Wednesday, January 30, 2013

U.S. Ruling on Investment Banker Liability in M&A


Last week, a jury in Boston rejected a claim against Goldman Sachs in its role as investment banker to the sale of Dragon Systems Inc. The deal involved a sale of Dragon to Belgian company, Lernout & Hauspie, in consideration for which Lernout & Hauspie issued its own stock to Dragon’s shareholders in an all-stock deal. The trouble was that the acquirer, Lernout & Hauspie, soon became mired in a fraud and then filed for bankruptcy leaving the selling shareholders with nothing of value from the deal.

Among others, Dragon’s founders sued Goldman Sachs, the investment banker on the sell side for breach of duties. However, the jury was not persuaded about the claim because the Dragon itself appeared to be keen to close the deal in a speedy manner and ignored some red flags.

More details and analysis of this verdict are available at:


This episode provides numerous lessons on M&A deal-making, including the process for appointment of investment bankers, negotiating the terms of the engagement and also running a tight ship while negotiating an M&A deal so that red flags are not missed that return to haunt a failed deal later.

4 comments:

vswami said...

Offhand:

The 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 favorably 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 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, though prima facie of relevance and importance, 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.
May be contd.

vswami said...

To put it succinctly, crucial points that call for an insightful deliberation by legal pundits are these:

A)Could the judiciary, - assuming that there had
been no jury, but were required to act independently, - have decided likewise?

That is, in view of the party's attitude not-so-keen- to- pursue its claim (s), allowed it to “close the deal in a speedy manner”, ignoring the reality that there are attendant "red flags”.

More over, despite the court being conscious of the unpleasant / adverse consequences likely to be faced by/ensue in several other similar cases, either pending or coming up in future.

B)Is not the court expected to, in its wisdom, rightly so, to adjudicate and hand out its clear-cut opinion, purely on merits, so that it will take care of / protect the common/ public good (both in its profound sense and effect)?

It is hoped, the hints provided will help.

vswami said...

To add:

The expert article -A Warning to Wall St. About Misleading Clients
by PETER J. HENNING makes for an interesting reading. It discusses the civil or criminal liability of investment brokers and advisers from a different perspective. The observations on the irrelevance / inapplicability of,- 'fiduciary relationship' and 'purchasers beware'are worth noting.

vswami said...

Any study on the subject, and further, come to form any sort of conclusive views,or opinion, is, as is obvious, an attempt no less difficult to reach the horizon.

To demonstrate:

Here is an article reporting a very recent ruling of the UK House of Lords, a majority decision >

> Client confidentiality privilege – Only for lawyers & not for accountants – UK SC
(@ Taxguru website)

On the first blush,it seems to throw more light, and bring about clarity in the form of a clear-cut judicial opinion on the specific area of controversy. But then, it does not cover the larger controversy on the concept of LPP, by confining to LAP.

By the way,anyone inclined to persist and pursue the study, even if purely academically,more food for thoughts may be looked for in following:

article @ "Takeover Panel Retreats"

>In the world of takeovers there is only one big ideological divide (and some smaller ones, but I'll ignore them for the time being). On the one side, there are those who believe that when it comes to questions about mergers or ......>

http://lawprofessors.typepad.com/mergers/crossborder/page/2/