Responsibilities of Directors Generally

1. BOARD OF DIRECTORS RESPONSIBILITIESPresentation To Ironwood Advisory ConferenceBuying and Selling a Company in a Tough EconomyHow to Optimize Price and Liquidity in a Buyer’s MarketRobert A. Miller, Jr.July 17, 2002UCLA Anderson School of Business

2. Responsibilities of Directors Generally • Duty of Care. • In general, the duty of care is the obligation of the directors to act on an informed basis after due consideration of the relevant materials and appropriate deliberation, including the input of legal and financial advisors. • Duty to maximize value of assets and not commit waste.

3. Responsibilities of Directors Generally - Duty of Care (cont…) • Duty of attention, i.e., requires Board to make reasonable inquiry – cannot abdicate responsibility or ignore facts. • Duty of Loyalty. • In order to prove that the board has not met its duty of loyalty, a plaintiff must show that members of the board have engaged in “self-dealing” transactions; however, a transaction between the company and a director is not automatically a breach of this duty.

4. Responsibilities of Directors Generally (cont…) • Business Judgment Rule. • The “business judgment rule” is a deferential standard of review with regard to decisions made by a company’s board of directors. Under the traditional business judgment rule, directors’ decisions are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

5. Responsibilities of Directors Generally - Business Judgment Rule (cont…) • In instances where the business judgment rule applies, the decisions of the directors are protected unless the plaintiff shows that the Board did not meet its duty of care or duty of loyalty.

6. Duties of Directors in Sale-Related Transactions • Enhanced Level of Scrutiny. Rather than applying the business judgment rule, courts may apply an enhanced level of scrutiny to the procedures followed and decisions made by a Board involved in a sale-related transaction. The courts require the Board to act in the manner that permits the members to receive the maximum immediate value for their stock.

7. Duties of Directors in Sale-Related Transactions (cont…) • Unsolicited Proposals. When confronted with an unsolicited offer to purchase any or all of the shares or assets of a company, the Board can either reject the offer, or take action and enter into negotiations in response to the offer. • Rejection. Directors have the right to reject unsolicited offers, subject to the duties of care and loyalty; however, the right to reject the

8. Duties of Directors in Sale-Related Transactions - Unsolicited Proposals (cont…) offer may be impacted by the value and composition of the offer. • Acceptance/Negotiations. If the directors decide to take action with respect to an unsolicited offer, they will be held to a different standard of care. • Placing a company “in play” results in the loss of the protections afforded by the business judgment rule.

9. Duties of Directors in Sale-Related Transactions - Acceptance/Negotiations (cont…) • Directors must take an active role in ensuring that proper procedures are followed with respect to the offer, including proper notice and discussion of the transaction, advice from outside advisors, and arms-length negotiations.

10. Duties of Directors if the Company is “In Play” • Triggering Events. Following are typical situations that will cause the corporation to be considered “in play,” thereby triggering additional duties of the directors. • Inevitability of Break-Up. Where the break-up or sale of a corporation is inevitable, such as the announcement of an anticipated merger or sale, such an event will be deemed to put the corporation “in play.”

11. Duties of Directors if the Company is “In Play” - Triggering Events (cont…) • Change of Control. The transfer of a majority of the shares of the corporation to an individual, an entity or a cohesive group, none of whom were in control prior to the transfer, places the corporation “in play” because the corporate strategy of independence has changed, and the shareholders have suffered a reduction in voting power.

12. Duties of Directors if the Company is “In Play” (cont…) • One or Few Bidders. In one bidder situations, the duty of the Board of Directors is to determine whether the proposed offer represents the highest value, or best reasonably available value, the members could likely receive.

13. Duties of Directors if the Company is “In Play” - One or Few Bidders (cont…) • If the Board cannot make this determination, it should at least conduct a survey of the market, and possibly an auction to solicit other bids. • In the case of a single bidder, the Board will be required to make a recommendation as to the desirability of accepting the proposed transaction.

14. Duties of Directors if the Company is “In Play” (cont…) • Multiple Bidders. If additional bidders come forth, the duty of the Board is to achieve the highest share price reasonably available. • The Board will still be required to make a recommendation.

