Even while the billion-dollar-plus legal slugfest between Morgan Stanley & Co. and takeover artist Ronald Perelman was far from over, dealmakers projected that the early rounds, which went in Perelman’s favor, will heavily impact how advisers and their clients pursue mergers and acquisitions. Shake-ups in M&A practice foreseen by attorneys and bankers include: * Sell-side advisers will have to do a more thorough job of determining the strength of the acquirer, especially when stock is the acquisition currency; * Both acquiring and selling clients will more precisely define exactly what they want their advisers to do and put it in writing through engagement letters; * An adviser with multiple roles in the deal will be required to reveal them early on, particularly if a firm is working both sides of the transaction; and * Advisers and clients must be more careful in devising policies and techniques for retaining e-mail documents and producing them if requested during litigation. Although all of these matters figured in the Perelman-Morgan duel, nothing in the early going produced a direct legal requirement for changes in adviser-client relationships. But, say dealmakers, the initial outcomes that generated damage awards of $1.45 billion had the same practical effect, sending a message that other advisers could wind up before hostile juries for advice that leads to client losses. “There is plenty to learn from this case,” says Scott Wendelin, a seasoned investment banker and CEO of Los Angeles-based Prospect Financial Advisors. In mid-May, a state court jury in Palm Beach, Fla., awarded Perelman $603.4 million in actual damages and $850 million in punitive damages on his complaint that he was misled by Morgan Stanley, his adviser in the 1998 sale of Coleman Co., which he controlled, to Sunbeam Corp. The heftiest part of the price paid to Perelman was 14.1 million Sunbeam shares, which lost virtually all value when the appliance maker went into bankruptcy in 2001. Accounting and operational irregularities were alleged in the business failure. The bright line that lawyers covet did not emerge from the case for two principal reasons. In general, legal precedents rarely are fashioned by jury decisions. And in this case, the outcome was heavily influenced by Judge Elizabeth Maass’s ruling that shifted the burden of proof to Morgan Stanley and made it relatively easy for Perelman to win, lawyers say. The judge issued the ruling after contending that the banking firm dragged its feet on producing e-mail documents requested by the plaintiff during the discovery process. Jolting M&A practices Morgan Stanley is appealing, and many lawyers predict that the jury award will be overturned either because of the judge’s e-mail ruling or other aspects of the case. Some say the odds on who wins the appeal also indicate that Perelman might feel pressure to settle for a lower amount than he was awarded. But regardless of which way the case goes post-trial, dealmakers maintain that the practical message is ringing loud and clear across the M&A market. “The pressures are going to continue at a number of different levels for corporate clients to change the way they do business with investment banking firms,” Wendelin says. “The pressure is going to come not only from the CEO or the CFO, who makes the hiring decision, but from the board and from the shareholders through the board. When an adviser is hired, it may be on a very different basis than we see today because of these issues.” Pressures should be especially intense, he adds, when the seller is asked to bet on the acquirer’s stock or when the deal structure includes deferred or contingent payments or seller paper, such as notes. The adviser’s work should include a top-to-bottom financial, operational, and managerial size-up of the buyer, including identification of all risks, even if it risks losing a fee. “The chilling effect on investment bankers if this case is upheld is whether they now become another deep pocket insurance company’ for an acquirer,” notes attorney Peter Coffey, a partner at Michael Best & Friedrich in Milwaukee. Coffey adds that if a sophisticated investor like Perelman “can be successfully portrayed as a victim and incapable of performing his own due diligence…imagine how wide open the door may be.” “Investment bankers traditionally attempt to protect against these types of arguments with their engagement letters and in the documents that go along with the books and the bidding process. Undoubtedly, those will be reviewed in the light of this decision,” he adds. William Lawlor of Dechert focuses on the issue of advisers playing multiple roles in the same deal. He points out that an issue in the Morgan-Perelman battle was that Morgan also was raising $750 million in financing for Sunbeam, which was a more lucrative project than the sell-side advisory fee. “Bankers for sellers also can be affiliated with buyers via financing or merchant banking or through affiliates that make portfolio investments,” he says. Wendelin is insistent that the client is entitled to know immediately if the adviser is wearing two or more hats. Worries over conflicts Lawlor says the problems with multiple roles may be widening and cover such issues as “stapled financing,” an increasingly popular technique in private equity in which the seller markets the company complete with financing commitments. While the arrangement can help a client validate pricing and facilitate an auction, “the potential for conflicts is also apparent.” The long-running controversy over having a deal adviser do fairness opinions is another sticky point. “Some fixes include a separate or second banker opinion, where the separate or second banker does not get a deal fee, or a bifurcated structure, where a significant portion of the deal fee gets shifted to the fairness opinion, which is not contingent on the deal getting done.” David Reif, a partner in the Hartford office of McCarter & English and an expert on electronic communications, says that litigants must face the reality that e-mail is likely to become evidence, and create a system so it can be produced in timely fashion. He advises companies to adopt a “reasonable document retention policy and stick to it” and have it endorsed by a senior executive. And lawyers, he says, should advise clients to lock down any requested e-mails “so they don’t accidentally get destroyed.” (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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