absolutely need them? When are they kind of more optional? I mean, I think public company versus private company matters there too.
Lisa Haddad 28:19
Yeah, it does. So the negotiation of the merger agreement will be dictated, again, by whether it’s a public or private company, the contents of that and what’s involved. That will generally be going on with parallel and there’ll be kind of an ultimate board meeting. The board will be meeting along the way here to get updates and make decisions, but there’ll be an ultimate board meeting where the board will be asked to approve the transaction. In a public company context, you would generally have your investment banker provide you with a fairness opinion. The fairness opinion is then disclosed to the shareholders and is part of the overall package that the shareholders are provided when they’re considering whether they want to vote for the transaction, but a fairness opinion obviously costs money, and in some situations for private companies, if all of the directors are sitting around the table, they may decide that they don’t need the fairness opinion. So it generally will depend upon how comfortable the board is in a private company context, whether there’s a significant number of investors that are not sitting around the board table, and so that will be a discussion in that context. In a public company deal, you would get a fairest opinion. That is just part of the playbook. One thing I want to note is, once the merger agreement gets signed, the board and the company committed itself to the transaction, sub to some fiduciary rights of termination, particularly in respect of public companies, but the shareholders need to approve the transaction under applicable law. So in effect, you’re just making a recommendation to the shareholders that they accept the deal. In a private company context, again, you probably have the bulk of the shareholders around the table, so that will get approved relatively quickly, almost simultaneously or immediately after the board approval. In a public company context, you have to actually go out to the shareholders through an SEC process where they’re going to get disclosure materials. You’ll have to have a meeting of the stockholders and ask them to approve the transaction. During the period between when the company signs up the merger agreement and when the shareholders approve the transaction, the fiduciary obligations of the directors continue. So in a public company context, for instance, where that period, may be several months, you would have a provision in the merger agreement that would provide that if there is an unsolicited inbound offer that’s better than the one on the table that the board after jumping through some hoops, including letting the initial buyer either match or top that new offer, could potentially terminate the merger agreement to take the better offer subject to the payment of a breakup fee. While those fiduciary obligations would still be the same in a private company context, because the stockholder approval happens relatively quickly after the deal gets signed, practically speaking, there isn’t sort of that period where another offer could be made, but it is something that is present in a public company transaction. We call those fiduciary outs, or fiduciary rights of termination, and that becomes a part of the negotiation of the merger agreement. One last thing that I wanted to mention before I talk a little bit about closing, is that, particularly in biotech, there’s sometimes a gap in value between what the buyer is willing to pay and what the seller thinks that the company is worth. And usually that’s around programs that are still in development, where there’s some risk that still remains, that the buyer sort of factoring into their consideration, but from the seller’s perspective, you don’t think you’re getting full value on the promise of those programs. So there may be a provision in the merger agreement that’s called an earn out in a private company context, or it’s called a contingent value right in a public company context, where you can bridge that value by having contingent payments that can be made in the future upon certain events, and they’re usually around, you know, clinical events having to do with the programs. It can be regulatory approval that triggers a payment, or it can be some sales threshold that gets met once the product is ultimately commercialized. And there’s different permutations of all of these, and it would get heavily negotiated how those triggers would work, but it is a way to potentially bridge a valuation gap between the buyer and the seller. In terms of the closing of the transaction, the timing between signing and closing will very much get dictated by whether it’s a public or a private company, because of the shareholder approval requirement, and also whether there’s antitrust filings that are required, and if so, whether there’s any competitive overlap that may pique the interest of the regulators and require more back and forth with them before you get approval. So in a private company transaction, often you can close a transaction relatively quickly, in a matter of weeks. In a public company transaction, it’s usually several months if there’s no regulatory hiccups, and it could be much longer if it takes time to go through the regulatory approvals. That’s why it’s important to do that assessment up front, so that you can give some consideration to the provisions in the merger agreement that dictate what you can do between signing and closing, and also whether you have a sufficient cash runway to get to closing or will need to discuss other ways to fund the business during that period.
Caroline Bullerjahn 34:10
So, as Lisa said, throughout kind of the deal negotiation process, directors should always have in the back of their head that all of their decision making and their process by which they made their decisions will be kind of second guessed, if you will, by shareholders who may disagree with the board’s determination to enter into the transaction. So in the public company context, virtually every single public company M and A transaction is subject to shareholder litigation after the deal is announced, and that’s really primarily driven by an industry of plaintiff’s lawyers in the US who represent individual shareholders. Sometimes larger institutional shareholders may be against a deal for some reason, and they could be a plaintiff in a lawsuit against the board of directors, but more typically, in the public context, it’s driven by plaintiff’s lawyers who represent individual shareholders. They can own anywhere from one share in the company to 100,000 shares in the company. Even owning one share gives you the right to challenge the board’s decision making in the M and A context. So usually, because this is so prevalent, particularly in the public context, but also there are plenty of post closing disputes in the private company context as well, and any shareholder who wants to challenge the transaction or the board’s decision making in connection with the transaction, can bring a breach of fiduciary duty claim against the board of directors. Typically, those claims are for both the breach of the duty of care, so essentially alleging that the Board did not undertake a sufficient process to deliberate in reaching its decision and a substantive duty of loyalty claim, essentially alleging that the board either was conflicted in some way which rendered their decision making breaches of the duty of loyalty, or that the directors just acted in bad faith And failed to get the best price reasonably available for shareholders. So again, duty valency claims are more substantive claims challenging the substance of the deal, either the price or other provisions of the deal, but typically, not surprisingly, mostly focused on price. So we see these in many, many M and A transactions, and so that should always be, as I said, in the back of minds of directors and their council advising boards through the transaction process, because there will come a point post announcement of that transaction where we the litigators, that’s where we come in. We defend the board’s decision making and the substance of the deal. Usually we will get demand letters at the outset when a deal is announced, and sometimes those demand letters are made under Section 220 of the Delaware corporate law, which essentially allows shareholders of every Delaware corporation to obtain certain books and records of the corporation, assuming that they meet certain statutory requirements to do so. And so we will get section 220 demands from shareholders saying that they need all of the board materials, so all of the presentations made to the board, all of the other materials presented to the board, all of the minutes describing the board’s deliberation and decision making processes for every board meeting during the relevant time period. And by statute, under Delaware law, we are required to provide those materials to a Delaware company shareholder. So we will provide those materials, you know, after entering into a confidentiality agreement with the stockholder, and then they usually will build a complaint based on those materials, and they will claim that the board breached either the duty of care or the duty of loyalty, or both, typically both in connection with the deal process. So these claims are much more prevalent when you have conflicts on your board of directors, particularly if those conflicts are not neutralized in the way that I talked about earlier, through formation of the special committee, or by recusing the conflicted directors related party transactions, or when there is a controlling stockholder, so a stockholder that owns more than 50% of the target company shares, who essentially can force the decision on to the remaining stockholders. So in those types of situations, we absolutely, probably in both the private company and public company context, see breach fiduciary duty claims after a transaction is announced. And those claims can be pursued after the after the transaction is closed as well. So we usually see them before closing, but they can survive closing or be brought at any time within three years post closing of the transaction. The standards of review when a board of directors is sued for breach fiduciary duty depends on the facts and circumstances of the particular board of directors at issue and the decision making. So typically, the default rule is the business judgment rule, or the business judgment standard under Delaware law. So this is the default standard of judicial review of any claim of breach fiduciary duty against directors of a Delaware corporation, and it generally applies when the majority of the board of directors is independent and disinterested in the decision that’s being made. So this is why it is absolutely critical that directors self identify any conflicts of interest that they may have in connection with the potential buyer, in connection with the the investment banker that the board is retaining, or in connection with the transaction. It’s really critical at the outset of the deal process to identify and neutralize conflicts, because if you do so, you get the benefit and the protection of the business judgment rule. So under the business judgment rule, courts will generally presume that directors acted on an informed basis and in the good faith belief that the action was in the best interest of the company. So it’s really a protective inference that courts will take that directors did what they were supposed to do, and when the business judgment standard is applied, the courts will presume that the directors have satisfied the standards of conduct and will not substitute their own judgment for the judgment of the board, so they really will defer to the board’s decision making where the business judgment rule is applied. So as you might imagine, it’s a lot easier for us to defend boards of directors and to get breach fiduciary duty claims dismissed when we have this highly deferential business judgment standard that’s applied. And again, the way that you obtain the deferential business judgment standard is to ensure that the majority of your board is independent and disinterested in connection with the transaction or the decision that’s being undertaken. Where the business judgment rule does not apply — there is a heightened scrutiny under Delaware law called entire fairness — and entire fairness applies where there are director conflicts, where there’s a related party transaction, where there’s controlling shareholders. So in those types of situations, whether in a private company context or a public company context, in general, Delaware courts will scrutinize those decisions by boards of directors for those transactions much more stringently and harshly. Under the entire fairness standard, the burden shifts from the plaintiff stockholder to the directors and officers to prove that their decision was entirely fair, both from a process standpoint and a substance standpoint. So procedural fairness includes the timing of the transaction, how it was initiated, how it was structured, how it was negotiated, how it was disclosed to the board, what the directors considered, what they shared with shareholders to inform shareholders so that they could make a decision as to whether or not to approve the deal. So procedural fairness really goes, as I said, to board process, more duty of care considerations. The substantive fairness relates to the actual deal terms, including, most significantly, the deal price. Is the deal price entirely fair to the company shareholders, and that’s where Lisa talked through the various kind of market checks that a board could do and obtaining a fairness opinion. This is where those processes that are undertaken by the board provide a ton of protection on the back end, right? That’s the way that we prove that a deal is entirely fair. We say an independent investment banker came in and did a fairness opinion and found that the price was fair to all shareholders. We went out to the market and reached out to eight other counterparties, no one else came forward with a superior offer, right? So that confirms that the offer that we accepted was substantively fair to our shareholders, etc. So all of those steps that are taken throughout the deal process, this is when we are able to utilize them and rely on them in getting any litigation or breach for the shared duty claims dismissed. The hard thing is, is that whether or not a price is entirely fair is really a subjective determination. So that requires a lot of evidence. That requires a lot of for example, depositions, documentary evidence being exchanged by the parties. Potentially trial testimony by the directors. So it’s not when we are in entire fairness land. It becomes much more difficult for us as litigators to get breach fiduciary duty claims dismissed at the earlier stages right, because again, the court is not going to defer automatically to the board’s decision making, because business judgment rule doesn’t apply in these circumstances. So it’s up to us to prove to the court that the price and the process were entirely fair, and that takes a lot of work and a lot of time and a lot of energy and a lot of money to do that. So that’s why we really we wanted to end just on this point, because it actually the steps that you take throughout the M and A process to ensure that your board follows the right processes and obtains, in the context of a sale of the company, the highest price reasonably available. Those steps are absolutely critical to be able to protect the deal on the back end and the board of directors on the back end from any shareholder litigation. So key points here, if there are any conflicts on the board, just deal with them right up front. At the outset, create that independent committee if you need to, because you know that will ensure that the board’s decision making process and the ultimate substantive decisions will be protected by business judgment. So I think that’s all we wanted to cover today. We really appreciate your time, and you can feel free to reach out to either Lisa or myself. You can find us on the Goodwin Proctor website. Feel free to reach out to us via email, and that’s all we wanted to cover. Thank you.
Allison Schmitt 46:54
I want to thank both of you for a fantastic program. I think that there’s a lot of really useful information here for our companies and entrepreneurs, so thank you so much for taking the time to join us. Thank you so much to the audience for joining us, and stay tuned for more startup programs.