Can an investment bank advising a company on a sale also provide the financing for a buyer of the company? Assume information barriers and other conflicts of interest mitigation measures will be utilized.
No. Known as “staple financing” (since the financing details are typically stapled to the back of the acquisition term sheet), this arrangement is convenient because it expedites the bidding process. The seller is presented with solid bids, since the financing of the bids has already been pre-arranged. Buyers benefit by seeing the lending terms upfront, which facilitates a more timely business decision, and also benefit in knowing the financing of their bids will be acceptable to the seller.
However, staple financing has been the subject of several court cases in the past few years, and each time the investment bank not only lost the case, but had to pay a hefty fine or settlement. Last year RBC Capital Markets, the investment banking arm of the Royal Bank of Canada, was penalized $76 million by the Delaware Chancery Court for advising the ambulance service provider Rural/Metro Corporation on its sale while also pitching to finance the buyer, the private equity firm Warburg Pincus. Similarly, in 2012 Goldman Sachs had to disgorge its $20 million fee for advising El Paso in its sale to Kinder Morgan, after it was revealed Goldman owned a $4 billion stake in the buyer. Also, in 2011 Barclays was found by the same court to have a conflict of interest for advising Del Monte on its sale while financing the buyers Kohlberg Kravis Roberts, Vestar Capital and Centerview Capital. Barclays and Del Monte ultimately paid a $90 million settlement.
This is a good reminder that no matter how creative your compliance team may be, there are some conflicts of interest that cannot be mitigated. Please contact us to advise your organization on any potential transaction that could conceivably raise conflicts of interest issues. Note I have a great deal of experience with conflicts of interest from my time working on the Troubled Asset Relief Program at the U.S. Department of the Treasury. It is far better to be safe now than sorry later.