Investment Banking Expert Witness

Overview

About Investment Banking Expert Witnesses

An investment banking expert decides whether an adviser ran a deal the way a competent banker would have: how the sale process was designed, how the valuation was built and presented, how conflicts were handled and whether the board got what it needed. Disputes usually follow a sale of a company, a public offering or a failed transaction. This page covers banker conduct and deal practice. Valuing a company belongs to a business valuation expert, deal mechanics generally to a mergers and acquisitions expert, and fraud in a stock offering to a securities expert.

The expert reads engagement letters, board books, fairness presentations, bidder logs, fee letters, internal emails and proxy statements. Comparing the internal drafts of a valuation with the version shown to the board is often the most telling step.

Fairness Opinions and Conflicts

The best-known example of adviser liability is the Rural/Metro litigation. The Delaware Court of Chancery held RBC Capital Markets liable for aiding and abetting breaches of fiduciary duty by the board ¹. In a later settled order, the SEC said RBC rendered a fairness opinion to the board that contained materially false and misleading information concerning its valuation analysis, and that the information was included in the proxy statement ². The SEC also described RBC's fee structure: advisory fees that included a fee for issuing a fairness opinion and a success fee if a sale closed, along with the right to offer staple financing to bidders, which offered the chance of more lucrative fees ². It said the court found that valuation information was provided only three hours before the board met to approve the merger, and was the first such information the board had requested and received during the sale process ².

The lessons translate directly into expert work. Did the banker disclose its financing interests? When did the board first see valuation work? Did inputs change near the end, and did anyone say why? An expert compares the method used with practice at comparable banks and asks whether adjustments had a reasoned basis.

Sell-Side Process

Process cases ask how a target was marketed. Who was contacted, how long did it take and what was the plan for strategic and financial buyers? A banker's practice is to widen or narrow the field for reasons that should be in the record. The expert reads the process letters, contact logs and board minutes, and says whether the conduct fit what a careful adviser does in a similar deal. Whether directors breached a duty is for the court, and an expert should stop short of that conclusion.

Going-private deals bring a federal disclosure rule. Under Item 1015 of Regulation M-A, a filing must state whether the subject company or an affiliate has received any report, opinion or appraisal from an outside party materially related to the transaction, and describe the preparer and a summary ³. So banker work may become public, and any difference between that summary and the internal work can be tested.

Underwriting

Public offerings bring other duties. Section 11 of the Securities Act reaches every underwriter with respect to a security, and gives a defense for parts of a registration statement not made on the authority of an expert if, after reasonable investigation, the defendant had reasonable ground to believe the statements were true ⁴. So an underwriting expert reads the due diligence file: management sessions, comfort letters, customer calls and how red flags were handled. Rule 10b-5 also prohibits any device, scheme or artifice to defraud and acts that operate as a fraud or deceit ⁵, which can apply to statements in a deal.

Who Is Qualified

Look for a former managing director with direct experience on the same type of deal, size and industry. Securities licenses and registration history matter, and a career record should be checked against the claimed experience. A person who did only large-cap public mergers may not fit a middle-market sale. Pair this expert with a valuation expert on the number and a damages expert on the loss.

Qualifications

Qualifications to Look For

• ✓Managing director level experience on the same type of deal
• ✓Direct work in the same size range and industry
• ✓Fairness committee experience where relevant
• ✓Securities registration history that matches the claimed work
• ✓Skill reading board books, models and bidder logs
• ✓Experience on both sell-side and buy-side mandates
• ✓Prior deposition or trial testimony on deal practice

FAQ

Frequently Asked Questions