The recent stock market downturn could cause severe indigestion for
several highly acquisitive companies. If the chief executive is
looking to make the FD the scapegoat for a deal that went sour, the
FD may not be able to lay the blame on the financial advice
obtained at the time of the transaction. Before he settles down to
re-read the financial advisers' engagement letter with the benefit
of hindsight, the FD should perhaps reflect on the lessons of
Ginora Investments Ltd v James Capel & Co. Ltd
Some six years on, the case provides useful
reminders for those reviewing engagement letters for corporate
finance advice. In the case, the judge noted that the board of the
public company retaining the adviser was not "an elderly widow with
failing eyesight and no business experience".
In 1989, James Capel were retained at three days'
notice to act as financial advisers to the property company Priest
Marians Holdings plc in connection with a £115 million hostile
acquisition of Local London Group plc.
Witnesses for Priest Marians alleged that Local
London's indebtedness had been far greater than anticipated at the
time of the bid. Priest Marians subsequently went into voluntary
liquidation. James Capel was sued for alleged negligent
misrepresentation and breach of the duties of care that Priest
Marians claimed that Capel had assumed when they agreed to act as
the bidder's advisers, albeit at such short notice. The amount
claimed was £34 million. The cause of the action was assigned to
Capel's letter of engagement expressly assumed a
duty to advise on "tactics and strategy". In these proceedings, it
was alleged that Capel also assumed an implied duty of care
to advise Priest Marians:
- On the financial implications of the proposed acquisition of
Local London Group;
- On the suitability of the proposed acquisition, including the
level of risk inherent in it and whether the possible benefits to
Priest Marians justified the level of risk;
- On the timing, price and terms of the bid; and
- On the tactics to be employed and, in particular, whether the
bid should have been a recommended or hostile one and whether or
not it should have been declared unconditional in all respects.
Capel alleged that its duty of care was more limited. In this
regard, it relied upon the report of the DTI Inspectors into
Atlantic Computers Plc published in April 1994. That report
described the role of a merchant bank in the takeover of a quoted
"... essentially a co-ordinating and
facilitating role, advising on regulatory and tactical matters and
on the financing of the bid and its presentation to the market,
with responsibility for ensuring that all documentation was
properly prepared and that all regulatory requirements were
The DTI Inspectors also indicated that, in the
absence of any express agreement to the contrary, a merchant bank
acting as a financial adviser on a takeover did not
impliedly assume a responsibility for giving advice on the question
of whether an acquisition was in the best interests of the offer or
company's shareholders. The merchant bank's duty was no higher than
"... to satisfy itself that the company has taken all reasonable
steps to enable it to evaluate the target and judge whether the
acquisition is in the best interests of shareholders". The judge,
however, did not adopt this definition.
Why Capel Won
Ruling in Capel's favour, the judge thought two
things were particularly important. First, the question of possible
negligence had to be considered in the light of the circumstances
obtaining at the time, rather than with the benefit of hindsight.
Second, whatever Capel's duties were, they were owed to the board
of the listed public company. The judge assumed that the directors
of that company had the knowledge, wherewithal and the business
acumen to run a company of that nature.
The advice given by the financial advisers may, of
course, turn out to be wrong. But the judge made it clear that,
provided the advice was given reasonably and in the light of what
was known at the time, the directors could not assume that the
company could recover its losses from its financial adviser.
Lessons to be learnt from the
(i) For corporate finance advisers the
- The importance of setting out in a letter of engagement the
precise duties and obligations, which a merchant bank, acting as
financial advisers in a takeover, is assuming to its client. That
is particularly so in view of the judge's refusal to adopt the
definition of the scope of a merchant bank's duty as outlined in
the report of the DTI Inspectors on Atlantic Computers Plc.
- The information for which the adviser takes responsibility, and
that for which it is relying on others.
- The need to apportion responsibility for the making of
commercial decisions; in the case, the company directors were
experienced property developers, yet they attempted to blame their
financial advisers for a subsequent decline in property values.
- The need to maintain, as far as possible, an accurate note of
telephone calls and meetings throughout the transaction.
For the board:
- The decision in Capel makes it very clear that a board must
consider carefully whether its proposed strategy is correct. It is
also vital that the board can subsequently demonstrate at any trial
that it was justified in relying on its advisers.
- Perhaps most significantly, the board must recognise that the
courts are likely to attribute to it a sufficient degree of
knowledge of its own business sector to make informed strategic
decisions, with or without financial advisers.
For the finance director, the case underlines the need
to pay particular attention to the description of services in the
letter of engagement with the financial advisers - not merely to
the fees clause.
- Is the description of the role so narrow that the adviser
appears to be taking no responsibility? So, for example, who will
ensure that the different advisers or the deal team are
co-ordinated, and that whatever is required to conclude the deal is
delivered when anticipated by the timetable.
- Will the financial adviser be responsible for "plugging the
gaps"? So, if the adviser considers that there are gaps in the
investigation of the target - or in the other advisers' reports is
it expected to "stick its hand up" and identify them?
- What sort of recommendation is the board going to receive from
the adviser? Are the directors happy to rely on their own
commercial assessments of the deal? If not, do they want the
advisers to advise the board on whether they actually believe that
the terms of the deal are reasonable in case the institutional
shareholders and the press start sniping. One other point to watch
is to whom the directors can disclose the financial advice they
- In what form, if any, will the advice be presented to the
board? Will there simply be an oral presentation or a written
summary, which can be circulated to all directors, particularly
those who cannot attend the sign-off meeting?
- Fees: check the fees clause carefully, particularly if there
have been any late changes. For example:
- Is there a monthly advisory fee? If
so, is there an offset against a success fee? What is payable if
the engagement is terminated by the Company?
- What is payable at what stage of the engagement
(for example, initially, on announcement and on the conclusion (or
aborting) of the deal)? And
- If there is a percentage success fee, what is it
to be worked out on?
(iv) For the in-house lawyer or company
secretary, it is important that decisions at board or committee
meetings dealing with major acquisitions (and the financial advice
given at the meetings) are carefully minuted. Check whether
correspondence from the financial advisers sent to a specific
individual within the Company at an earlier stage of the deal needs
to be drawn to the attention of the board before rather than after
the deal is announced. The letter may, for example, highlight a
crucial aspect of the transaction, which is outside the financial
For further information, please contact:
Andrew Crawford, Mitre House, 160 Aldersgate
Street, London EC1N 4DD
Phone: 020 7367 2867, e-mail:
Simon Howley, Mitre House, 160 Aldersgate Street,
London EC1N 4DD
Phone: 020 7367 3566, e-mail: