The NY Times report on Microsoft's planned acquisition of Linkedin contains a phrase corporate lawyers hate to see:
Satya Nadella, the Microsoft chief executive, may have abandoned his prudent approach.
His $26.2 billion deal to buy LinkedIn could reinvigorate the software giant’s slipping grip on corporate computer systems and employee interactions. Paying a nearly 50 percent premium for a flawed business raises several red flags, however.
Numerous Delaware cases (mostly arising in the oversight context, of course) hold that independent directors will be liable for acting in bad faith only when they ignore alleged “red flags” that are “either waved in one’s face or displayed so that they are visible to the careful observer.” Rattner v. Bidzos, 2003 WL 22284323 at 13 (Del. Ch. 2003), quoting In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. 2003).
Of course, this is a different situation than those in the Caremark lineage. Here we have an acquisition with potential red flags. Acquirer boards are rarely sued in M&A cases and almost never lose. Yet, there have been some red flag cases in the M&A context.
As a result, before approving the deal, Microsoft's board would be well advised to explore such issues as:
- The 30% drop in LinkedIn's stock price since its high.
- Well-publicized warnings about slowing growth.
- The security breach.
- Microsoft's history of overpaying in acquisitions.
The worst thing a board--acquirer or target--can do in the M&A context is to just rubber-stamp the CEO's plans. When the financial press is warning that "Concrete indications of the deal’s financial benefits are in worryingly short supply," the board needs to be especially careful in conducting a deliberative process.
