March 30, 2017

Financial Advisors: Merger Vote Enjoined Pending Conflict & Fee Disclosure

The Delaware Chancery Court hasn’t issued many preliminary injunctions in M&A transactions in recent years – but this Shearman blog reports on one issued earlier this month by Chancellor Bouchard.  As this excerpt reveals, the issue that prompted the Chancellor’s action is one that has proven to be near & dear to the hearts of the Delaware courts & the SEC – financial advisor conflicts & fee disclosure:

On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. of FairPoint Communications, Inc.  Vento v. Curry, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017).

Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures.  The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.

In this case, general disclosure that the advisor’s affiliate would receive financing fees was not enough.  The Chancellor emphasized that under Delaware law investment banker fees and potential conflicts should be fully disclosed because of the central role bankers play in mergers.  The advisor rendered a fairness opinion in the deal, and the Chancellor found that the financing fees provided a potential incentive to issue that opinion. He also found that the financing fee was material in amount & quantifiable.  As a result, more disclosure was necessary.

John Jenkins