The following is not meant to be legal advice.
In In re Netsmart Technologies, Inc., Shareholders Lit., management presented the board with three options: remain independent, strategic sale, or sell to a private equity firm. The court found that the presentation was weighted in favor of a private equity transaction. After the meeting, management's focus on a going-private option strengthened. For those now aware, generally when engaged in a going-private transaction, management may be asked to stay with the company after the transaction and receive incentives for doing so. This may be less so in other strategic options where management may lose their jobs. A board in such circumstances should consider analyzing options outside the presence of management and recognizing that management's interests may be different than those of the public shareholders.
The court found that the Netsmart board's decision to exclude possible strategic buyers from the list of parties potentially interested in acquiring the company violated the board's duty of care. The company also failed to prepare and approve minutes of board meetings in a timely fashion, but the court did not prevent the deal from closing. The court, instead ordered further disclosures and then allowed the company's shareholders to decide whether or not the transaction was acceptable.
The court’s decision should awaken board members to become more aware of how in a sale of a company they must make a reasonable effort to inform themselves about the company's value. This includes informing themselves about the market and understanding the options available to the company.
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