15. Procedural Considerations Involved in Sale-Related Transactions • Good Corporate Governance. In considering a sale-related transaction, the Board must make every effort to exercise prudence and follow good governance procedures, including seeking advice from outside advisors, reviewing all pertinent documents, engaging in adequate discussions regarding

16. Procedural Considerations Involved in Sale-Related Transactions - Good Corporate Governance (cont…) the transaction, and documenting all Board procedures and meetings in the minutes. The rationale for the Board’s ultimate decisions should be clearly reflected in the minutes. The Board should request an opinion from a qualified independent advisor regarding the fairness of the transaction to the company and the stockholders, from a financial point of view.

17. Procedural Considerations Involved in Sale-Related Transactions (cont…) • Disinterested Directors. The Board should make every effort to ensure that its members have no personal pecuniary interest in the transaction at hand. In the event that one or more directors have an unavoidable personal interest in the matter, the Board should follow the procedures set forth for approving interested director transactions.

18. Special Committees • Authorization of Special Committees. • The board may, by resolution, authorize and appoint various committees to serve the board, including a special committee to consider a sale transaction.

19. Special Committees (cont…) • Use of Special Committees. • Use Special Committees to protect the interests of shareholders when interests of the directors differ substantially from those of the shareholders, or when practical issues dictate. • Although Special Committees are not legally required except in limited circumstances, it is helpful to have such a committee in order to more clearly establish that the Board acted in

20. Special Committees - Use of Special Committees (cont…) good faith with regard to the immediate transaction. • Role of Special Committees. • Special Committees should play an active role and have real negotiating power, and be prepared to make a reasonable recommendation to the Board regarding the transaction after evaluating all the alternatives.

21. Special Committees (cont…) • Characteristics of Special Committee Members. • The members of the Special Committee should be disinterested, and have the power to choose legal and financial advisors.

22. Special Situation: The Insolvent Corporation • To Whom do Directors’ Duties run? In a solvent corporation, duty and value are at the same level and run to the same constituency. Recent case law has tried to make duty follow value. • Duty to Creditors. There is clearly some duty owed to creditors, at least duty of care, subject to the business judgment rule.

23. Mitigation of Directors’ Liability • Certificate of Incorporation. The elimination of monetary damages against Directors to the maximum extent permitted by law. • Bylaws. Indemnification and advancement of expenses, mandatory or discretionary, to the maximum extent permitted by law.

24. Mitigation of Directors’ Liability (cont…) • Indemnification Agreements. • Directors’ and Officers’ Liability Insurance.

25. Recent Government and Exchange Initiatives Relating to Corporate Governance, Disclosure and Accounting 1. Form 8-K Disclosure of Certain Management Transactions (SEC Release Nos. 33-8090; 34-45742; April 12, 2002)

26. Recent Government and Exchange Initiatives Relating to Corporate Governance, Disclosure and Accounting (cont…) 2. Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports (SEC Release Nos. 33-8089; 34-45741; April 12, 2002) 3. Disclosure in MD&A about the Application of Critical Accounting Policies (SEC Release Nos. 33-8098; 34-45907; May 10, 2002)

27. Recent Government and Exchange Initiatives Relating to Corporate Governance, Disclosure and Accounting (cont…) 4. Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date (SEC Release Nos. 33-8106; 34-46084; June 17, 2002) 5. Certification of Disclosure in Companies’ Quarterly and Annual Reports (SEC Release No. 34-46079; June 17, 2002)

28. Recent Government and Exchange Initiatives Relating to Corporate Governance, Disclosure and Accounting (cont…) 6. SEC Press Release 2002-91 on Proposal to Establish the Framework for a “Public Accountability Board”; June 20, 2002 7. Nasdaq Corporate Governance Rulemaking Proposals; June 5, 2002

29. Recent Government and Exchange Initiatives Relating to Corporate Governance, Disclosure and Accounting (cont…) 8. New York Stock Exchange Board Report of the Corporate Accountability and Listing Standards Committee; June 6, 2002 9. President Bush’s New Enforcement Initiatives; July 9, 2002