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3 November 2015 By Reynolds Holding

Shareholders may beat courts as judges of banker conflicts. A Delaware jurist reversed his own ruling and tossed claims that Bank of America Merrill Lynch played both sides of Signet Jewelers’ $1.4 billion purchase of rival Zale. His decision came after a higher court said shareholder approval of a deal can override such charges. A crackdown on advisers’ skewed loyalties is overdue, but owners deserve a say on when it goes too far.

The Signet deal was born of a common banker pitch. Merrill offered to represent the jewelry chain in its buyout of Zale. The bank ended up representing Zale’s board instead, without disclosing its approach to Signet. The potential conflict emerged after the deal was announced. The board and shareholders approved the transaction anyhow.

Some shareholders sued, though, claiming Merrill and the board hadn’t negotiated vigorously enough. They pointed out that the purchase price – $21 per share – was also the top figure Merrill had suggested to Signet. It was a 41 percent premium over Zale’s undisturbed stock price, but the judge declined to dismiss the lawsuit.

The case is the culmination of recent challenges to banker conflicts. Barclays got thwacked in 2011 for advising Del Monte on a sale while also financing the buyers. In 2012, Goldman Sachs forked over its $20 million fee for helping pipeline operator El Paso sell itself to Kinder Morgan – while owning a $4 billion stake in the buyer.

The Delaware Supreme Court is now considering a $76 million judgment against RBC Capital Markets for working both sides of ambulance operator Rural/Metro’s $440 million sale to equity shop Warburg Pincus. It’s the rare case to connect a bank’s conflicts to investor losses, on the theory that the adviser aided the board’s breach of duty.

That was also the theory behind the Zale suit, until the Supreme Court ruled in another case that fully informed shareholders essentially shield a board – and its bankers – from liability when they vote for a transaction.

Bankers have played fast and loose with conflicts and deserve their recent comeuppance. Yet Merrill’s conduct seemed well within reasonable limits, and Zale investors agreed. It’s a reminder that, in the deal world, their judgment is the one that counts.


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