M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, June 11, 2007

The Perils of "Deal Counsel" -- Metcap Securities LLC v. Pearl Senior Care, Inc.

Vice Chancellor Noble has issued an opinion in Metcap Securities LLC v. Pearl Senior Care Inc., 2007 WL 1498989 (Del. Ch., May 2007).  The case concerns the perils of serving as deal counsel and highlights the potential problems with the common practice of having clients sign signature pages so that the deal can be completed in their absence. 

The facts of the dispute are complicated and the opinion should be read in full to completely grasp the situation but sum into this:  an entity with no assets of its own, named North American Senior Care, Inc. or NASC, was formed specifically to acquire a nursing home chain.  It then retained an investment bank, Metcap Securities, and agreed to pay it a standard success fee upon completion of a transaction.  NASC, along with two other acquiring entities, eventually entered into a merger agreement with a target company.  Three months later, the parties agreed that the three acquiring entities would be exchanged for three other acquiring entities, who would assume the obligations of the original group of acquirers.  The agreement initially required that the new group also assume Metcap's success fee.  But according to the facts of the complaint, as summarized by Vice Chancellor Noble, this would soon change:

Late into the final evening of negotiation of the last set of amendments to the merger agreement, the two principals representing the original acquiring entities, who had previously delivered their signature pages to a fellow law partner, left the negotiations and went home. They gave him no instructions, limitations, or conditions on which to proceed during the negotiations. A few hours later, another partner, still negotiating the terms of the amendment, would agree to delete the merger agreement’s one reference to the financial advisor’s fee. The practical effect of this amendment was that the obligation to pay the success fee was neither assigned to nor assumed by the second group of acquirers.

Both Metcap and NASC brought suit for reformation.  Metcap also brought several other claims related to its lost fee. In the part of relevance here, the Chancery Court denied a motion to dismiss NASC's cause of action to reform the contract.  The Court stated: 

The Complaint carefully and somewhat flimsily—but sufficiently—alleges facts that would support an inference—one that must be given in the “plaintiff-friendly” confines of Court of Chancery Rule 12(b)(6)—that, during the evening of November 20, Dickerson [deal-counsel] was somehow conflicted because of his role as “deal counsel” and the payment of his fees by Pearl (or its related entities) [Ed. Note:  Pearl was the second acquirer and a defendant in the action].

Of particular note, the Court in footnote 71 continued:

The Complaint was carefully drafted with respect to Dickerson’s role. It alleges that he did not have the authority to bind NASC. It alleges that he was paid for some of his work by Pearl or its related entities. It alleges that he was “deal counsel,” but it provides no basis for gaining a full understanding of Dickerson’s role. Without an understanding of Dickerson’s actual role, it is difficult for the Court, within the confines imposed by Court of Chancery Rule 12(b)(6), to determine whether or not Dickerson had the authority to do what he did or, more importantly, whether Dickerson’s knowledge may be imputed to NASC. Because the Court must give NASC the benefit of any reasonable inference that can be drawn from the allegations of the Complaint, the Complaint must be read to suggest that Dickerson was somehow conflicted and that his conflicted status would make it improper or inequitable to attribute his conduct or his knowledge to NASC, even though the Complaint scrupulously avoids any such express allegation and that inference is far from the one most likely to be drawn from the allegations of the Complaint. Ultimately, Dickerson’s role will be a factual matter, one informed by an understanding of the ethics of the practice of law, and, if NASC has no more to offer than what has been set forth in its Complaint, its claim for reformation might fail not only because it is fairly charged with Dickerson’s knowledge, but also because it is bound by Dickerson’s conduct. NASC’s position must be something more than a whine that it did not like what its lawyer did during the final hours of negotiation of the Third Amendment. Parties to a transaction and their counsel must be able to rely—and to act accordingly—on the negotiating authority generally accorded transactional attorneys. This is especially true when the negotiations are ongoing and the principals have abandoned the negotiation field after leaving signature pages. Nothing in this Memorandum Opinion should be viewed as undercutting that dynamic. The result here is more the product of Court of Chancery Rule 12(b)(6) than it is of substantive law.

While the Court's language is comforting it still means that the case will proceed.  And while the case is likely to be limited to its very complicated set of facts which I have only provided a flavor of here, it is a clear warning to lawyers of the general hazards of serving as deal counsel and the particular complications which can arise with having clients pre-sign agreements.   


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» Delaware Court of Chancery on the actual and apparent authority of a transaction lawyer from New Developments
In MetCap Securities LLC v. Pearl Senior Care, Inc., NASC struck a deal to acquire Beverly Enterprises. The merger agreement contained a parenthetical requiring NASC to pay a finder’s fee to MetCap, an investment banker. NASC could not raise sufficient [Read More]

Tracked on Sep 4, 2007 10:18:58 PM


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