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Special committees of independent, disinterested directors have been widely used by corporate boards to address conflicts of interests and reinforce directors' satisfaction of their fiduciary duties in corporate transactions since the wave of increased M&A activity in the 1980s. In 1988, The Business Lawyer published an article titled The Emerging Role of the Special Committee by one of this article's co-authors, examining the emerging use of special committees of independent directors in transactions involving conflicts of interest. At that time, the Delaware courts had already begun to embrace the emergent and innovative mechanism for addressing corporate conflicts. Now, after over thirty years of scrutiny by the Delaware courts, it is clear that the special committee is a judicially recognized (and encouraged) way to address director conflicts of interest and mitigate litigation risk. This article will examine the role of the special committee in the context of conflict of interest transactions, with a particular focus on transactions involving a change of control or a controlling stockholder, from a U.S. perspective (in particular, under the laws of the state of Delaware), and will briefly consider international applications of the concepts discussed. To this end, this article will examine recent case law developments, and compare the special committee processes at the heart of two high-profile Delaware decisions, and, finally, provide guidance to corporate practitioners on the successful implementation of a special committee process.
I. Introduction
Corporate transactions often involve conflicts of interest, presenting legal and business risks that require careful management by corporate counsel and outside legal advisors. This is particularly true in the context of high-stakes public company M&A transactions, where a failure to adequately address actual or potential conflicts of interest risks potential litigation, personal liability, and the inability to successfully complete the transaction on the terms agreed between the parties. Facing these risks, and with increased frequency, U.S. corporate boards have sought additional legal protection through the use of special committees of independent, disinterested directors for purposes of evaluating and negotiating transactions involving a change of control (or the complete takeout of a minority by an already controlling shareholder).
In the 1980s, the Delaware courts first began to embrace the use of special committees of independent directors as an innovative mechanism for addressing corporate...