Financial advisor gets tagged for aiding and abetting a fiduciary breach.

As highlighted in our 2012-2013 and 2013-2014 Updates, plaintiffs' attorneys are now focusing on the roles of bankers in an effort to enjoin otherwise independent third-party transactions.

THE HISTORY

This new tactic gained traction in 2011 in In re Del Monte Foods Company Shareholders Litigation, 25 A.3d 813 (Dei. Ch, 2011), when the Court of Chancery temporarily enjoined a premium merger transaction, finding a reasonable probability that the board of directors of Del Monte Foods Company breached its fiduciary duties in the course of selling the Company. The decision was driven, in large part, by conflicts of interest suffered by Del Monte's financial advisor who, unbeknownst to Del Monte, approached its private equity clients to stir up interest in the Company. The financial advisor was then engaged to advise on the offers but never disclosed that it stirred up the interest and that it planned to provide buy-side financing. The bidders all signed a "no teaming" provision, but ultimately Del Monte did not accept any bids. Later, the financial advisor approached two bidders and advocated a joint effort, which violated the "no teaming" provision. This time, a deal was reached.

The court found that the board's decision to allow the joint bid was "unreasonable" because it eliminated Del Monte's "best prospect for price competition." The court also found that it was "unreasonable" for the board to permit its financial advisor to provide buy-side financing at a time when no price had been agreed to and there was a "go-shop" process to run. The case settled for US$89.4 million, and the court approved the settlement in December 2011, with Del Monte paying US$65.7 million and the financial advisor paying US$23.7 million, The Court awarded US$23.3 million in attorney's fees.

In 2012, the Court of Chancery, in In re El Paso Corporation Shareholder Litigation, 41 A.3d 432 (Del. Ch. 2012), denied a motion to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. However, the court severely criticized the actions of El Paso's management and its financial advisor. El Paso's financial advisor owned approximately 19 percent of Kinder Morgan (valued at US$4 billion) and controlled two board seats. The conflicts were fully disclosed and a second financial advisor was brought in to handle the sale. Nonetheless, first advisor continued as the lead advisor on a spinoff option and helped El Paso craft the second advisor's engagement letter in a way that provided for a fee only if the company was sold as a whole.

While the court ultimately concluded that, in the absence of a competing bid, the El Paso stockholders should have the opportunity to decide whether or not they like the price notwithstanding the conflicts, the court went on to state that "[a]lthough an after-the-fact monetary damages claim against the defendants is not a perfect tool, it has some value as a remedial instrument, and the likely prospect of a damages

trial is no doubt unpleasant ..." The case settled for US$110 million.

The trend continued in 2013, but this time the Court of Chancery's opinion in In re Morton's Restaurant Group Shareholders Litigation, 74 A.3d 656 (Del. Ch. 2013), demonstrated that a second financial adviser, when properly engaged and actively involved, can help to overcome a merger challenge based upon a primary financial adviser's alleged lack of independence. The complaint alleged that Morton's board of directors breached its fiduciary duties by acting in bad faith when it allowed the investment bank that ran the sales process to provide financing for the buyer after...