A Governance Solution to Prevent the Destruction of Shareholder Value in M&A Transactions

15 Pages Posted: 23 Jan 2019 Last revised: 20 May 2019

See all articles by Stephen L. Weiss

Stephen L. Weiss

Short Hills Capital Partners, LLC / weiss advisory partners llc

Date Written: May 17, 2019


This paper introduces a preventative solution to the unjust enrichment of insiders and acquirers at the expense of minority shareholders upon the acquisition of a company, a circumstance occurring with alarming frequency. The proposed initiative advocates for creating the position of an Independent Shareholder Monitor (“Monitor”) to observe compliance with acceptable standards of corporate governance by a Board of Directors upon embarking on a process that could reasonably lead to a material event susceptible to meaningfully and permanently impacting shareholder value such as the sale or merger of a company. The Monitor’s observations, codified in a report appended to the proxy, will provide much needed transparency into the actions undertaken by the Board, empowering the shareholder with the knowledge to execute a proxy ballot on a fully informed basis. Cognizant that the Monitor’s report will be a complete factual representation of the Board’s actions rather than a partial or biased narrative drafted by advisors devoid of fiduciary responsibility, the measure will drive adherence among investee companies to the tenets of strong corporate governance thereby curing any deficiencies in events leading to the change of control.

Upon commencement of discussions in contemplation of a change of control, the Board will confidentially request the assignment of a Monitor from a third party firm charged with recruiting and maintaining a database of qualified individuals pre-approved by a consortium of institutional fund managers. The existence of the Monitor will be revealed contemporaneously with the announcement of a transaction. The Monitor’s fee will be absorbed by the company creating a cost efficient and effective solution for enhancing engagement at the most critical point in a fund’s tenure as a shareholder. Although the majority of Boards aptly perform their fiduciary responsibilities, collectively within a portfolio the increasing incidence of poor governance can meaningfully influence investment returns. Left unchecked, the compounding effects of poor governance will negatively impact fund managers, investors and capital markets in a meaningful way. Rather than viewing this initiative as intrusive, it should be embraced by a Board of Directors as a preventative measure against potential litigation challenging aspects of the merger, particularly those alleging conflicted behavior or a deficient process. The impetus for a Board to comply with this initiative will be the following inclusion in the institutional manager’s proxy voting guidelines:

Upon commencement of discussions that may reasonably lead to the sale or merger of the company, we request that the Board of Directors retain an independent shareholder monitor to observe compliance with acceptable principles of corporate governance. We will weigh compliance with this guideline in executing our proxy at the Special Meeting and when considering electing members to the Board in the event the company remains independent.

Keywords: proxy, shareholder, conflict of interest, minority shareholder, proxy vote, governance, ESG, M&A, acquisition, engagement, passive

JEL Classification: G10, G30, G34, G39, K22

Suggested Citation

Weiss, Stephen, A Governance Solution to Prevent the Destruction of Shareholder Value in M&A Transactions (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=3317584 or http://dx.doi.org/10.2139/ssrn.3317584

Stephen Weiss (Contact Author)

Short Hills Capital Partners, LLC / weiss advisory partners llc ( email )

343 Millburn Avenue
Ste 204
Millburn, NJ 07041
United States
9735471010 (Phone)

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