Communicating with stakeholders is critical throughout the M&A process. Understanding to whom you need to talk and what their roles are is critical to the success of the deal. It can greatly affect the net outcome, how smoothly the transaction goes (or not), and the legal and financial risks you may incur by not following protocols.
There can be a variety of stakeholders involved in this process. Know who they are, what their roles are, and how to interact with them.
What is the role of the board of directors in an M&A transaction?
As the founder or CEO, you may end up getting the first real call, conversation, or pitch to sell your company. Despite your history with the company, it is important that you don't forget your new place in the organization.
When it comes to corporate law, most jurisdictions dictate that the executive team operates under the direction of the board. The board of directors governs. They decide the strategy and direction of the company. The management team, including the CEO, COO, CFO, and CIO, operates under their guidance and simply executes on their decisions.
That means you don't really get to have an opinion on an offer or price. By law, you are operating at the direction and on the decisions of the board. Otherwise, it wouldn't be much different than your CMO or customer service lead engaging in an M&A conversation with a larger competitor.
This can be a hard pill to swallow at first. It is hard to get your head around as a first time entrepreneur and founder who just threw yourself into this business, and all of a sudden you have investors, shareholders, and a board of directors.
It will make a lot more sense your second time around, when you are approaching building your organization more strategically, with the end in mind from the beginning.
Of course, in turn, the board of directors is serving at the pleasure of the shareholders with voting rights.
Typically, and depending on the jurisdiction governing the corporation, the approval of a merger or acquisition will require the unanimous approval of the board of directors or the majority of voting shareholders. The majority of votes may be differentiated by the majority of all voting shares, the majority of shares of each class, or the majority of votes at the meeting. (Another good reason for founders to create and hold super voting rights.)
This all applies to the buy side of the table as well.
In many cases, early-stage startups and their boards haven't yet developed a formal M&A or exit strategy and policies for it. This is something that will come along with a more mature company, one that is also making acquisitions of its own.
When it comes to making decisions, and especially M&A, the board of directors is governed by two implicit rules and protocols:
Directors have a fiduciary duty of loyalty to the company. This means operating in the company's best interest. It involves taking action and making deals, ensuring privacy, and protecting confidentiality. Although many founders may interpret “loyalty to the company” as the mission and founding vision and values, it is the other shareholders who are going to sue if they don't love the decisions made. So it really often comes down to a duty to the shareholders' desires and interests.
Then there is the duty of care. That means putting enough due care into ensuring that a proper acquisition process is carried out. It all comes down to due diligence. Your acquirer's thorough due diligence can seem like a real pain and overkill, but it is fulfilling their legal obligation to their company and shareholders.
During M&A discussions and transactions, the board has several special roles and jobs. If anything, the board members must go above and beyond to demonstrate and prove they are adhering to these two legal duties.
The board must weigh all potential options before accepting an offer in the form of an LOI, even if it is a great one. Options may include going public or raising new rounds of funding and remaining independent. It can also mean shopping around and soliciting other bids to ensure maximization of the price and returns for investors and shareholders.
The board should be involved in data-driven discussions on value and strategic fit. It is their job to set value expectations based on facts. They should understand the danger of high valuations with little rationale, how shaky that can make deals, and the problems it can cause internally when other shareholders start thinking too big.
In addition, be sure that shareholders don't sabotage a great deal because they are trying to hold out for too much money or have an unrealistic view of the value. At the same time, board members are also responsible for making sure the valuation of the company and any assets sold are not so overvalued that it could be considered fraud in the future.
After the closing, down the road, if the acquirer gets into financial trouble, or has trouble repaying any loans the company used to finance the deal, the buyer is going to claim there was fraud in the overvaluation of what the company paid for.
Management, and especially founders, are subject to unconscious bias. They are on the frontlines and in the trenches. They have lived with an extreme level of passion and optimism. They are also subject to the deepest swings in doubt and panic in a crisis. They may have the least experience at the big-picture level. They are much more likely to act emotionally rather than objectively, and that can be risky financially and legally. The board is there to temper these elements with their experience and wisdom.
On top of that, the board members need to prove their own objectivity in the process. This typically means forming special committees to evaluate and oversee this process, and outsourcing things such as valuation opinions to third parties who are able to think, research, and present objectively.
Experienced board members can bring a lot to the table when it comes to post-merger integration, and the strategy and tactics leading up to the closing that will determine how well the two companies will integrate.
Board members may also continue to play a role after the merger or acquisition. Harvard released a study1 on Fortune 500–level companies that stated that board members on the acquiring side stay on after the deal 83 percent of the time. Directors on the sell side stay on 34 percent of the time, and just 29 percent of external directors end up continuing with the company.
Investors can have a lot of sway in the M&A process, especially those who have put in a lot of money and have been given significant amounts of equity.
Most institutional investors will already have a seat on your board as part of the terms of their investment. They'll be among the first alerted to talks of a deal.
Eventually, all may have a vote. If you've chosen your investors well and your visions and time lines have remained aligned, you ought to be in agreement on handling any offers or selling the company. They should want what is best for the company, and if that is selling, then they should be on board.
Of course, they are also in the investment business. They invested with the expectation and hope of a certain level of return. Perhaps most important, they have an obligation to deliver on the returns they promised their limited partners.
They are going to be looking at the earnings multiples they will get back with this exit. In most cases, they will have negotiated multiples and preferences that will ensure they get paid first and best in the transaction.
In fact, when you agree to take their money, at least from professional angels and venture capitalists, you are really committing to delivering an exit for them. Of course, there can be disagreements and differences of opinion when it comes to selling—especially about the right time and price. Some may want to hold out for more. Private equity and strategic corporate investors may not want you to sell out, particularly if they view it as potentially detrimental to their own businesses.
When investors may not be part of the board, it pays to be prepared. It pays to be able to present well, to include the other options, and to prepare for potential future tangents, valuations, and the pros and cons of selling. There's also the question “Why now?” (or “Why not now?”). There's also the matter of which options best match what they signed up for or provide the best future, given the reality of the current situation and outlook.
Then, keep them appropriately updated on developments and upcoming votes. This may be by phone or email. Just make sure you keep information contained that you are required to keep confidential. Experienced investors will know the roller coaster and circus of going through an M&A deal. They will want to be looped in, but they should be able to handle the uncertainty more than you are prepared for.
Telling employees about offers and potential sales can be one of the major deal killers in M&A.
First, you can't control confidential information when you broadcast it across your organization. Second, although you want to be fully transparent with your team members, you can seriously jeopardize your whole business by leaking information prematurely.
You can throw their whole world into chaos. Once they start Googling terms about mergers and acquisitions, they'll mostly find information that makes them panic and become defensive. They'll feel they need to be proactive about securing another job or fighting for their stock options or benefits. Doing a good job at their daily tasks can quickly become the last thing on their minds, through no fault of their own. That can not only derail the deal but also be disastrous for the business you are left with when it falls apart.
As much as you love and trust them and want them to be there with you through the process, and to enjoy a great outcome, most advice about this is to wait as long as possible to tell most of your employees.
When it comes time to tell them, be transparent. Explain why this is the best move for the company and the benefits for them. Get their buy-in so that they will continue to help you power through.