Assessing Financial Advisor Compensation Disclosure Following Vento v. Curry

James E. Langston is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Langston, and is part of the Delaware law series; links to other posts in the series are available here.

Last month, in Vento v. Curry, [1] the Delaware Chancery Court preliminarily enjoined the Consolidated Communication Holding (“Consolidated”) shareholder vote [2] on the company’s all-stock acquisition of FairPoint Communications (“FairPoint”) due to Consolidated’s failure to adequately disclose the compensation its financial advisor would receive for participating in the acquisition financing. The court’s ruling ultimately had very little impact on the transaction—Consolidated subsequently disclosed that its financial advisor would receive $7 million in financing fees and the Consolidated shareholders overwhelmingly approved the transaction without any delay. [3] Vento nonetheless provides important guidance for principals and financial advisors in evaluating whether disclosure of a financial advisor’s transaction-related compensation is required when seeking shareholder approval of an M&A transaction.

The plaintiffs’ principal claim in Vento was that the Consolidated board of directors breached its fiduciary duties by omitting from the proxy statement the exact amount of financing fees that Morgan Stanley—the financial advisor from whom Consolidated received a fairness opinion in connection with the transaction—would receive for its separate role as an acquisition financing lender. The Consolidated proxy statement did contain boilerplate disclosure that Morgan Stanley would be compensated for financing the merger; however, Chancellor Bouchard found that, in light of the critical role a financial advisor’s fairness opinion plays in a merger transaction and the need for shareholders to assess the independence of the financial advisor and determine how much weight to afford its opinion when voting on a transaction, this approach fell short of the “clear and transparent” disclosure that was required for shareholders to have a “complete and accurate” picture of the financial advisor’s various financial interests in a transaction.

While disclosure of financial advisor conflicts of interest will continue to be driven by the facts and circumstances of the particular situation, key takeaways from Vento for principals and financial advisors to consider going forward are as follows:

  • If a buy-side financial advisor will be participating in the financing of a transaction for which it is also delivering a fairness opinion, the amount of the financing fees the buy-side financial advisor stands to receive should be disclosed in the proxy statement for the acquirer shareholder meeting unless the fees are not material or quantifiable.
    • In assessing whether disclosure of financing fees is required, acquirers should consider, among other factors, the magnitude of the fees and the financial advisor’s role in the acquisition financing. In this context, financing fees should be broadly defined to include not just commitment fees, but other forms of fees the buy-side financial advisor may receive for participating in the acquisition financing, including syndication and underwriting fees and the potential impact of flex terms.
    • The financing fees should be disclosed alongside the other customary financial advisor fee disclosure, such as the financial advisory fee and other investment banking fees the financial advisor has received from the parties involved in the transaction during the relevant look-back period, and not buried in another section of the proxy statement so that shareholders have a full picture of the financial advisor’s financial interests in the transaction.
  • Although Vento acknowledges that the inability to quantify the financing fees is a legitimate consideration in assessing the utility of disclosure, if the financing fees cannot be quantified with precision acquirers should consider ways to go beyond mere boilerplate disclosure of the fact that the financial advisor will be compensated for providing acquisition financing. Potential formulations may include disclosing the types of financing fees the financial advisor will receive and good faith descriptions of fee probable arrangements, possibly including ranges or formulas.
  • The principles articulated in Vento should be considered not just in the context of financing fees but also when evaluating disclosure of other transaction-related compensation a financial advisor may receive in addition to the financial advisory fee. In making this determination, principals and financial advisors should consider, among other factors, the source of the compensation and its nexus to the relevant transaction. For example, if a transaction is contingent on the consummation of a divestiture by the acquirer and the buy-side financial advisor will be separately compensated for its role in the divestiture transaction, the acquirer should consider disclosing the divestiture-related fee in light of its direct link to the principal transaction.
  • Prior to Vento, it was not uncommon for the acquisition financing fees a buy-side financial advisor would receive to be omitted from the proxy statement. While that will likely change in light of Vento, absent extraordinary circumstances, we would not expect past omissions of financing fee disclosure to provide plaintiff shareholders with ammunition to pursue post-closing damage claims due to, among other reasons, the hurdles plaintiffs would likely face in establishing a non-exculpated breach of fiduciary duty claim (i.e., bad faith or breach of duty of loyalty) or aiding and abetting claim that would be capable of surviving a motion to dismiss based on a Vento-like fact pattern.
  • It is also worth noting that neither the plaintiff shareholders nor Chancellor Bouchard questioned the legitimacy of a buy-side financial advisor financing a transaction for which it has also delivered a fairness opinion. Nonetheless, acquirer boards should continue to be mindful of the various financial interests its financial advisor may have in a transaction and to ensure it engages in a timely discussion of these interests that is contemporaneously documented in the relevant board minutes.

Endnotes

1Richard Vento v. Robert J. Curry, et al., C.A. No. 2017-0157-AGB, letter op. (Del. Ch. Mar. 22, 2017).(go back)

2A merger will often not require a vote of the acquirer shareholders. In the Consolidated/FairPoint merger, a vote of the Consolidated shareholders was required under the NASDAQ 20% rule in light of the large number of shares Consolidated must issue to the FairPoint shareholders as merger consideration.(go back)

3In his letter ruling, Chancellor Bouchard enjoined the Consolidated shareholder meeting until five days after Consolidated supplemented its disclosures to include a clear and direct explanation of the amount of financing fees Consolidated’s financial advisor would receive for its role in the acquisition financing. Consolidated was able to supplement its disclosures on the same day the preliminary injunction issued thereby avoiding any delay in its shareholder meeting.(go back)

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