The new takeover code notified by the Sebi on September 23, 2011 has brought about various changes in the extant law aimed at benefitting shareholders. An important provision, which has been drafted, is the obligation of the board of directors to constitute a committee of independent directors to provide reasoned recommendations regarding the open offer to the company.

According to the proviso to Regulation 26(6), such a panel can seek "external professional advice" for making their recommendations. The code doesn't provide guidelines in the form of such a statement or the relevant factors for arriving at the same.

In the US, the takeover bids or tender offers are governed by the Williams Act amendments to the Securities Exchange Act, 1934. The target board is under an obligation to publish to its shareholders, a statement recommending the acceptance or rejection of the bid, within a period of 10 days. In such situations, the directors must exercise due care, and act honestly and in good faith.

The board's decision-making process must be reasonable under the circumstances and must enable and be seen to enable informed decisionmaking by the directors. By exercising their fiduciary duties diligently, a target's directors will help protect the company and themselves against litigation.

Under the business judgment rule, courts will generally look for evidence that directors have acted (i) on an informed basis (ii) in good faith; (iii) in a manner they reasonably believe to be in the best interest of the company; (iv) without fraud or self-dealing. The decision of the Supreme Court of Delaware in Smith Vs Van Gorkom highlights the potential liability which the directors face when they ignore their fiduciary and relevant statutory duties. In this case, the offer pertained to a leveraged buyout merger of TransUnion.

Defendant Jerome W Van Gorkom, TransUnion's chairman and CEO, chose a proposed price of $55 without consulting outside financial experts and the decision of the board was made in haste. In these circumstances, the approval by the board was described as grossly negligent and in breach of duty of care which they owed to the shareholders.

The directors agreed to pay $23.5 million as damages. In the US, Schedule 14D-9 of the Securities and Exchange Act, 1934 prescribes the format for the recommendations to be filed by the target board. Some of the points, which have to be included in the statement, are (i) basic and financial information about the company,(ii) all material information about the person (s) filing the statement, (iii) past contacts, transactions, negotiations and agreements which might have a bearing on the proposed transaction, (iv) solicitation or recommendation along with reasons, (v) interest of the filing person in securities of the target company.

In order to avoid any conflict situations, and to demonstrate reasonable business judgement, target directors obtain fairness opinions before the completion of these transactions, although not expressly required by the law.

A fairness opinion is a document that comments on the creditability of the transaction and the consideration payable in the transaction. Such an opinion is made from a financial point of view. Fairness opinions serve two purposes (i) to provide key decision-makers with information which may affect their analysis of the transaction and (ii) to serve as evidence in litigation that the decision-makers used reasonable business judgment in approving a transaction. (Economic Times)