United States: Financial Advisor Conflicts Update

Recently, the Delaware Court of Chancery has examined financial advisor conflicts in the mergers and acquisitions context and emphasized in various opinions that although financial advisors play a valuable role, disclosure of potential conflicts is crucial. This newsletter examines recent Delaware cases focused on financial advisor conflicts in the areas of stapled financing, contingent fee arrangements, prior work and the financial advisor's interest in the transaction, and concludes with some recommended best practices.

In recent cases the Delaware Court of Chancery has increasingly scrutinized financial advisor conflicts in the mergers and acquisitions context. The court has emphasized in various opinions the sentiment that financial advisors play a valuable role, but that disclosure of potential conflicts is crucial and, in the Atheros decision (discussed below), specifically stated financial advisors "serve a critical function by performing a valuation of the enterprise upon which its owners rely in determining whether to support a sale. Before shareholders can have confidence in a fairness opinion ... the conflicts and arguably perverse incentives that may influence the financial advisor in the exercise of its judgment and discretion must be fully and fairly disclosed."

This newsletter examines recent Delaware cases focusing on financial advisor conflicts in the areas of stapled financing, contingent fee arrangements, prior work and the financial advisor's interest in the transaction, and concludes with some recommended best practices.

Stapled Financing

In February 2011 the court halted a stockholder vote on the proposed buyout of Del Monte Foods Company because it found that the merger agreement between Del Monte and a group of private equity firms resulted from collusion between Del Monte's financial advisor and those firms in In re Del Monte Foods Company Shareholders Litigation. Vice Chancellor Laster criticized the financial advisor for its conflicting roles in bringing together competing bidders, thus limiting the competition, and seeking to provide buy-side financing while simultaneously acting as the financial advisor assisting the board of Del Monte in its potential sale. Del Monte's board of directors allowed the financial advisor to run the 45-day go-shop process, despite the advisor's expectation of earning a fee for providing financing in the deal. The financial advisor stood to earn $21 million to $24 million from the financing and approximately $23 million for its advisory role, and Del Monte paid an additional $3 million by engaging another financial advisor to provide a second opinion.

The court enjoined the stockholder vote for 20 days and found that Del Monte's board of directors breached its fiduciary duty of care to stockholders even though the court found that the board was misled by the financial advisor. "Although the blame for what took place appears at this preliminary stage with the [financial advisor], the buck stops with the Board," the court stated, and emphasized, "[T]he role of outside, independent directors becomes particularly important because of the magnitude of a sale of control transaction and the possibility, in certain cases, that management [and here I add other contingently compensated professionals like investment banks] may not necessarily be impartial."

Del Monte follows a 2005 decision by then-Vice Chancellor Strine criticizing the board of Toys "R" Us for creating "an appearance of impropriety" by allowing its financial advisor to finance the winning bidder of the company. In that opinion, however, Strine also noted in a footnote that he was not making a bright-line statement and could "imagine a process when a board decides to sell an entire division or the whole company, and ... obtains a commitment from its financial advisor to provide a certain amount of financing to any bidder, in order to induce more bidders to take the risk of an acquisition," that would be wholly consistent with the best interests of the primary client company.

Contingent Fee Arrangements

In 2007, in Globis Partners v. Plumtree, the court dismissed inter alia plaintiffs' claims that the defendants breached their disclosure obligations pursuant to a merger between two software companies by failing to provide details about their financial advisor's compensation in the proxy statement to stockholders. Specifically, that such compensation was partially based on the successful completion of the merger. The proxy statement stated the financial advisor's fees were "customary" and partially contingent, with no further details. Vice Chancellor Parsons found that without an "allegation of exorbitant or otherwise improper fees, there is no basis to conclude the additional datum of the [advisor's] actual compensation, per se, would significantly alter the total mix of information available to stockholders."

In contrast, in March 2011, in In re Atheros Communications, Inc. Shareholder Litigation the court enjoined the target, Atheros Communications, Inc., from holding a stockholders meeting to approve a merger with Qualcomm, Inc. pending curative proxy disclosure of the amount of contingent fees to be paid to the financial advisor, among other issues. Like Globis, the original proxy statement did not disclose the exact amount of the financial advisor's fee nor the exact percentage of the fee that was contingent upon closing of the merger. The proxy statement did state, as many that are not reviewed by the U.S. Securities and Exchange Commission (SEC) do, that the financial advisor would "be paid a customary fee, a portion of which is payable in connection with the rendering of its opinion and a substantial portion of which will be paid upon completion of the [m]erger." The financial advisor was to be paid a flat fee, of which approximately 98 percent was contingent upon the closing of the transaction. Though declining to announce a bright-line rule, Vice Chancellor Noble reasoned "it is clear that an approximately 50:1 contingency ratio requires disclosure to generate an informed judgment by the shareholders as they determine whether to rely upon the fairness opinion in making their decision to vote for or against the [t]ransaction." Also, the amount of fees paid to the financial advisor was required to be disclosed.

Prior Work

In December 2010 the court enjoined the acquisition of Art Technology Group, Inc. (Art) by Oracle Corporation, requiring the financial advisor to Art to disclose a description of the type of services it had performed for Oracle and the aggregate compensation paid by Oracle to the financial advisor for the prior four years in In re Art Technology Group, Inc. Shareholders Litigation. Such enhanced disclosure exceeds the disclosure requirements of 1015(b)(4) of Regulation MA under the Securities and Exchange Act of 1934, which requires disclosure of material relationships in the past two years between the financial advisor and the parties, and any compensation received as a result of that relationship, and the two-year look-back period required by FINRA Rule 5150. Vice Chancellor Laster enjoined the merger for 10 days while the disclosures were made in a public filing with the SEC.

