Banker Loyalty in Mergers and Acquisitions

Andrew F. Tuch
Washington University in Saint Louis – School of Law

September 21, 2015

94 Texas Law Review 1079 (2016)
Washington University in St. Louis Legal Studies Research Paper No. 15-09-10


When investment banks advise on merger and acquisition (M&A) transactions, are they fiduciaries of their clients, gatekeepers for investors, or simply arm’s-length counterparties with no other-regarding duties? Scholars have generally treated M&A advisors as arm’s-length counterparties, putting faith in the power of contract law and market constraints to discipline errant bank behavior. This Article counters that view, arguing that investment banks are rightly characterized as fiduciaries of their M&A clients and thus required to loyally serve client interests.

This Article also develops an analytical framework for assessing the liability rules that will most effectively deter disloyalty on the part of investment banks toward their M&A clients. Applying optimal deterrence theory, the framework shows why holding only banks liable for disloyalty is unlikely to effectively deter such disloyalty. Instead, it suggests the need for fault-based liability rules to be applied to corporate directors (of M&A clients) for their oversight of the banks they engage as well as the potential need for public enforcement of certain hard-to-detect conflicts.

Applying this framework, this Article assesses existing law, focusing on recent Delaware decisions, generally supporting that law but arguing that it is unlikely to effectively deter advisor disloyalty. It suggests changes to address the regulatory gap.

Banker Loyalty in Mergers and Acquisitions

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