DealLawyers.com Blog

Financial advisors’ engagement letters often try to prevent their clients from settling a lawsuit that could give rise to indemnification without the financial advisor’s consent unless it includes a full release of claims against the advisor. In recent years, some financial advisors have also started pushing to make it more difficult for individual directors and officers to settle claims and get out of the litigation. These provisions may look something like this:

The Company shall not settle, compromise or consent to the entry of any judgment in or seek to terminate any pending or threatened proceeding or participate in or otherwise facilitate any settlement, compromise, consent or termination of any proceeding by or on behalf of any other person or the Board of Directors unless such settlement, compromise, consent or termination contains a release of the [financial advisor and its affiliates].

These provisions probably stem from some stockholder lawsuits years ago (including RuralMetro) where all of the defendants other than the financial advisor settled.

It’s not entirely clear what it means for a company not to “participate in” or “facilitate” a director’s settlement. For example, could that affect a company’s actions under a D&O insurance policy or indemnification agreement when a director seeks advancements or tries to settle (e.g., some indemnification agreements prohibit D&Os from settling without the company’s consent)?

From the investment banker’s perspective, I suppose misery loves company…. But M&A lawyers could have a very unhappy board if the investment banker raises this provision to stop individual directors from settling – especially if their financial advisor allegedly engaged in misconduct. This provision could be particularly relevant where the board members are not equally situated (e.g., in a conflict of interest transaction where individual defendants settle for a de minimis amount).

There is some Delaware authority suggesting that prohibitions like these may not bind directors and others who are not parties to the engagement agreement, but they may nevertheless create obligations that are enforceable against the company.  As a result, in-house counsel and M&A lawyers may want to start paying closer attention to these provisions during the negotiation process.

– John Jenkins