All the great analysis and advice in this post notwithstanding… there is at least some poetic justice in the fact that the Mindbody transaction — software to manage gyms and yoga studios — occurred right before the COVID lockdown! 😉
Very good analysis. I would just emphasize the need to rely on independent advisors where the Board is conflicted and a transaction will only or primarily benefit the holders of preferred stock. There are instances where a sale at a price that does not provide proceeds to the holders of common stock is the best alternative, e.g. where the company would need to raise further capital and no one wants to provide it, and that can be saved by a good process.
100%. Sometimes common stockholders should get zero, but the risk of lawsuits is certainly raised. Documenting your process of considering all alternatives and getting non-conflicted party buy in is also critical to avoid legal pain
The part nobody writes about is the dinner. The one where the VC director and the CEO agree on the narrative before the board even convenes. The conflict of interest is not a legal technicality. It is the operating system. I have watched boards run M&A processes where the outcome was decided before the first slide was presented. The fiduciary duty exists on paper. In practice, it bends toward whoever controls the room and the relationship with the buyer.
Six out of seven board members conflicted. That is not a governance failure. That is a governance fiction. The entire construct of independent oversight was a performance from the start. And the detail about the CEO already having a relationship with the acquiring PE firm tells you everything. The sale was agreed in principle long before any formal process began. The process existed to create a paper trail, not to protect shareholders. Boards that want to avoid this outcome need to ask one question at every material transaction: who in this room benefits from a specific result. If the answer is most of the room, you do not have a board. You have a syndicate.
I do believe most CEO and CFO as well as directors in startups received serious precious funding level are insured at the Company’s cost against potential legal claims. These protections are harmful.
All the great analysis and advice in this post notwithstanding… there is at least some poetic justice in the fact that the Mindbody transaction — software to manage gyms and yoga studios — occurred right before the COVID lockdown! 😉
The requirement to chart all potential paths likely did not anticipate a global pandemic that would cause people to stay far away from gyms :)
Boards don’t break when things are going well.
They break when outcomes stop being shared.
That’s when incentives quietly diverge—and decisions start looking rational to insiders and unfair to everyone else.
Very good analysis. I would just emphasize the need to rely on independent advisors where the Board is conflicted and a transaction will only or primarily benefit the holders of preferred stock. There are instances where a sale at a price that does not provide proceeds to the holders of common stock is the best alternative, e.g. where the company would need to raise further capital and no one wants to provide it, and that can be saved by a good process.
100%. Sometimes common stockholders should get zero, but the risk of lawsuits is certainly raised. Documenting your process of considering all alternatives and getting non-conflicted party buy in is also critical to avoid legal pain
The part nobody writes about is the dinner. The one where the VC director and the CEO agree on the narrative before the board even convenes. The conflict of interest is not a legal technicality. It is the operating system. I have watched boards run M&A processes where the outcome was decided before the first slide was presented. The fiduciary duty exists on paper. In practice, it bends toward whoever controls the room and the relationship with the buyer.
Six out of seven board members conflicted. That is not a governance failure. That is a governance fiction. The entire construct of independent oversight was a performance from the start. And the detail about the CEO already having a relationship with the acquiring PE firm tells you everything. The sale was agreed in principle long before any formal process began. The process existed to create a paper trail, not to protect shareholders. Boards that want to avoid this outcome need to ask one question at every material transaction: who in this room benefits from a specific result. If the answer is most of the room, you do not have a board. You have a syndicate.
I do believe most CEO and CFO as well as directors in startups received serious precious funding level are insured at the Company’s cost against potential legal claims. These protections are harmful.