In a ruling from the bench in April 2010, the court denied a preliminary injunction motion seeking to block a merger between Zenith National Insurance Corp. and Fairfax Financial Holdings Ltd. based on inter alia allegedly inadequate disclosures regarding the financial advisor's work for both sides. While the proxy disclosure regarding the advisor's role in advising Fairfax on an unrelated engagement before the Zenith deal was disclosed along with the total compensation received, the disclosure did not mention that the "day-to-day" banker advising Zenith on the Fairfax transaction was the same person who represented Fairfax on the earlier engagement. Vice Chancellor Laster reasoned that in large investment banking firms the implication is the same professionals are not working on both sides of the transaction. The court ultimately found that due to a number of factors—including the fact that this was an all-cash merger between unaffiliated parties, the advisor was not directly involved in negotiations and no one took the deposition of the particular banker in question, which the court viewed as a "critical omission"—that the additional disclosure would not be material nor required. In stressing that this was a "very close issue," the court stated that "nobody should cite this transcript as saying 'Court of Chancery blesses same banker working for target side, having six months ago worked for bidder side.'"

Financial Advisor's Interest in the Transaction

The court granted a preliminary injunction in 2008 based on inadequate disclosures regarding the nature and amount of the financial advisor's interest in the success of an acquisition of a software company in David P. Simonetti Rollover IRA v. Margolis. The proxy statement disclosed that, as of the date of the financial advisor's opinion, the advisor and its affiliates held convertible notes and warrants in the company. Upon consummation of the merger, the advisor would be entitled to cancellation payments relating to the warrants and the conversion value and certain make-whole payments relating to the notes. Requiring the benefits to the advisor to be disclosed, Vice Chancellor Noble stated, "it is imperative for the stockholders to be able to understand what factors might influence the financial advisor's analytical efforts. ... It is not simply the magnitude of the [financial advisor's note and warrant] holdings, but how those obligations will be treated as a result of the [m]erger."

Financial advisor conflicts have also threatened to derail the recent proposed $38 billion buyout of rival El Paso Corporation by Kinder Morgan Inc. In El Paso Corp. Shareholders Litigation, plaintiffs' lawyers alleged El Paso's financial advisor improperly stood on both sides of the deal because it advised El Paso while its affiliates held a 19 percent stake in Kinder and had two representatives on the Kinder board. El Paso's board accepted Kinder's bid of $25.91 per share, which represented a 37 percent premium to shareholders, but plaintiffs' lawyers argued that was inadequate. The financial advisor's "conflict of interest was obvious from the outset: With a stake in [Kinder] worth over $4 billion, every dollar shaved off the buyout price represented approximately $150 million of savings" for the financial advisor, plaintiffs' lawyers stated in a February 3, 2012, court filing. In its defense, the financial advisor stated in court filings it took "reasonable measures" to mitigate any conflicts, including disclosing its stake in Kinder, having its affiliates' directors recuse themselves from considering the deal and having bankers from a separate financial advisory firm also serve as financial advisors to El Paso. Plaintiffs' lawyers contend this was not enough and that the financial advisor still steered the El Paso directors toward the sale instead of the alternatives of remaining independent or spinning off El Paso's exploration and production business. On February 29, 2012, Chancellor Strine declined to issue an injunction, but did indicate he was concerned in general about the deal process, and in particular about the financial advisor's alleged conflicts, and allowed the possibility of the plaintiffs continuing to pursue the case to seek monetary damages.

Recommended Best Practices

In general, concerns regarding conflicts may arise when the financial advisor has potential incentives outside of the transaction in question. For example, in the sale of a company, its sell-side investment bank could be perceived to favor a leveraged buy-out due to relationships with management or a sale to another client of the investment bank. The investment bank could also be perceived to favor a private equity fund or a particular strategic buyer that requires financing. Conversely, on the buy-side, a contingent fee structure could create what may be perceived as incentives for the financial advisor to encourage its client to overpay for a target, and the more heavily weighted the contingent fee, the greater the potential perceived conflict.

In order to solve or mitigate such conflicts, different steps may be taken. The sell-side investment bank may be restricted from having any role in financing, and an additional or separate financial advisor (whose fees may be credited to the success fees owed to the initial financial advisor) could be hired to provide an independent opinion, to advise on the sale process or to run the go-shop process, if one is used. The buy-side investment bank's fee structure could be revised so it is less contingent on completion of the sale and the buy-side investment bank may similarly be restricted from having any role in financing.

If a financial advisor has existing or prior relationships with the target or the acquiror, there may be similar potential concerns over the financial advisor's impartiality and confidentiality. These may be mitigated or solved by the financial advisor disclosing prior and existing engagements with the counterparty, obtaining the consent of the company's board of directors to act as financial advisor in light of such disclosures and/or establishing ethical walls to ensure the financial advisor's deal team is not exposed to information from previous engagements. Still, ethical walls may be of limited usefulness. For example, despite establishing such ethical walls, the role of the financial advisor in El Paso was still subject to challenge.

When a financial advisor is advising on the fairness of the consideration changing hands in a transaction, the role of, and the fees received by, the financial advisor should be carefully structured so that the financial advisor is as ambivalent to the ultimate outcome of the transaction as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions