Wasik, too, says that rather than spend money on permanent staff, he’d prefer to keep an independent adviser on retainer. “That,” he says, “is a cheap date.”
Randy Myers is a contributing editor of CFO.
Legal Liability: Little to None
Investment banks and their corporate clients have strong legal protections from lawsuits over debt and equity issuances.
Investment banks may cater to two sets of customers in capital-raising transactions, but from a legal standpoint securities attorneys say there’s not much reason for them, or their corporate clients, to worry about conflict-of-interest liabilities.
For starters, most lawsuits alleging such conflicts on the part of investment banks have revolved around mergers and acquisitions, usually in the context of fairness opinions, notes Daniel Berick, a partner with law firm Squire, Sanders & Dempsey. And rather than issue broad rulings in these cases, he says, courts have usually settled them on issues of fact particular to the individual transaction, or on the basis of the language of the engagement letter signed by the bank and its client.
By contrast, in a capital-raising context, “particularly for secondary offerings, companies generally don’t sign an engagement letter with an underwriter to retain them as their agent and structure an offering for them,” says Berick. “In fact, there usually isn’t a contract signed until the pricing of the offering. So the investment-banking firm isn’t acting as the agent of the issuer in quite the same way, in a legal sense, that it is when a company hires an investment bank to help it arrange an M&A transaction.”
As for the liability of corporate officers and directors, if a lawsuit did claim that they entered into a poor deal, an important factor in their defense would likely be whether the transaction was consistent with a “pretty broad range” of what other bankers would have advised or offered in that situation, notes Alex Gendzier, a capital-markets partner with Jones Day. In that case, he says, they would likely have a strong defense based on the business judgment rule that governs many corporate decisions and presumes good faith in decision making, particularly if there is evidence that the parties did exercise good faith and performed reasonable due diligence.
Still, Gendzier notes, the law is always evolving, and any company or CFO that did use an independent adviser effectively could have a stronger defense if a deal were challenged in court.
That extra protection would make all the more sense, adds Berick, in the case of complex transactions.
“A plain-vanilla offering of securities sold at market price by a company that isn’t in financial distress, has at least some experience as a capital-markets participant, and has a CFO who has been through the process a bunch of times doesn’t create a lot of risk to the board or its executives from a fiduciary standpoint,” Berick says. “But once you move away from that to an offering that’s more complex — or if the board can’t really tell itself with a straight face that the CFO is all over this stuff and knows exactly how it works — they might want to get some help.” — R.M.