Conflicted advisors causing trouble: directors are at risk of not being fully informed.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

WE RECENTLY were reminded that boards of directors must be watchful for potential conflicts of interest, and not just those involving directors; it is equally important to be sensitive to conflicts involving their advisors. This was highlighted by two recent cases in the Delaware Court of Chancery involving investment banks in M&A transactions. In these cases, the price of failing to avoid the conflict was expensive litigation and a temporary injunction that delayed the shareholder vote and risked scuttling the transactions involved.

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In In re Art Technology Group, Inc. Shareholders Litigation, the Court of Chancery enjoined a deal because it was concerned about an undisclosed relationship between the target's financial advisor and the proposed buyer. In its original proxy disclosure to shareholders, the seller, Art Technology Group (ATG), explained that its financial advisor, Morgan Stanley, would collect a fee only if the proposed sale was approved. However, the proxy did not disclose that Oracle, the proposed buyer, and Morgan Stanley had a pre-existing relationship dating back years.

Ruling from the bench, Vice Chancellor J. Travis Laster expressed skepticism that ATG's shareholders would be able to appropriately determine the level of credibility to assign to Morgan Stanley's fairness opinion without knowing exactly how much Oracle had previously paid to the bank. In order to remedy this, he enjoined the shareholder vote until the parties had made supplemental disclosure regarding: (i) the services Morgan Stanley had provided Oracle throughout their relationship and (ii) the annual fees Oracle paid to Morgan Stanley during that time. This went well beyond current practice and any federal disclosure requirements.

In the second case, In re Del Monte Foods Company Shareholders Litigation, the court enjoined the sale of Del Monte Foods Co. to a buyout group led by Kohlberg, Kra-vis, Roberts & Co. (KKR) and temporarily prohibited the enforcement of KKR's deal protection measures. This was due to its finding, based on a preliminary record, that the board had likely breached its fiduciary duties by failing to provide the oversight needed to detect its financial advisor's misconduct.

During the sale process, Barclays Capital, Del Monte's financial advisor, worked behind the scenes to favor its handpicked buyer, KKR, evidently so that it could provide buy-side financing in addition to serving as the sell-side advisor. This...