Practising Law Institute. CORPORATE LAW AND PRACTICE Course Handbook Series Number B Doing Deals 2017: The Art of M&A Transactional Practice

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1 CORPORATE LAW AND PRACTICE Course Handbook Series Number B-2306 Doing Deals 2017: The Art of M&A Transactional Practice Chair Igor Kirman To order this book, call (800) 260-4PLI or fax us at (800) Ask our Customer Service Department for PLI Order Number , Dept. BAV5. Practising Law Institute 1177 Avenue of the Americas New York, New York 10036

2 4 Deal Lawyers; Vol. 11, No. 1: The Disclosure of Material Relationships by Financial Advisors Board Disclosure Memos v. Engagement Letter Provisions (January February 2017) Kevin Miller Alston & Bird LLP The author gratefully acknowledges the comments of David M. Schwartzbaum, a partner of Covington & Burling LLP. Any errors are the sole responsibility of the author Executive Press, Inc. Reprinted with permission. If you find this article helpful, you can learn more about the subject by going to to view the on demand program or segment for which it was written. 283

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4 DEAL LAWYERS Vol. 11, No. 1 January-February 2017 By Kevin Miller 1 The Disclosure of Material Relationships by Financial Advisors Board Disclosure Memos v. Engagement Letter Provisions But what is critical is that banks have a sensible and defensible disclosure policy that way moments that were foreseeable. Disclosure is comforting to clients and the courts, as it suggests a forthright attempt to grapple with self-interest in [a] principled, ethical way. Leo E. Strine, Jr., Chief Justice of the Supreme Court of Delaware 2 Board Disclosure Memos Given the focus of the Delaware courts on the duties of boards to investigate and consider the potential 3 clients or prospective clients with memos containing information regarding their material relationships with the most-likely buyers. These Board Disclosure Memoranda are typically provided at a relatively early stage in the sales process, 1 M. Schwartzbaum, a partner of Covington & Burling LLP. Any errors are the sole responsibility of the author. 2 Strine, Leo E., Documenting the Deal: How Quality Control and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target Zone. Business Lawyer, Vol. 70 No. 3 (Summer 2015). 3 See e.g., RBC Capital Mkts. v. Jervis, No. 140, 2015, (Del. Nov. 30, 2015); No VCP (Del. Ch. Oct. 1, 2015), amended on reargument by (Del. Ch. Oct. 29, 2015), rev d sub. nom. Singh v. Attenborough, 137 A.3d 151 (Del. May 6, 2016);, CA No VCL (Del. Ch. Aug. 27, 2015); CA No VCL (Del. Ch. April 15, 2015) (Transcript of Oral Argument) and Sept. 3, 2015 (Telephonic Ruling); CA No CS (Del. Ch. Feb. 29, 2012); and, No VCL (Del. Ch. Feb. 14, 2011). However, it is worth noting that at a legal seminar in May, 2012, then Chancellor Strine is reported to have said, Banks with the least number of i.e., boutique banks) are not necessarily the best advisors for a target company. TABLE OF CONTENTS The Disclosure of Material Relationships by Financial Advisors... 1 Small Company M&A: Boy, Could This Deal Use a Few More 000s!... 5 Proxy Access a la Private Ordering? Not So Fast!...7 Tips for a Successful Working Capital Adjustment... 9 Questions Abound: FTC Antitrust Actions Under the New Administration Executive Press, Inc. DealLawyers.com P.O. Box 1549 Austin, TX (512) Fax (512) info@deallawyers.com ISSN

