In recent years the role of financial advisors in M&A transactions has garnered increased attention. Traditionally viewed as a sort of insurance policy for disappointed buyers, financial advisors are now more commonly viewed as service providers responsible for specified duties. The courts have reinforced this position with a string of opinions which both narrowly tailor the role of financial advisors in such transactions and appear to limit their duties of disclosure in connection with financial analyses and the issuance of fairness opinions.

Role of Financial Advisors: HA-LO

In HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC,[1] the U.S. Court of Appeals for the Seventh Circuit recently held that financial advisors are only liable for damages resulting from specifically contracted duties. The opinion absolved Credit Suisse First Boston ("Credit Suisse") of liability arising out of its engagement as financial advisor to HA-LO Industries ("HA-LO") in connection with HA-LO's acquisition of Starbelly.com ("Starbelly").

HA-LO, a "promotional products" retailer looking to expand into online commerce, had agreed to purchase startup e-commerce company Starbelly at a price of $240 million. HA-LO had engaged Credit Suisse for investment bank services and Ernst & Young ("E&Y") as a business consultant in connection with the transaction. As a part of its duties to HA-LO, Credit Suisse negotiated pricing, structured payments, and arranged for new credit facilities to cover HA-LO's purchase of Starbelly. It also issued a fairness opinion to HA-LO which stated that Credit Suisse was relying on given financial information that it was neither required nor expected to verify. Based on the given information Credit Suisse issued a fairness opinion stating that "the Merger Consideration is fair to HA-LO from a financial point of view." Subsequent to the issuance of the fairness opinion E&Y discovered that Starbelly's financial projections were unrealistic and the company was unlikely to generate its projected revenue stream. HA-LO's board of directors was fully aware of this discrepancy when it issued proxy solicitations to shareholders proposing the acquisition. The merger was subsequently approved and the transaction was completed. Shortly after closing and due in part to the financial strain placed upon it by the acquisition of Starbelly, HA-LO was forced into bankruptcy. The trustee of HA-LO's Liquidating Trust brought suit against Credit Suisse for damages resulting from the merger.

In claiming that Credit Suisse had been grossly negligent in preparing and issuing its fairness opinion, the Trust argued that Credit Suisse should have relied on E&Y's evaluation of Starbelly's prospects rather than on the given information and projections supplied by HA-LO's board. It further argued that Credit Suisse should have revised or withdrawn its fairness opinion in anticipation of a market downturn once the price of other dot-com stocks began to plunge.

The Seventh Circuit rejected these arguments, holding that Credit Suisse was engaged only to conduct an analysis of given and available information and that it had performed its clearly articulated duties. More significantly, the court "found it impossible to label as 'grossly negligent' [Credit Suisse's] decision to do what [its] contract required it to do: use the figures and projections furnished by its client." The opinion chastised the Trust stating "[t]his suit is nothing but an attempt to find a deep pocket to reimburse investors for the costs of managers' blunders," and "[Credit Suisse] did not write an insurance policy against managers' error of business judgment." The court would not expand the contractual obligations and liabilities of Credit Suisse as a financial advisor, because to do so would be to "throw out the detailed contract that HA-LO and [Credit Suisse] had negotiated and to make up a set of duties as if this were tort litigation." Finally, the court concluded that "[t]he Trust's belief that [Credit Suisse] should have been hired to do something different is not a basis of liability."  

Disclosure Obligations: Globis and Merrill Lynch

In a line of similar cases the Court of Chancery of Delaware defined in further detail the disclosure obligations of financial advisors in M&A transactions. In each of these cases, plaintiffs alleged inadequate disclosure of information by the respective Board of Directors and inadequate analyses of financial information by engaged financial advisors. The Delaware Court dismissed a majority of these claims, effectively limiting the disclosure obligations of both boards and financial advisors in connection with such transactions.

In Globis Partners, L.P. v. Plumtree Software, Inc.,[2] plaintiff Globis Partners L.P. ("Globis") sued defendants Plumtree Software, Inc. ("Plumtree") and BEA Systems, Inc. ("BEA") over BEA's acquisition of Plumtree. Globis was a major shareholder of Plumtree stock and it was dissatisfied with BEA's purchase price of Plumtree. Globis claimed that the proxy disseminated by Plumtree to its shareholders over the merger was flawed and that the fairness opinion issued by Plumtree's financial advisor Jeffries Broadview ("Jeffries") was deficient and misleading. Globis alleged that "the discount rate used in the Present Value of Future Share Price Analysis was not disclosed.'" Globis also argued that the "Proxy was materially false and misleading," and that Plumtree "should have disclosed additional details on the private transactions used in Jeffries' analyses." Globis further contended that Plumtree directors disseminated a "materially false and misleading Proxy," leading to an uninformed shareholder vote over the merger between Plumtree and BEA.

The Court of Chancery of Delaware dismissed all of these claims, holding instead that Globis must demonstrate "a substantial likelihood that the disclosure of the omitted fact[s] would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." The court further held that "Directors must give stockholders financial information material to their decision. Stockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely. This duty does not require directors to provide financial information merely 'helpful or cumulative to other information that was provided,' and the duty does not require the provision of information to permit stockholders to make 'an independent determination of fair value.'" The sort of "quibble" that Globis had over the substance of Jeffries' fairness opinion and the way in which it conducted its financial analyses did not constitute a disclosure claim. Jeffries was deemed to have performed a fair and competent analysis of available information and issued a clear and sufficient fairness opinion. The court noted that "Delaware law does not require disclosure of all the data underlying a fairness opinion such that a shareholder can make an independent determination of value," and "[s]tockholders who disagreed with Jeffries' analyses had sufficient information to make an informed decision." This opinion reaffirmed the responsibility of financial advisors to conduct their duties accordingly while quashing attempts by dissatisfied shareholders to expand the duties and obligations of financial advisors beyond their actual scope.

Similarly, County of York Employees Retirement Plan v. Merrill Lynch & Co.[3] arose out of a failed merger between Merrill Lynch ("Merrill") and Bank of America ("BofA"). County of York Employees Retirement Plan ("County of York") asserted that the merger between defendants Merrill and BofA was reached "because directors of Merrill failed to satisfy their fiduciary duties," and the preliminary proxy that was disseminated contained an inadequate disclosure of material information. County of York claimed that there were material deficiencies in the disseminated proxy because it did not discuss certain specific and particular aspects of the financial analyses conducted by the financial advisors engaged for the merger. Although the court held that some of the other claims against Merrill and BofA were colorable, it dismissed all of the disclosure claims against Merrill and its financial advisor. The court emphasized that boards "need not disclose specific details of the analysis underlying a financial advisor's opinion," and that "pursuant to Delaware law, Merrill was not required to disclose all financial projections considered by [their financial advisor]."

Financial advisors should view the opinions set forth above as a guide in determining and articulating their obligations in connection with M&A transactions. Clients engaging the services of financial advisors should also take note of these opinions and be wary of delegating too much weight to their financial advisors' opinions in the absence of their own independent research and analysis.