POLITECNICO DI TORINO

BUSINESS LAW SEMINAR 2021

M&A transactions and role of independent directors

Mary is a non-executive director of ABC Media Ltd, a successful medium sized listed company. The
CEO has recently devised a plan to combine the company with XYZ Media Ltd. another media
business to increase market share and create a “champion” in the media industry. The deal will be
very expensive and will drive the company into high levels of debt. The CEO has also told the board
that he has a substantial shareholding in XYZ Media.

There will no doubt be criticism from the media and from some shareholders who would rather see
profits returned to shareholders as dividends rather than engaging in this M&A transaction. In light of
these factors, the Chairman has requested that a due diligence committee inside the board be
established to ensure that the transaction will provide long term benefits to shareholders. The
Chairman also wants to ensure that any litigation against the board would attract the business
judgment rule defense.

As a non-executive director, Mary has been asked to serve on the due diligence committee with 2
other non-executive board members. Complete the following tasks:

1. What are the litigation risks to the company and board, from shareholders and creditors if the deal
results in excessive debt?

2. What steps could the board take to ensure that they obtain the protection of the business judgment
rule in respect of the decision to pursue the combination?

3. How would you recommend to address the issue related to the substantial shareholding of the CEO
in XYZ Media?