The importance of context when evaluating the need to establish
a special committee
In a recent bench ruling in Re Plains Exploration, the
Delaware Courtheld that a special committee was not required to
take the lead in merger negotiations in circumstances where almost
all of the members of the board were independent and free from
conflict in connection with the transaction.
In Re Plains Exploration, the Delaware Court denied the
plaintiff shareholders' request to enjoin a merger between
Plains Exploration & Production Company and Freeport-McMoRan
Copper & Gold even though the Plains' board (a) did not
shop Plains before agreeing to merge with Freeport, (b) did not
conduct a "pre" and "post" market check, and
(c) allowed the Plains' CEO to lead negotiations with Freeport,
who then agreed to retain the CEO post-closing.
Among other things, the plaintiffs argued that the Plains'
board breached its fiduciary duties by not creating a special
committee to lead the merger negotiations with Freeport. On the
necessity of a special committee in the circumstances, the Court
"The formation of a special committee can
serve as "powerful evidence of fair dealing," but it
is not necessary every time a board makes a
decision. ... the Plaintiffs have not come close to
demonstrating that [the CEO] dominated and controlled the Board.
Where, as here, seven of the eight directors on the Board
are independent and disinterested, the need to establish a special
committee was obviated. Thus, under the circumstances, the
Board's decision not to form a special committee was
reasonable." p. 13 of transcript, Consolidated C.A.
No. 8090-VCN (our emphasis)
The holding in Re Plains Exploration seems consistent
with Canadian jurisprudence. Although in a different context, in
Maple Leaf Foods Inc. v. Schneider Corp., the Ontario
Court of Appeal dismissed allegations that the Special Committee
failed to consider whether the CEO had any conflict of interest as
he conducted negotiations with prospective bidders, noting:
The Special Committee had no prior experience in dealing with a
take-over bid and did not have the in-depth knowledge of Schneider
that [the CEO] did. It was therefore appropriate for the Special
Committee not to conduct the negotiations with potential bidders
directly...The evidence supports the conclusion that the members of
the Special Committee acted independently in the sense that they
were free to deal with the impugned transaction on its merits. 1998
CanLII 5121 at para. 58 (ON CA)
Three quick takeaways
A court will be reluctant to second-guess strategic
decisions made by an independent and disinterested board of
directors in good faith.
A board should consider establishing a special committee to
minimize actual or perceived conflicts of interest, particularly in
circumstances where shareholders may reasonably expect one.
Under Delaware law, a special committee may not be necessary if
most of the board is independent and disinterested, and there is no
evidence that any members of management on the board dominated or
controlled the board. It remains to be seen whether Canadian courts
will follow this approach but there is little reason to expect a
different outcome in Canada on this particular point.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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