United States: Financial Advisory Update (December 2013)

Novel theories by plaintiffs' lawyers need to foster novel approaches by M&A lawyers.

A number of recent cases highlight the increasing risks for financial advisors and the lawyers who represent them. Financial advisors, and the lawyers who represent them, should be cognizant of these recent developments and heed their lessons as they work on transactions.

1. Rural/Metro

In a case awaiting decision in the Delaware Court of Chancery, Rural/Metro Corp. stockholders are suing the company's initial financial advisor on a theory of aiding and abetting the Rural/Metro board's breach of its fiduciary duties. Both the company's second financial advisor involved in the deal as well as the Rural/Metro board settled without admitting or denying any wrongdoing, leaving the initial financial advisor as the sole defendant. Financial advisors should be aware of this case because any success on the part of the plaintiffs could open up new obligations and potential avenues of legal liability.

The plaintiffs allege that the initial financial advisor was conflicted, primarily because it was trying to finance the acquisition of a competitor to Rural/Metro at the same time it was advising Rural/Metro on a potential sale, and it wished to use the Rural/Metro transaction to achieve greater visibility as a sell-side advisor in the health care field. According to the plaintiff's theory of the case, the initial financial advisor pushed for the sale of Rural/Metro, at an inopportune time for Rural/Metro's stockholders, in order to serve the interests of the initial financial advisor to generate future business and higher potential fees. The conflicts theory pursued by the plaintiffs is particularly interesting because, although the initial financial advisor attempted to provide stapled financing to the buyer, the initial financial advisor was ultimately not on both sides of the sale of Rural/Metro because it did not participate in the buyer's financing. In its defense, the initial financial advisor noted that it worked with the second financial advisor to run a robust auction in which it contacted 28 potential buyers, entered into 21 confidentiality agreements, obtained six indications of interest, conducted five management presentations and got a final bid that represented a 37 percent premium to the company's stock price.

The plaintiffs also allege that the initial financial advisor had an obligation to periodically update the board on its valuation analyses. Currently, there is no duty to provide, let alone update, valuation analyses as part of a sales process, and the plaintiffs concede that the board never asked either financial advisor for updated valuation analyses. Imposing such a duty on a financial advisor would, in effect, reverse the current monitoring paradigm.

Lastly, there is the issue of indemnification. Assuming that the financial advisor had a common indemnity provision in its engagement letter, the problem is whether a judicial finding that the initial financial advisor aided and abetted the board's breach of its fiduciary duties would constitute gross negligence and/or bad faith or willful misconduct, such that the indemnity would no longer apply. If the financial advisor is found liable pursuant to either of these theories, then the determination of relative fault pursuant to some contribution provisions in many engagement letters would also be problematic because the directors settled without admitting or denying any fault or wrongdoing. To make clear that a judicial determination of aiding and abetting a breach of fiduciary duties will not negate the indemnity, legal advisors should work with their clients to draft indemnity language that specifies that such a finding will not constitute bad faith or willful misconduct or should otherwise adjust their contribution language. In addition, financial advisors should try to ensure that neither the company nor its directors may settle litigation without such financial advisors' consent.

2. CVR

A case just filed in a federal district court highlights the need to make sure that clients are fully aware of the material terms of an engagement letter with an investment bank. CVR Energy Inc. (CVR) is suing its lawyers for legal malpractice because they allegedly did not adequately inform the board of the payment structure for CVR's financial advisors. At issue were the investment bank engagement letters regarding CVR's defense against a hostile tender offer. The engagement letters allegedly specified that the financial advisors would each receive a $9 million fee if CVR stayed independent, but a higher fee if there was a "sales transaction." CVR was allegedly not aware of the fact that a sales transaction included the consummation of the hostile tender offer and that the financial advisors would, therefore, receive a higher fee if the client's takeover defense failed than if it succeeded. In its suit, CVR alleged that its legal advisors were negligent and breached their duties to CVR because they failed to fully inform CVR of the various definitions of a sales transaction, even though the lawyers knew that CVR had no experience defending against hostile tender offers and specifically solicited legal advisors based on their expertise in similar matters. It is optimal, in our view, to ensure that financial advisors are equally incentivized, regardless of the outcome. But it is not uncommon, in our experience, that the financial advisors are entitled to a higher fee in the event of a sales transaction because of the liquidity event occasioned by such transaction.

