A Blog by Jonathan Low

 

Mar 18, 2015

Free Advice Ends Legal Dispute Over Advice

How awesome is this intangible post-industrial economy!?

People get paid millions for advice - even if its wrong - and then offer free advice as additional compensation - which is accepted.

Those bitcoin cowboys should be terrified: who knew advice could be an even less tangible but more popular currency than theirs. JL

Liz Hoffman reports in the Wall Street Journal:

Banks increasingly are coming under fire for their merger advice, as recent court decisions opened the door to lawyers. The development represents a threat to one of Wall Street’s most lucrative businesses, as fees on big takeovers run into the tens of millions of dollars
A dispute between a bank and a client over advice ended in a settlement Monday that included an unusual payment: more advice.
Credit Suisse Group AG agreed to pay $16.25 million to Freeport-McMoRan Inc. and its shareholders amid allegations it gave faulty counsel on two acquisitions. The agreement comes in two parts: Credit Suisse is to pay Freeport $10 million in cash, and the Swiss bank must give the natural-resources company $6.25 million worth of investment-banking advice free over the next two years.
The second part, lawyers said, is a very rare arrangement—and one that seemed contradictory to some. “It’s a bit like complaining of a hair in your soup and getting a discount on your next bowl of the same soup,” said Robert Daines, a lawyer and former Goldman Sachs Group Inc. banker who teaches at Stanford University.
The agreement, filed Monday in the Delaware Court of Chancery, settles shareholder allegations that Credit Suisse made a mathematical error that contributed to Freeport overpaying for the 2013 purchases of McMoRan Exploration Co. and Plains Exploration & Production Co. for $9 billion combined.
The payment amounts to more than half the $30.5 million Credit Suisse received for its advice on the two transactions. Refunds of mergers-and-acquisitions fees are rare enough, but there are few if any precedents for a bank agreeing to do pro bono work to settle claims it fell short on a prior assignment.
Credit Suisse “continues to vigorously deny” any allegations of wrongdoing, according to the filing. A Credit Suisse spokeswoman declined to comment further.
Banks increasingly are coming under fire for their merger advice, as a string of recent court decisions has opened the door to plaintiffs’ lawyers looking for new avenues for pressing their claims, which themselves have risen sharply. The development represents a threat to one of Wall Street’s most lucrative businesses, as fees on big takeovers regularly run into the tens of millions of dollars, and successful assignments confer prestige on the banks that land them.
Credit Suisse isn’t the only merger adviser to be accused of making a critical error of late. Goldman Sachs, with the biggest merger business on Wall Street, is a defendant in a lawsuit brought by Tibco Software Inc. shareholders, who allege the bank last year failed to spot a mistake in the company’s share count that resulted in its private-equity buyer paying $100 million too little in the deal.
Plaintiffs suing over the 2011 acquisition of a small broadband-equipment maker recently said they plan to add Jefferies Group LLC to the list of defendants. They allege shortcomings in the investment bank’s financial projections for the company.
Goldman Sachs has defended its advice. A Jefferies spokesman said plaintiffs are “futilely attempting to pull us into this lawsuit at the eleventh hour.”
“We intend to vigorously resist that effort and expect to prevail,” he said.
A number of other cases have involved accusations that banks’ deal advice is tainted by shortcomings of other sorts. In October, a Delaware judge ordered RBC Capital Markets LLC to pay $76 million over its role in the 2011 buyout of Rural/Metro Corp. The Canadian bank’s effort to win fees from parties on both sides of the deal compromised its advice to the ambulance operator’s board, the judge found.
Deutsche Bank AG is currently a defendant in a lawsuit over the 2013 buyout of Dole Food Co. The German bank advised the company’s founder, who has been accused by shareholders of orchestrating a sweetheart deal for the fruit company.
Those banks, too, have defended their advice. RBC is in the process of appealing.
Freeport’s 2013 acquisitions of the two oil-and-gas producers have soured in part because of the sharp decline in oil prices since last summer. The deals remade Freeport, historically a gold and copper miner, into a large energy producer, too. Freeport shares have fallen 54% since mid-July.
Freeport itself earlier this year settled with shareholder plaintiffs, agreeing to pay $137.5 million into a fund, much of which has been earmarked for a special dividend. That settlement allowed shareholders to pursue claims against Credit Suisse.
Freeport’s payout to its own investors also is unusual in merger litigation. Such cases typically are settled quickly for nominal fees to plaintiffs’ lawyers and more disclosures about the transaction or often-superficial tweaks to deal terms.

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