10 Tips for Forming Special Committees of the Board: The Year in Governance

This is the tenth installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.

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Special Committees of the board of directors serve an important governance function by preserving the integrity of the decision-making process when potential conflicts of interest arise or a director’s independence may be compromised. The effectiveness of Special Committees depends on appointing the right directors and establishing a thoughtful process. Here are ten tips to think about when forming a Special Committee.

1. Purpose. Special Committees are often formed when there is a potential conflict of interest or for matters that require a specialized focus. Composed of a subset of the board, these committees assume special duties for a limited duration, with the goal of creating an unbiased decision-making process. Example topics addressed in Special Committees include transactions involving a controlling shareholder, investigations of management’s conduct related to violations of the company’s code of conduct, or an unplanned CEO succession.
2. Formation and Authority. Special Committees are typically formed through delegation by the board in accordance with state corporation laws, organization bylaws, and other corporate governance documents. Responsibilities should be properly delegated and memorialized. Note that there are certain responsibilities that are nondelegable under state law, including authorizing dividends, issuing stock, and amending or repealing bylaws.
3. Who, When, What. Three threshold topics to consider with forming a Special Committee are (a) who should be on the Special Committee, (b) when they should meet, and (c) what will be discussed. These three considerations are interconnected. The right committee members will influence the meeting structure; the meeting structure will depend on the anticipated discussions; and the anticipated discussions will inform who should be included on the committee, with independence as a critical consideration. Strategic alignment across these three dimensions is crucial for the committee’s effectiveness and credibility. A Special Committee related to CEO succession will likely require a more significant time commitment than one focused on a related-party transaction.
4. External Advisers. Depending on the topic, it’s common for Special Committees to retain external advisers, including financial experts, outside counsel, and public relations firms. Independence is also a critical component when selecting advisers. While prior relationships with the company or the company’s directors and officers can be helpful in general engagements, it may be harmful when looking for an unbiased perspective.
5. Intentional Process and Recordkeeping. Actions of a Special Committee are often heavily scrutinized. Given this, it’s imperative to be intentional in the process of setting up the committee, ensuring proper communications, thoughtful materials, and independent advice. Be sure to keep not only records of the committee meetings (in the form of minutes) but also records related to committee membership determination, committee communications, and vetting of external advisers.
6. Committee Competence. Courts consider the composition of a Special Committee to be of central importance. Remind committee members that they have the same director fiduciary responsibilities when they sit on a Special Committee as in the rest of their board service. In fact, decisions made by a Special Committee can have a higher risk of being subject to litigation. Committee members should have relevant expertise and experience related to the matter at hand, so their participation is not questioned. And don’t discount the importance of good working relationships: mutual respect among the Special Committee members is essential to foster open dialogue, constructive debate, and collaborative decision-making.
7. Compensation. Consider the time and effort both during the Special Committee meetings and the homework required throughout the process. It’s common to provide directors with additional fees above their regular director compensation, either in the form of flat fees or meeting retainers. The chair of the Special Committee may receive additional compensation given the additional leadership responsibilities. It’s helpful to discuss compensation consideration with outside advisers to minimize any appearance of conflict.
8. Standard of Review. Decisions by the board of directors are typically reviewed under the business judgement rule where the assumption is that they acted in good faith, on an informed basis, and in the best interest of the company and shareholders. Courts have applied a higher standard of review, the entire fairness standard, if it appears that a director is conflicted in the decision-making process. However, creating a Special Committee in which the conflicted director is excluded from the process can shift the standard of review back to the more deferential business judgment rule.
9. No Charter, Typically. Unlike standing committees of the board, Special Committees of the board do not often have charters. Instead, the rules and responsibilities are determined by the board through delegation, and the members of the committee are appointed by the board through a formal approval process ensuring consideration of any conflicts. The delegation of authority should also provide clear direction on the use of external advisers and additional compensation.
10. Communications and Interactions. Provide clear guidelines related to interactions among the members of the Special Committee, its advisers, and the board to protect the independence of the Special Committee. The Special Committee should avoid interactions with conflicted directors or members of management on matters in the purview of the Special Committee unless necessary. These guidelines should be communicated to all participants in the process. Maintaining clear boundaries in communications and interactions protects the decision-making process by ensuring objectivity.

The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.