Bankers and Chancellors
William W. Bratton
Institute for Law and Economics, University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)
Michael L. Wachter
University of Pennsylvania Law School - Institute for Law and Economics
Texas Law Review, Vol. 93, P. 1, 2014
U of Penn, Inst for Law & Econ Research Paper No. 14-23
The Delaware Chancery Court recently squared off against the investment banking world with a series of rulings that tie Revlon violations to banker conflicts of interest. Critics charge the Court with slamming down fiduciary principles of self-abnegation in a business context where they have no place or, contrariwise, letting culpable banks off the hook with ineffectual slaps on the wrist. This Article addresses this controversy, offering a sustained look at the banker-client advisory relationship. We pose a clear answer to the questions raised: although this is nominally fiduciary territory, both banker-client relationships and the Chancery Court’s recent interventions are contractually driven. At the same time, conflicts of interest are wrought into banker-client relationships: the structure of the advisory sector makes them hard to avoid and clients, expecting them, make allowances. Advisor banks emerge in practice as arm’s length counterparties constrained less by rules of law than by a market for reputation. Meanwhile, the boards of directors that engage bankers clearly are fiduciaries in law and fact and company sales processes implicate enhanced scrutiny of their performance under Revlon. Revlon scrutiny, however, is less about traditional fiduciary self-abnegation than about diligence in getting the best deal for the shareholders. The Chancery Court’s banker cases treat conflicts in a contractual rather than fiduciary frame, standing for the proposition that a client with a Revlon duty has no business consenting to a conflict and then passively trusting that the conflicted fiduciary will deal in the best of faith. The client should instead treat the banker like an arm’s length counterparty, assuming self-interested motivation on the banker’s part and using contract to protect itself and its shareholders. As a doctrinal and economic matter, the banker cases are about taking contract seriously and getting performance incentives properly aligned, and not about traditional fiduciary ethics. They deliver considerably more than a slap on the wrist, having already ushered in a demonstrably stricter regime of conflict management in sell-side boardrooms. They also usher in the Delaware Chancery Court itself as a focal point player in the market for banker reputation. The constraints of the reputational market emerge as more robust in consequence.
Number of Pages in PDF File: 84
Keywords: Corporation law, mergers and acquisitions, M & A, M&A, takeovers, corporate finance, investment banking, conflicts of interest, fiduciary v. contractual relationships, conflict management, reputational marketplace
JEL Classification: G24, G34, K22
Date posted: June 7, 2014 ; Last revised: December 13, 2014
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