Sunday, April 3, 2011

Providing for Disclosures of Conflicts of Interest in Investment Bank Engagement Letters

In the wake of the Del Monte shareholder litigation -- previously blogged about here -- a prominent Wall Street law firm is urging corporations to request that M&A advisor candidates disclose existing and potential conflicts of interest prior to selection and engagement.  From the view here, such disclosure at the time of engagement would best be memorialized in a representation from the advisor.  Ongoing disclosure would occur pursuant a covenant from the advisor.

The law firm is known for, among other things, tenacious advocacy of the business judgment rule's protection of corporate directors.  The firm is urging the disclosure in the context of commenting on how corporate directors should oversee investment bank advisors.

Investment bank contracts typically require clients/customers to acknowledge and accept -- in extremely broad language -- any and all conflicts of interest, whether present or future, identified or non-identified.  So it will be interesting to see if the law firm's urging gets traction and results in a change in what is "standard" (or "market") in M&A advisor engagement letters.  

Can advisors' conflict of interest disclosures reduce the overall costs businesses pay to investment bank advisors?  By reducing conflicts of interest, bringing to light biases resulting from conflicts of interest, or both:  the answer is yes.

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