January 24, 2013
I-Banker Liability in M&A
For those of you paying attention to the back and forth related to the H-P/Autonomy acquisition, the question of the potential liability of advisors has popped up more than a couple of times. How could H-P's advisors (investment bankers, lawyers, and accountants) let slip by the alleged accounting fraud that caused H-P to write down more than $5 billion? Close on the heels of that question is whether the advisors should face any liability for not picking up on the fact that Autonomy might not be a good candidate for an acquisition.
Well, for a partial answer as to the liability exposure of M&A advisors when the transaction goes wrong look no further than Baker v. Goldman Sachs, just decided by a jury in federal district court in Boston. There, the founders with Goldman's assistance sold their company, Dragon Systems to Belgium-based Lernout & Hauspie for $580 million in L&H stock. Not long after the transaction closed, fraud at the acquirer was discovered and the acquirer quickly went bankrupt leaving Dragon stockholders holding worthless stock.
Having lost everything, including their tech company, founders Janet and Jim Baker sued Goldman for allegedly failing in its duties to them, their clients, when it brokered the deal. Here's the original complaint (Baker v Goldman) - filed in state court and then removed to federal district court. The jury heard the evidence and the arguments in this case and found that Goldman had not breached any duties to the Bakers.
If H-P is thinking about going after its advisors for its ill-fated Autonomy deal, it will have to be more successful than the Bakers were in convincing a jury that M&A advisors should bear liability for a deal gone wrong.
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Offhand (reproducing a comment posted @indiacorpblog):
The short write-up brings to one's mind certain intriguing aspects; especially, in the broad context of judicial system created and in place in any nation, for serving the social purpose of a proper adjudication and administration of justice. Not to forget that, Jury is a system, which because of its inherent deficiencies and shortcomings, has never been favourably viewed or endorsed, uniformly all around the globe? For a study, look up the useful material available @ http://mrwhatis.com/jury-system.html
Jury is an institution still prevalent in certain countries, As a common law (as opposed to civil law / criminal law) system , it forms an essential arm or wing of the judiciary. Possibly, a further study may help in finding some guidance, in the form of 'precedent' or any other on practical experience on the various aspects of the jury system . But one thing seems to be clear:; in that, in discharging its duties and responsibilities, Jury should, ideally speaking, not confine itself to the case on hand, but necessarily have in mind the consequences /repercussions, rather influence its verdict in a given case entails. That is, the likely impact of a Jury ‘s verdict on the principles of jurisprudence, and on the judiciary itself.
Even if viewed differently, the subject dispute and the verdict of the jury, albeit confined to the facts and circumstances of the given case, so also the evidence adduced and examined, have unavoidable potentials for quite many far reaching consequences, most likely to impact such or similar other cases. It appears that, this is the aspect which has been underlined in the concluding paragraph.
In reflecting on the verdict, the writer (of the iclblog)says, -
“....HOWEVER, THE JURY WAS NOT PERSUADED ABOUT THE CLAIM BECAUSE THE DRAGON ITSELF APPEARED TO BE KEEN TO CLOSE THE DEAL BECAUSE THE DRAGON ITSELF APPEARED TO BE KEEN TO CLOSE THE DEAL IN A SPEEDY MANNER AND IGNORED SOME RED FLAGS.” (upper case supplied)
In short, the poser requiring a useful debate is, -as to whether or not the jury was right in doing so?
This is an angle which the cited two blogs - M&A Law Prof Blog; and - Deal Professor., on a quick reading, do not seem to have even touched upon.
Posted by: vswami | Jan 30, 2013 7:01:30 PM