3. Red Zone

A recent case decided in the Civil Branch of the Supreme Court of the State of New York, New York County illustrates the risk lawyers face when they do not carefully draft investment bank engagement letters. The trial court found Red Zone LLC's legal advisor guilty of legal malpractice because of its work on an amendment to an engagement letter with an investment bank. Red Zone sought legal advice in connection with its consent solicitation for three of the seven seats on the target's board. The financial advisor and Red Zone entered into an engagement letter. The financial advisor argued that a successful consent solicitation would constitute an "acquisition transaction" pursuant to the terms of the engagement letter; thus, the financial advisor would be entitled to a $10 million success fee. Red Zone disagreed with this interpretation and indicated that it would not proceed unless it was assured that it would not owe such a fee. The parties entered into an oral agreement that the proposed consent solicitation would not constitute an acquisition transaction, that the fee owed to the financial advisor in the event such consent solicitation was successful would be only $2 million and that a $10 million success fee would not be payable unless Red Zone controlled greater than 51 percent of the target's common stock. The oral agreement was later memorialized as an amendment to the engagement letter. The amendment stated that the definition of an acquisition transaction would not include Red Zone's proposed consent solicitation, but it made no mention of the 51 percent control requirement. After the initial consent solicitation was successful, Red Zone eventually gained nine of the 10 board seats of the target and effectively controlled the target. Red Zone's financial advisor sued Red Zone to recover its $10 million success fee pursuant to the acquisition transaction language in the engagement letter. Red Zone lost its case against the financial advisor and then sued its legal advisor for legal malpractice in drafting the amendment. The trial court ruled that Red Zone's legal advisor was guilty of legal malpractice because the amendment, as drafted, did not accurately memorialize the oral agreement. The court ordered the legal advisor to pay damages.

4. Bioclinica

Turning from investment bank engagement letters to fairness opinions, in a recent case in Delaware, In Re Bioclinica, Inc., Vice Chancellor Glasscock clarified one of his earlier decisions, Koehler v. NetSpend Holdings Inc., in which he referenced what he termed a "weak" fairness opinion. By way of background, certain of Bioclinica's stockholders sued to stop the sale of the company, alleging a breach of the board's Revlon duties for failing to procure the highest reasonably available sales price. In support of their contention, the plaintiffs cited the vice chancellor's earlier decision, in which he found that the plaintiffs had a likelihood of success on the merits of their Revlon claim because the sale process was not designed to achieve the highest reasonably available sale price for stockholders. He made this determination by pointing to various factors, such as the lack of a pre-agreement market canvas, various stringent deal protection devices, the one-off negotiated nature of the sale and the NetSpend board's reliance on, what he termed, a weak opinion. The opinion was weak, in his view, because he discounted the validity of the comparisons in the selected public companies and precedent transactions methodologies. The final price agreed to by the NetSpend board was below the financial advisor's discounted cash flow analysis, which was based on management projections that were higher than those forecasted by the street, although the price was within the range of the selected companies and precedent transactions valuation methodologies. Distinguishing NetSpend from Bioclinica, the vice chancellor noted that the Bioclinica sale involved an auction process and, thus, had a market check on its pricing, unlike the NetSpend sale, which was a single-bidder negotiated transaction. The key take away from these opinions is that not all fairness opinions carry the same weight in the court's view. Lawyers who advise financial advisors should be aware of the overall process of the sale, especially if the sale is pursuant to a negotiated transaction with a single bidder instead of a broader auction process.

5. Gerber

Lastly, given the requirement in some limited partnerships, especially master limited partnerships, that they must obtain a fair and reasonable opinion before an interested party transaction can be entered into, we closely monitor developments in this area. Another recent Delaware case, this one involving a limited partnership, clarified which fiduciary duties a limited partnership could contract away. Gerber v. Enterprise Products Holdings, LLC involved a challenge to two transactions, a sale of assets and a merger involving Enterprise GP Holdings L.P., on conflict grounds. Before the transactions were consummated, an independent committee of the board sought the opinion of an independent financial advisor. This was done in accordance with the "special approval" process, which was defined in the limited partnership agreement as approval by a committee of three or more independent directors. In upholding the defendant's motion to dismiss, the Delaware Court of Chancery held that the special approval process in the limited partnership agreement displaced any common law fiduciary duties regarding the approval of conflicted transactions. The court went one step further, however, when it addressed the plaintiff's claim regarding the breach of the implied covenant of good faith and fair dealing. First, the court noted that the implied covenant of good faith and fair dealing binds only the named parties to the limited partnership agreement. Thus, the only colorable claim was against the general partner. In assessing the claim against the general partner, the court, again, looked back to the limited partnership agreement, which provided for a "conclusive presumption" of good faith if the general partner relied on the opinion of experts, such as the opinion provided by the financial advisor in this instance. Under the Delaware Limited Partnership Act, however, a partnership agreement may not eliminate the implied covenant of good faith and fair dealing. The court reasoned that the covenant is a gap filler, and, in this case, there was no gap, due to the express language of the agreement. In reversing and remanding the case on this issue, the Delaware Supreme Court held that the court erred by conflating two distinct principles: the contractual fiduciary duty regarding good faith and the implied covenant of good faith and fair dealing that applies to every provision in an agreement. As the Delaware Supreme Court noted, there could be many instances in which the good-faith language of the agreement was followed, but the implied covenant was not. The lesson of Gerber is that, while the limited partnership form allows for the contracting away of many fiduciary duties and liabilities, such contractual provisions must be specific and explicit to be effective and, if there is only a general waiver, the implied covenant of good faith and fair dealing, which will always be in effect, could work to undercut the waiver.

Evan Konstantinou, associate in McDermott Will & Emery's Corporate Advisory practice, also contributed to this article.

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
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
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