Philadelphia partner Doug Raymond published his latest column in Directors & Boards, written with the assistance of Philadelphia associate David Carboni.
In the article, Doug discussed “Success Fees for Special Committee Work.” A common route that boards take to protect against a conflict of interest challenge is to assign issues involving potential conflicts to a special committee comprised entirely of directors who are free of any conflict. However, the directors need to be truly free of conflicts or the committee will not provide any protection.
In the recent case of Southeastern Pennsylvania Transportation Authority v. Volgenau, a third party acquired a publicly traded company with a majority stockholder. This case is significant because it applied the conflict of interest analysis to this “going private” transaction, although the controlling stockholder was not initially part of the buying group. However, the controlling shareholder did in fact receive different consideration from the other stockholders in that he had agreed to roll over a substantial portion of his equity into the buying entity.
The core of the discussion was whether the special committee that had approved the transaction was in fact disinterested and independent. After the merger agreement had been signed, the chairman of the special committee expressed dissatisfaction over the “meager compensation” offered him for his special committee work and requested a $1.3 million special bonus, payable to charities he supported. The plaintiffs alleged that this request for a bonus, contingent upon the successful sale of the company, revealed a conflict of interest on the part of the chairman that undermined the independence of the special committee
The court eventually ruled that the bonus request did not tarnish the independence of the special committee. In particular, the court emphasized that the bonus was ultimately not granted to the chairman, and the chairman would not have personally benefited from the bonus even if it had been granted. However, in a strongly worded footnote, the court warned that such requests for contingent compensation can lead to abuse.
Doug concluded that the takeaway from the decision is that a significant bonus paid to a member of a special committee upon a successful deal — even if it arises after the fact — can destroy the independence of the special committee and call into question the fairness of the transaction.