Journeys in Revlon-Land with a Conflicted Financial Advisor

When the board of directors of a Delaware corporation begins a process that results in a change of control of the company (typically, a cash-out merger), the board’s Revlon duties are triggered: the directors then have a fiduciary obligation to take reasonable steps to get for the shareholders the best price reasonably available. In my recent article, Journeys in Revlon-Land With a Conflicted Financial Advisor: Del Monte and El Paso, I discuss two cases in which the Delaware Court of Chancery considered claims that a board of directors had breached its Revlon duties because its financial advisor had a conflict of interest related to the underlying business combination transaction.

The cases are very different. In Del Monte, at least on the facts as found by Vice Chancellor Laster at the preliminary injunction stage, the financial advisor had flagrantly breached its duty of loyalty to the target. After Del Monte had engaged the advisor to assist it in a possible sale of the company, the banker had secret discussions with one of the bidders and even facilitated a pairing of two bidders to make a joint bid, an arrangement that violated agreements that the bidders had previously entered into with Del Monte. The banker did this, apparently, because it wanted to steer the deal to a bidder who would reward it by using financing that the banker would arrange and for which it would receive an additional fee from the bidder (so-called stapled financing). Although the Vice Chancellor found that certain decisions by the Del Monte board breached the directors’ Revlon duties even apart from the banker’s misconduct, the court stated that the primary blame lay with the banker. This raises a somewhat novel legal issue: how does a breach of fiduciary duty by an agent of the target such as a banker result in a breach of fiduciary duty by a board of directors that, acting loyally and in good faith, was deceived by the agent?

Relying on Mills Acquisition, Vice Chancellor Laster held that when a board is deceived by a faithless agent, the protections of the business judgment rule are lost, but the court never explained how this patently sound conclusion relates to established Revlon jurisprudence. I suggest an answer: since Revlon requires a board to be informed of all the material facts reasonably available to it before making a decision, material facts known to an agent but wrongfully withheld from the board should be deemed reasonably available. Hence, directors who make a decision without such facts breach their duty of care, but they would also be shielded from personal liability under Section 141(e) of the Delaware General Corporation Law. This view integrates the court’s holding with existing doctrine.

In El Paso, the target’s financial advisor was a large shareholder of the acquirer, but the material facts about this conflict of interest were fully disclosed to the target board, and knowing the facts the target board decided to retain the financial advisor and engage an additional financial advisor as well. Oddly, Chancellor Strine never considered whether these decisions, which would seem to be among the most important ones that the board made in the sales process, breached its Revlon duties. Rather, after stating that the target board’s decisions in selling the company would provide little basis for enjoining the transaction, the court backtracked and argued that the board likely breached its Revlon duties because its decisions “were motivated … by a fiduciary’s consideration of [its] own financial and personal self-interests.” In other words, the primary complaint about the board’s decisions was not that they were unreasonable on the merits but that they reflected the advice of a conflicted financial advisor—a conflict that the board fully understood. In my view, this gets the law of Revlon duties wrong. If the board’s original decision, after full disclosure, to engage a conflicted banker does not violate Revlon, then its subsequent decisions based on advice from that banker do not become unreasonable under Revlon merely because of the advisor’s conflict of interest. Holding otherwise virtually implies a per se rule against a board’s engaging a conflicted banker that would be quite foreign to Delaware’s takeover jurisprudence. When a board in Revlon-land engages a conflicted banker, that decision should be scrutinized under Revlon just like any other decision the board makes, but if the decision does not violate Revlon, then, absent some additional breach of duty by the banker, its conflict should be irrelevant in evaluating the board’s subsequent decisions under Revlon.

The full text of the article is available on my SSRN page here.