Disclaiming Loyalty: M&A Advisors and Their Engagement Letters

Abstract

Are investment banks fiduciaries of their merger and acquisition clients? If not, what rules, if any, constrain the conflicts of interest M&A advisors may face when advising their clients? These questions are rarely asked but central to the regulation of investment banking activities. In their article Bankers and Chancellors, 93 TEX. L. REV. 1 (2014), Professors William W. Bratton & Michael L. Wachter contend that M&A advisors effectively contract out of fiduciary duties in their client engagement letters, “emerg[ing] in practice as arm’s-length counterparties constrained less by rules of law than by a market for reputation.” They also regard recent Delaware decisions, namely, Del Monte, El Paso, and Rural Metro, as requiring directors to “treat the banker like an arm’s-length counterparty, assuming self-interested motivation on the banker’s part and using contract to protect [the corporation] and its shareholders.” In this Response to Bankers and Chancellors, I argue against each of these conclusions by pointing to the narrow operation of informed consent in engagement letters and to the unique role of fiduciary doctrine in protecting clients’ interests.

Keywords: Investment banking, conflicts of interest, mergers and acquisitions, disloyalty, financial advisors, fiduciary duties, informed consent, fiduciary waivers, engagement letters, Delaware law, Del Monte, El Paso, Rural Metro, conflicts of interest, M&A

JEL Classification: K10, K22, G20, G21, G24, G34