5 range of aggregate fees received during the past two years for providing investment banking advice and services (e.g. typically disclose whether any of the senior investment banking professionals assigned or expected to be additional information requested by the board. Engagement Letter Provisions As an alternative to the Board Disclosure Memorandum approach, an article in 4 Requirements for Effective Disclosure advisors should be to assist boards in making informed business decisions. Effective disclosure for purposes of informed board decision making requires three things: Content relationships with prospective buyers; the disclosure of information at the beginning or at a relatively early state in the sales process; and Access board access and attention to the disclosed information. informed business decisions include the increased likelihood that a board s decisions will survive legal for any damages resulting from those business decisions. Board Disclosure Memorandum v. Engagement Letter Provisions Content The delivery of a Board Disclosure Memorandum to a client s or prospective client s board at a relatively early stage in the sale process that discloses the range of aggregate fees received during the past two years (e.g., less than $X million; between $X and $Y million; between $Y million and $Z million; more than $Z million) for providing investment banking advice and services to the most-likely buyers, as well as any material 5 4 Klinger-Wilensky, Eric S. and Emeritz, Nathan P., Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations. Business Lawyer, Vol. 71 No.1 (Winter 2015/2016). The authors of artic)le acknowledged many of the issues and 5 CA No VCS (Del. Ch. Oct. 12, 2016) ( The Proxy also disclosed that more than 140 banking services over the prior three years. With these disclosures in hand, OM stockholders knew that the OM Board was aware (emphasis added)). Deal Lawyers 2 January-February

6 In contrast, the principal purpose of contractual provisions in engagement letters, like rights, responsibilities, obligations and remedies of the parties for purposes of allocating risk advisor s material relationships with potential buyers by means of contractual provisions in an engagement letter as advocated by article often results in demands for overly detailed disclosure that takes too long to negotiate and prepare (and, to the extent provide consent in a timely manner, if at all. Furthermore, because of issues regarding the effectiveness of contractual remedies, it is not clear that contractual provisions regarding the disclosure of material relationships in an engagement letter do a very good job of allocating risk and liability. Timing Proponents of Board Disclosure Memoranda believe that once a limited number of the most-likely buyers has been identified whether before or at the outset of a sale process, following the receipt of first-round indications of interest or following management presentations information regarding the financial advisor s material relationships with the most-likely buyers can and should be promptly provided to a client s or prospective client s board and periodically updated as facts and circumstances warrant e.g., to reflect additional likely buyers or material changes in the previously disclosed information regarding the financial advisor s material relationships with the most-likely buyers. By providing a Board Disclosure Memorandum to a client s or prospective client s board at a relatively early stage in the sale process, financial advisors provide the board with an opportunity to review and discuss the financial advisor s material relationships with the most-likely buyers directly with the financial advisor when it has the greatest utility, without having to wait for the terms of the engagement letter to be finalized. Delaying the selection of a financial advisor and/or action upon its advice until the detailed disclosure provisions in an engagement letter have been finalized and the resulting disclosures regarding the financial advisor s material relationships with potential buyers have been reviewed by the board risks delay that could adversely affect the likelihood of a successful transaction. Access Providing a Board Disclosure Memorandum to the board at a relatively early information regarding those relationships and the possible need for a second advisor. Given advisor s material relationships with potential buyers would form only a part of the broader engagement letters are often negotiated contemporaneously with the performance of an engagement, the board may not have adequate time to address the resulting disclosures required disclosures are received toward the end of the sales process. Other Considerations In addition, if a primary goal of detailed contractual provisions in an with potential buyers is to allocate risk and liability, it is far from clear that such provisions mergers still close, any contractual claims for breach of provisions in an engagement letter the target. Even if the target becomes aware of such claims prior to the execution of the merger agreement, attempts by the target to negotiate for additional consideration from 3 Deal Lawyers January-February

7 resulted in the buyer obtaining a favorable purchase price. * * * In practice, it appears that, as a result of the issues and concerns discussed above regarding the use of to the available remedies for any breach of those engagement letter provisions, the Board Disclosure Memorandum has become the predominant market approach for addressing the need for disclosure of a board. Our New John Tales Blog! We have launched a new members-only blog for DealLawyers.com: John Tales. John Jenkins is telling stories on this new long-form blog education by entertainment! Place your address in the box when you click the Subscribe link near the top if you want these precious tales pushed out to you! So far, nothing but rave reviews! Deal Lawyers 4 January-February

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