– by John Jenkins, Calfee, Halter & Griswold LLP
In Joyce v. Morgan Stanley, 538 F.3d 797 (7th Cir. 2008), the Seventh Circuit recently held that, under the circumstances of that case, the investment bank did not owe a fiduciary duty to the company’s shareholders and could not be liable to them for its services as the board’s financial advisor, despite the bank’s provision of a fairness opinion that was provided to shareholders. Here is a copy of the court’s opinion.
Lawyers for investment banks spend a lot of time worrying about the possibility that bankers may face liability to third parties with whom they did not contract, such as a corporate client’s shareholders, in connection with an M&A engagement. That concern is heightened if the investment bank renders a fairness opinion that is furnished to shareholders as part of a proxy statement soliciting their approval of a proposed deal. That’s because sharing a fairness opinion with shareholders as part of the proxy materials facilitates a claim that the bank had undertaken an obligation to the shareholders.
That was the claim made by the shareholders in Joyce. In rejecting it, the court relied heavily upon disclaimer language contained in the investment bank’s fairness opinion. This is an area where the SEC has taken a hard line, generally objecting to disclaimers that directly or indirectly suggest that shareholders do not have a right to rely on the fairness opinion. In the Staff’s view, these disclaimers are “inconsistent with the balance of the registrant’s disclosure addressing the fairness to shareholders of the proposed transaction from a financial perspective.” (See p. 12 of the Division of Corporation Finance’s Current Initiatives and Rulemaking Projects dated November 14, 2000.)
In response to the SEC’s concerns, lawyers for investment banks devoted quite a bit of time to coming up with alternative disclaimer language acceptable to the staff. While this language has become fairly standardized over the past decade, the extent to which this modified disclaimer provided the bank with any real protection against third party claims remained uncertain. That is because the only disclaimers that proved acceptable to the SEC were those that merely indicated to whom the opinion was directed and went on to disclaim making any particular recommendation concerning the transaction.
The Joyce decision addressed one fairly common disclaimer formulation that the SEC finds acceptable:
It is understood that this letter is for the information of the Board of Directors of the Company, except that this opinion may be included in its entirety in any filing required to be made by the Company in respect of the Merger… In addition, this opinion does not in any manner address the prices at which the RCN Common Stock will trade following announcement or consummation of the proposed Merger, and Morgan Stanley expresses no opinion or recommendation as to how the holders of the 21st Century Common Stock should vote at the shareholders’ meetings held in connection with the Merger.
The highlighted language, together with language in the investment bank’s engagement letter indicating that it would serve as an independent contractor with duties solely to 21st Century, lead the court to conclude that it could see “no way that the Shareholders can show that their relationship with Morgan Stanley possessed the ‘special circumstances’ necessary to give rise to an extra-contractual fiduciary duty.”
While this is not likely to be the last time that the adequacy of an SEC acceptable disclaimer will be tested in court, it is useful to note that despite being watered down from what the investment bank would have likely preferred to have said, the disclaimer in this case was sufficient to prevent a claim that the bank owed a fiduciary duty to its client’s shareholders.
By the way, this is the second important fairness opinion decision to come out of the Seventh Circuit this year. In February, the court decided The HA2003 Liquidating Trust v. Credit Suisse, which Broc blogged about a while back.