Investment bank not liable for fairness opinion relying on unverified financial projections
The HA2003 Liquidating Trust v. Credit Suisse Securities LLC, February 20, 2008 | No. 06-3842 (U.S. Court of Appeals for the 7th Circuit)
Contract between parties set out terms of engagement and the defendant did not have a duty to go beyond its mandate.
This case takes us back to the heady days of the dot-com boom. Back in the 1990s, HA-LO Industries was in the business of making logo-bearing promotional products that companies could use to market themselves. In 1999, the company decided it needed to join the e-commerce bandwagon and subsequently agreed to purchase Starbelly.com for $240 million in cash and shares. While Starbelly.com was a young start-up with a negligible track record, its e-commerce system was attractive to HA-LO.
Facts
HA-LO retained Credit Suisse as investment banker and Ernst & Young as a business consultant. Credit Suisse subsequently provided HA-LO with a fairness opinion, dated as of January 17, 2000, stating that the consideration for the merger was fair. The engagement letter and the fairness opinion both specified that Credit Suisse relied on the unverified financial projections provided by HA-LO.
Ernst & Young, meanwhile, reviewed the financial projections, and informed HA-LO that they were unrealistic. Refusing to accept Ernst & Young’s pessimistic opinion, however, HA-LO proceeded with the transaction. A proxy solicitation was sent to shareholders in April 2000 and a copy of Credit Suisse’s fairness opinion was included in the mailing. Shareholders approved the transaction, which closed in May 2000. The merger, however, did not result in the success hoped for by HA-LO, as the company experienced distress within months. HA-LO subsequently entered into bankruptcy in July 2001 and the plaintiff was formed for the purposes of pursuing claims on behalf of creditors. To that end, the plaintiff turned its sights on the defendant and its fairness opinion.
The engagement letter limited liability on the part of Credit Suisse to “bad faith” and “gross negligence”. While bad faith was not claimed, the plaintiff argued that Credit Suisse should have relied on E&Y’s opinion of Starbelly.com’s prospects rather than HA-LO’s financial projections. The plaintiff also went further, claiming that Credit Suisse should have withdrawn its fairness opinion or prepared a new one once the market for technology stocks began to slide in early 2000. At trial, the Supreme Court of Delaware rejected these arguments as beyond Credit Suisse’s mandate.
Appeal
On appeal, the Seventh Circuit upheld the Supreme Court’s decision. The Seventh Circuit found that Credit Suisse had simply performed the duties under the contract for which it was retained. The defendant relied on HA-LO’s projections as required and the decision to continue with the transaction despite E&Y’s opinion was that of HA-LO. The Seventh Circuit likened the plaintiff’s attempt to seek recourse from Credit Suisse for management’s errors to that of an insurance policy, an idea it rejected. "Compelling investment banks to provide business-risks insurance as part of a fairness opinion would just make investors worse off, as that would increase the price of each opinion."
With respect to updating the opinion, the Circuit Court found no such duty on the part of Credit Suisse. The defendant performed the work for which it was retained and paid, and had no further duty. The impending drop in the market became apparent only in hindsight and even if it had been obvious at the time, as asserted by the plaintiff, then it would not have been necessary for Credit Suisse to restate such an obvious fact.
As such, Credit Suisse could not have been expected to assess the financial projections provided by HA-LO or to provide an updated opinion once the market experienced volatility. The contract between HA-LO and Credit Suisse set out the defendant’s duties, and the court upheld the terms of that agreement. As the court observed: “Intelligent adults can set their own standards of performance, and courts must enforce the deal they have struck.”
As such, the appeal by the plaintiff was dismissed.
