Banks' Dual Role in Deals Is Often a Conflict

Anyone who cares about deals would do well to read Monday’s opinion from Delaware's Vice Chancellor J. Travis Laster in the litigation brought by shareholders against Del Monte Foods.

  • Read the Entire Delaware Opinion Here

Laster’s opinion is a stinging indictment of what I would argue is too often the standard practice among investment banks when it comes to the execution of leveraged buyouts.

In this case, Barclays and its banker, Peter Moses, were not only intent on controlling the process of sale, but, more importantly, were determined to wring fees from the seller for providing advice and the buyer for providing financing for the deal.

That dual role introduces the perception of a conflict, at the least, and a deep conflict, at its worst, because it precludes the bank from aggressively courting other suitors when it knows it will receive huge fees ($24 million in the case of Del Monte) from financing the bid of one buyer.

The fact that many bankers are fee-chasing freaks with no regard to fiduciary duty should be news to no one (especially someone who’s been covering this stuff for a quarter century), but it never hurts to get a refresher course.

In particular, the behavior of banks, private equity firms and management when it comes to leveraged buyouts (particularly when management is part of the acquisition—see J. Crew) is why boards must be more vigilant about their duty to protect the interests of shareholders.

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