If All Investment Banks Are Conflicted, Why Blame Barclays? An Examination of Investment Bank Fee Structures and Del Monte Foods
In February 2011, Vice Chancellor Laster held in In re Del Monte Foods Co. Shareholders Litigation that the Del Monte Foods board of directors breached its duty of care to the Del Monte stockholders by failing to identify and guard against its investment banker Barclays’ conflicts in a merger transaction with Blue Acquisition Group. The court identified four instances of misbehavior throughout the sale process: (1) Barclays met secretly with potential bidders to solicit interest in acquiring Del Monte before the company was up for sale, and prior to being hired as the company’s sell-side advisor; (2) once the company was up for sale, Barclays facilitated a relationship between two competing bidders in violation of confidentiality agreements between the bidders and the company; (3) Barclays planned to and in fact did obtain the company’s permission to provide the acquirers’ financing; and (4) subsequent to the approval of the merger agreement, Barclays conducted the go-shop despite an agreement to finance the acquirers. And how did the Del Monte board breach its duty? It didn’t stop Barclays.
What could the board have done differently? The court explained that, despite having relied in good faith on Barclays’ independence and expertise, the Del Monte board breached its duty of care by failing to realize that Barclays had pieced together a deal resulting in its earning more than forty million dollars in fees from its dual role. The board, according to the court, should have recognized that Barclays suffered from a conflict of interest as it stood on both sides of the transaction by providing both sell-side advice and buy-side financing. I argue in this Note, however, that Barclays, and indeed all sell-side advisors, face a serious conflict of interest in standing on even one side of the transaction—by receiving success fees contingent on the consummation of a merger. For that reason, it is unclear whether the Del Monte decision imposed on boards of directors a duty to identify conflicts that are more serious than those ordinarily accepted in the investment banking industry, or merely a duty to fully disclose all conflicts. But considering the facts of Del Monte, I argue that the possibility of obtaining permission to provide buy-side financing is just another conflict shared by all full-service investment banks, and that additional disclosure would not have changed the outcome of the case. As a result, I conclude that Delaware courts should either (1) accept that investment bankers are necessarily conflicted when working on the sale of a corporation or (2) require a fundamentally different fee structure for investment bankers working on such a sale, and ultimately advocate for the elimination of success fees and staple financing.
This Note proceeds as follows: In Part I, I describe investment banking services provided in the sale of a corporation and common fee structures used in those services. In Part II, I contextualize Del Monte with respect to relevant case law, and in Part III, I describe the facts of the case. In Parts IV and V, respectively, I present the claims brought against the Del Monte board as well as the Delaware Court of Chancery’s response to those claims. Part VI describes the consequences of the court’s holding for Del Monte and Blue Acquisition Group. Finally, in Part VII, I argue that Barclays’ conflicts were no more significant than the conflicts that exist for nearly all full-service investment banks, and that, for this reason, additional disclosure would not have affected the outcome. I do make the caveat that the Del Monte board did breach its duty of care by permitting Barclays to conduct the go-shop after Barclays had committed to provide the acquirers’ financing. Finally, I analyze the standard for investment bank conflicts going forward and advocate for eliminating success fees and staple financing altogether.