Some recent court decisions in Delaware are causing unrest among American investment banks, mergers and acquisitions consultants and other consulting firms.
In a fundamental decision in response to a class action suit on behalf of aggrieved shareholders, the Delaware Supreme Court found that the investment bank RBC Capital owed $76 million in damages. In the court’s opinion, the company's executive board was complicit in a breach of obligation as an M&A consultant in the context of mergers and acquisition deals.
The investment bank was specifically accused of failing to disclose a conflict of interest and of manipulating its financial analysis to make the particular transaction appear advantageous. For business consultants this decision is momentous since the investment bank had been commissioned in this case exclusively by the company and not by the shareholders. Nevertheless, the bank had to pay compensation directly to its shareholders.
The U.S. class action lawsuit is an instrument not to be found within the German legal system and for good reason. However, even in Germany comparable financial effects could result if a large number of unhappy shareholders coordinate their efforts and fund litigation. Niklas Rahlmeyer, Lawyer, Field Fisher LLP
The U.S. class action lawsuit is an instrument not to be found within the German legal system and for good reason. However, even in Germany, there could be lawsuits if a large number of unhappy shareholders coordinate their efforts and fund litigation. There are already signs this is changing. Bentham Europe, one class action specialist, has already said it will coordinate a shareholder suit against Volkswagen withn Germany. If it succeeds, it will have fundamentally changed the German legal landscape.
Investment banks M&A consultants and other advisers who work for companies in Germany may also find they have a direct liability for shareholders. Much of this liability should be taken care of through properly worded contracts anc clauses. But these kind of contracts will not protect against direct tort claims by aggrieved shareholders against board members and their assistants in capital market law or in the field of insolvency liability. Many consultants are board members and they, along with non executive board membbers, may soon find themselves in the line of legal fire.
The hurdles in Germany are slightly higher than in the U.S. In particular, the shareholders are responsible for the burden of proof. Unlike in U.S. law, there is no requirement for disclosure prior to litigation, which is another reason why such claims in the local court practice are more the exception than the rule. Nevertheless, a spillover from this U.S. trend could become a real threat to investment banks and other consultants in Germany, especially since conditional intent seems enough for liability on the part of the consultant.
Each consultant should take his professional legal obligations seriously and disclose conflicts of interest at an early stage or - if possible - avoid them completely.
The author is a lawyer at Field Fisher LLP, Dusseldorf. You can reach him at: [email protected]