Last week, a Delaware court made a ruling that indicates CEOs may face increased oversight during mergers and acquisitions, says The Wall Street Journal.
The court ruled that although Delphi Financial shareholders will be able to vote on the company’s proposed takeover by Tokio Marine Holdings, Inc., the plaintiffs in the case will most likely be able to prove that CEO Robert Rosenkranz isn’t entitled to the high share price that he negotiated for himself during the deal.
The CEO holds 49.9% of the company in Class B stock and negotiated a payout price of $53.875 per share for himself. Other shareholders, however, who held Class A stock are only to get $44.875 per share. Shareholders are upset, as this deal may indicate a conflict of interest. They ask, how can a CEO make the best deal for the company when they can negotiate a low sale price for shareholders and a high share price for himself?
Even though the court didn’t stop a shareholder vote on the deal, it did indicate that Rosenkranz may not legally be entitled to his inflated share price.
The Journal interviewed governance author Nell Minnow who said that the ruling indicates that the court, “‘will no longer defer to the business judgement of boards that are hopelessly conflicted’ because of a too-powerful CEO.”
So what does this mean for the future of M&A deals?
Judges can rule what they like within the law. But a standard that states a director is compromised because his CEO is “too powerful” as Minnow states is a troubling one indeed. How does one judge a CEO is “too powerful” versus one that is just powerful enough or not powerful at all? What seems certain is that the “business judgment” rule that has been the cornerstone of corporate and governance law since the 1930s is being attacked, and who knows where this might lead.