April 22, 2007
The NYT's Misapprehension of the Role of Law Firms in M&A Deals: Law Firms Don't Talk to Boards, Lawyers Do
Posted by Jeff Lipshaw
I was bemused by the shallow analysis in the "Dealbook" column by Andrew Ross Sorkin (right) in the New York Times business section this morning ("When Conflicts Arise, Lawyers May Be a Source").
It's not completely clear, but I think the point of this column is to suggest another reason why the well-publicized alleged conflicts of investment bankers firms (i.e. representing multiple parties; wanting M&A fees; simultaneously doing M&A work while doing "buy-hold-sell" analysis) should also be imputed to the Wall Street law firms with big M&A practices.
Here's Mr. Sorkin's hypothesis (I think). A public company agrees to a private equity buyout arranged by an investment banker like Merrill Lynch or Citigroup. The board meets over a period of time, in accord with its duties under Van Gorkom, Revlon, Unocal, and the myriad of Delaware cases that defines the board's obligation in connection with the sale of the company. There are lengthy presentations by the company's management and the investment bankers. The lawyers expound at length on the fiduciary obligations of the board, but it's all a show because they are going to say that it's okay to go forward with the deal. Nobody on the company side, including the board members who continue to serve in the "post-Enron" "post-Sarbanes" environment, or the general counsel, really does any thinking at all, being content to be able to say that because they relied on the advice of their advisors, everything is copacetic. And the lawyers from Wachtell, or Skadden, or Weil, or whomever, are saying go ahead because the big investment banking firms are their clients as well (in other transactions as to which there is no conflict under the PR rules, or as to which, by and large, there has been disclosure even if there is no technical conflict) and the investment banking firms want the lawyers to approve the deal.
Hooey. I'm not saying that well-advised board can't make mistakes. I also know almost nothing about the specifics of the Zell-Tribune deal that sparked the column. I do know that one of the toughest calls for lawyers and boards is the issue of proving that the board maximized shareholder value in a Revlon situation (where the company is or will be in play) when the bid in front of you appears to be pre-emptive, and may even be conditioned on a "no-shop" agreement with some kind of fiduciary "out" if another bidder appears after announcement of the deal. In the vernacular, you have a bird (and a quite tasty one, at that) in the hand, and sometimes the law looks like you have to let the bird go in order to prove that it's tasty (actually, the analogy at this point is backwards because you are letting the bird go to see if another bird thinks your hand is tasty, but what the hell, reporters don't need precision, so why should I?).
The one thing that I feel pretty sure about is that there wasn't a single mindless automaton sitting in the Tribune board meeting digesting all the information. I know from my own experience as a public company general counsel that, in the midst of the consideration of a public company deal, I was on the phone almost endlessly, not with some noumenal entity like WeilSkaddenKirklandSidleyWachtell, but with a real human being with a name, whom, if I thought for one second had an interest other than complete, total, experienced, knowledgeable, nuanced, wise, loyal, cautious but realistic advice to the board (and the shareholders), I would have fired in a heartbeat.
As far as I can tell, there isn't a single fact cited in this column to suggest any GC would do otherwise. Of course, no reporter has ever witnessed a vigorous board debate, so it can't have happened.
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