Possible Financial Advisor Conflicts of Interest May Derail Deal
Nancy Waterman Belton | Bloomberg Law
Another case involving allegations that financial advisor conflicts of interest tainted a deal has survived preliminary judicial review. This time, the advisors are Jefferies & Co. and Bank of America Merrill Lynch (BofA), which advised the target’s special committee and board of directors, respectively. Based on proxy disclosures describing unrelated services the advisors performed for the acquirer and its affiliates, the Delaware Court of Chancery granted the target shareholders’ request for expedited discovery on the narrow question of whether the advisors’ past, present, or expected future dealings with the acquirer or its affiliates created a conflict of interest. The ruling is particularly noteworthy because it clarifies that disclosure of potential financial advisor conflicts of interest does not necessarily cleanse their deleterious effect—a question that seemingly lingered following the court’s ruling in In re Atheros Communications, Inc., Consolidated C.A. No. 6124-VCN., 2011 BL 61366 (Del. Ch. Mar. 04, 2011). For a summary of the Atheros ruling, see Bloomberg Law Reports®, Corporate & M&A Law, Delaware Chancery Court Addresses Need to Disclose Advisor and Officer Compensation that Is Contingent on Deal Closing (March 21, 2011).
Acquirer and Its Affiliates Were Clients of Target Financial Advisors
In July 2010, Ness Technologies, Inc.’s largest shareholder, Citi Venture Capital International (CVCI), indicated its interest in acquiring Ness for between $5.50 and $5.75 per share. Since one Ness director was appointed by CVCI, the board formed a special committee of independent and disinterested directors to respond to CVCI’s overture. The special committee engaged Ropes & Gray as its legal advisor and Jefferies as its financial advisor.
After negotiations with CVCI fell apart, the special committee contacted 21 potential strategic buyers and six potential financial buyers about acquiring Ness. Three additional strategic bidders also threw their hats in the ring and negotiated with Ness for several months. After one of those bidders offered $7.40 per share, CVCI reemerged, submitting a non-binding bid of $7.75. Ultimately, the other bidder lowered its bid to $7.00. In June 2011, after CVCI confirmed that it was willing to pay $7.75 per share, Ness and CVCI announced their deal.
Ness shareholders filed a putative class action and moved to expedite the proceedings, alleging that the deal was tainted by conflicts of interest that resulted in an unfair process and price, and that the board’s disclosures regarding the deal were inadequate. Click here to view the complaint.
Financial Advisors’ Relationships with Acquirer May Have Tainted Sale Process
The court noted that it typically grants requests to expedite proceedings, but a plaintiff must first articulate a sufficiently colorable claim. The court found that, of the shareholders’ price and process claims, only the conflict of interest claim directed at Jefferies and BofA was potentially colorable. The claim was based on statements in Ness’s proxy statement disclosing that Jefferies previously and currently provided advisory and financing services to certain affiliates of CVCI, and that BofA and its affiliates previously and currently provided investment banking, commercial banking, and other financial services to CVCI and its affiliates. It was unclear, however, whether these relationships were material to Jefferies or BofA because, among other things, the proxy statement did not disclose the compensation they received or expected to receive in the future from CVCI or its affiliates. The shareholders might have a colorable claim, the court explained, if the amount of business was material to either advisor. Thus, it granted the shareholders’ request to expedite discovery to determine whether Jefferies or BofA had a conflict of interest.
By contrast, the court found that the remainder of the shareholders’ claims regarding the sale process and price were not colorable. It noted that the sale process lasted 11 months, involved about 30 potential bidders, and resulted in a price that was at least $0.65 per share more than any other bidder was willing to pay. In addition, the court found the deal protections—including a no shop provision, a no talk provision, a termination fee equal to approximately 2.72 percent of the sale price, and a fiduciary out that required the board to determine that a higher bid was a “superior offer” before it could engage in negotiations—were “relatively mundane” and commented that the shareholders offered no explanation as to how those protections would prevent a serious bidder from making a superior offer. Ness at 7.
Failure to Fully Disclose Relationships Might Constitute Breach of Duty of Disclosure
The court also found that the board’s failure to fully disclose the amount of business Jefferies and BofA had done with CVCI and its affiliates, if material, could constitute a breach of the directors’ duty of disclosure. The court explained:
Because of the central role played by investment banks in the evaluation, exploration, selection, and implementation of strategic alternatives, this Court has required full disclosure of investment banker compensation and potential conflicts.
Id. at n.24 (quoting In re Del Monte Foods Co. S’holders Litig., C.A. No. 6027-VCL, 2011 BL 43049 at 29-30 (Del. Ch. Feb. 14, 2011)).
However, the court determined that none of the shareholders’ other disclosure claims were colorable, finding that the proxy statement provided a fair summary of management’s projections of Ness’s performance as a standalone entity, fair summaries of the financial advisors’ work, and a fair summary of the sale process. The shareholders failed to show how additional details would be material to their decisions regarding the proposed transaction.
Is this case part of a growing trend of increased scrutiny of the role played by target financial advisors in M&A deals? It appears so. To read about other recent cases involving such claims, see Bloomberg Law Reports®, Corporate & M&A Law, Trend Watch: Financial Advisors in the Crosshairs. Are Legal Advisors Next? (Apr. 12, 2011); Bloomberg Law Reports®, Corporate & M&A Law, The Role of Financial Advisors following Del Monte: Steps to Take to Avoid Having Your Deal Tainted by a Similar Conflict of Interest (Mar. 7, 2011); and Bloomberg Law Reports®, Corporate & M&A Law, Chancery Court Enjoins Del Monte Merger Vote and Deal Protections; Court Cites Barclays’ “Secret” Manipulation of Sale Process (Feb. 22, 2011).
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