Monday, June 20, 2011

Keep This in Mind When Choosing an M&A Banker

By definition, CFOs have a fiduciary duty to their companies to do what's in the best interest of the company. If you have a Board of Directors, that Board has the same fiduciary duty to act in the best interest of the company. (Note: Advisory Boards are informal entities with no real documentation. Hence they are not subject to the same requirements as an actual Board of Directors.) I saw an article on CFO.com that I found interesting. Here's an excerpt from that article, Keeping Your M&A Bankers Honest.

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The Del Monte ruling sends a strong message that CFOs and other board members need to have an honest, open conversation with their prospective bankers about conflicts of interest. If a board wants to avoid breaches of fiduciary duty, the "beauty contest" for selecting an investment banker or financial adviser now needs to include "blunt questions about [the bank's] potential conflicts of interest," say Davis and Parramore.

That may require negotiation, because the first draft of engagement letters from investment-banking firms typically says the banker can and may represent other parties involved in the transaction and may in fact at the time of the auction sale be engaged by them, says Libby Kitslaar, a partner in the corporate practice at law firm Jones Day. Says Kitslaar: "As a client you need to go back and say, 'Look, that's really not acceptable. If you're working for us as our banker in the sale, you cannot be compensated or be engaged by another party in this transaction. On this deal you're our banker.'"

If a conflict arises in the middle of a sale, Kitslaar says the seller should engage a second investment banker to "do the backstop work on a fairness opinion" and perhaps evaluate competing bids. The selling company's board could demand that the first bank split its fee with the second.

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The article analyzed two court rulings in a Delaware court and the implications for CFOs and Boards of Directors. Interesting insights. If you are considering engaging an investment banker, M&A banker, merchant banker, etc. the takeaway is ask your banker if there are ANY POTENTIAL conflicts of interest...and what those conflicts are. If you really like the banker and believe the entity will still provide the best and fairest service, then you should DOCUMENT why you believe this and what steps you and/or the banker is taking to ensure this. The main reason for documenting is to decrease the probability of a shareholder/investor/co-owner suit or at least to reduce the probability that the suit filer would win.

To read the entire article, go to Keeping Your M&A Bankers Honest.



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