Personal Liability of officer and directors in M&A transactions

Doron Afik, Esq.
September 15, 2010

A corporation can not usually grow over a short period as a result of its own activity only and therefore, when a complementary activity exists at another corporation and as a result of a merger both may profit (the merged corporation will provide more services to more customers and make more profits) it is likely that a merger and acquisition or transaction of purchase of all, or some of, the other corporate activities will be made.  Such corporations will usually retain the service of an attorney who specializes in mergers and acquisitions instead of the regular lawyer escorting them (if the corporation has a legal department it will supervise the work of the specialist but will not do the work itself) - such a transaction has many aspects relating to all aspects of law and business: including contract law, labor law, securities, taxes, real estate, corporate and antitrust law. A transaction of this sort has another aspect that those unfamiliar with the field tend to ignore: personal liability of directors and officers in respect of the merger itself if it is not carried out properly and in accordance with antitrust laws and sometimes liability due to violations that are already existing at the other corporation. For this reason, when the ordinary attorney of the corporation manages the transaction, it is at least advised that the directors hire an M&A specialist to review the transaction process and protect the directors.

For example, in a due diligence process made in a transaction in which we represented a company that was to invest in a factory we discovered that a significant part of the factory was build without a building permit and that the plant does not have a business license because the business license was on the name of the shareholder and not on the name of the company owning the factory.  After the merger the directors and officer could have found themselves under criminal proceedings due to both these offenses. In that case (due to other discoveries in the due diligence process) the client decided to withdraw from the transaction. In other cases, a specialist may find ways to protect the purchasing company and its officers by changing the structure of the transaction.  For example, in a case where our client was acquire two companies that managed a business together due to discovery of legal issues in one of the companies we recommended to change the structure of the transaction so that one company acquired all activities of the other and our client purchased on that one.

Among the laws imposing personal liability on officers and directors for offenses of the corporation one will find the antitrust law, planning and building laws, labor laws, laws dealing with pollution and other environmental issues and more. The common denominator of such laws is that they not only oblige the officer of the corporation to do everything possible to prevent an offense by the corporation or by any of its employees, but also establish a legal presumption that the officer violated the duty, unless the officer proves to have done everything possible to carry out such duties.

There are various means to avoid responsibility, such as an internal compliance programs (for that reason, for example, we are promoting for more than one client internal antitrust compliance programs) and certainly that a proper due diligence review and proper M&A agreement should be in place in case of a merger or acquisition transaction. To avoid liability in such cases it is advisable to consult an attorney specializing in the field, even if the corporation has its own legal advisor or even an internal legal department.