Arthur H. Rosenbloom is Managing Director of Consilium ADR LLC, and Gilbert E. Matthews is Senior Managing Director and Chairman of the Board of Sutter Securities, Inc. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.
Introduction
To err is human but there is often no divine or other forgiveness for investment banks in Delaware litigation when their misconduct rises to the level of aiding and abetting the board’s breach of fiduciary duty to its shareholders. In this article, we consider recent Delaware case law on investment banker liability that has resulted in judgments against bankers and has caused them to make contributions to shareholders when some of these matters settle even when they deny liability.
Delaware has ruled that investment banks are not in privity with the shareholders, their obligations being limited solely to those who engage them. In the 1990 Shoe-Town decision, the Court of Chancery ruled that the investment bank hired by management “owed no fiduciary duty to the shareholders.” [1] The Court distinguished this case from the Wells decision in New York (which had ruled that the investment banks liable to shareholders) “because the investment advisor in that case was hired by a special committee charged solely with determining the fairness of the transaction for the shareholders.” [2] In 1996, the Delaware Superior Court ruled similarly in Stuchen v. Duty Free Int’l, Inc. [1996 WL 33167249 (Del. Super. Apr. 22, 1996) at *12.]