Abstract
The Delaware Chancery Court recently squared offagainst the investment banking world with two rulings that tie Revlon violations to banker conflicts of interest. Critics charge the court with slamming down fiduciary principles of self-abnegation in a business context where they have no place or, contrariwise, letting culpable banks offthe hook with ineffectual slaps on the wrist. This Article addresses this controversy, offering a sustained look at the banker-client advisory relationship. We pose a clear answer to the questions raised: although this is nominally fiduciary territory, both banker-client relationships and the Chancery Court's recent interventions are contractually driven. At the same time, conflicts of interest are wrought into banker-client relationships: the structure of the advisory sector makes them hard to avoid and clients, expecting them, make allowances. Advisor banks emerge in practice as arm's-length counterparties constrained less by rules of law than by a market for reputation. Meanwhile, the boards of directors that engage bankers clearly are fiduciaries in law and fact and company sales processes implicate enhanced scrutiny of their performance under Revlon. Revlon scrutiny, however, is less about traditional fiduciary self-abnegation than about diligence in getting the best deal for the shareholders. The Chancery Court's banker cases treat conflicts in a contractual rather than fiduciary frame, standing for the proposition that a client with a Revlon duty has no business consenting to a conflict and then passively trusting that the conflicted fiduciary will deal in the best of faith. The client should instead treat the banker like an arm's-length counterparty, assuming self-interested motivation on the banker's part and using contract to protect itself and its shareholders. As a doctrinal and economic matter, the banker cases are about taking contract seriously and getting performance incentives properly aligned and not about traditional fiduciary ethics. They deliver considerably more than a slap on the wrist, having already ushered in a demonstrably stricter regime of conflict management in sell-side boardrooms. They also usher in the Delaware Chancery Court itself as a focal-point player in the market for banker reputation. The constraints of the reputational market emerge as more robust in consequence.I. IntroductionOn Valentine's Day 2011, Delaware's Vice-Chancellor Travis Laster enjoined the shareholder vote on a private equity buyout of Del Monte Foods Company. The ground: the company's board of directors was disabled from acting fairly in approving the merger due to the conflicted position of its investment banker-advisor, Barclays.1 The injunction lasted only twenty days, and the deal eventually closed.2 Even so, the ruling rocked the world of mergers and acquisitions (M&A)3 by casting standard practices into question, most prominently "stapled" financing-an arrange- ment in which the selling company's banker-advisor also finances the purchase price for the buyer. Uncertainty followed for sell-side companies, their advisors, and their counsel.4A second upset followed just over a year later, when then-Chancellor Leo Strine ruled on a request to enjoin the shareholder vote on the merger of El Paso Corporation into Kinder Morgan, Inc.5 Investment banker con- flicts had poisoned the sell-side well once again and the court excoriated the actors responsible, in particular Goldman Sachs.6 But this time the injunction was refused, the chancellor declining to obstruct sell-side shareholder access to what might be deemed a good deal.7 Reaction again was loud. Some praised the chancellor's shaming strategy,8 while others accused him of surrendering to the investment banking interest in declining to enjoin.9 Still others thought that any surrender was to the plaintiffs' lawyers10: the chancellor had departed from "traditional principles of agency law."11 It was a case of a judge making a mountain out of a Wall Street molehill. …