Lender conflict6th February 2021
Conflicts of interest pose significant reputation and legal risks to corporate finance professionals. In investment banking, and M&A in particular, there is a higher risk of bad press and civil litigation than is the case with other areas of corporate finance.
Because of the higher risk of conflict problems arising, investment bankers must be particularly careful in identifying, assessing, and managing conflicts of interest in connection with such transactions.
In many cases, investment banks can easily identify conflicts. In other cases, important conflicts may not be as readily identifiable. It is not possible to provide a comprehensive definition of what constitutes a “conflict of interest” but the phrase generally refers to circumstances in which:
- A firm has more than one interest in a transaction
- The existence of those multiple interests may compromise, or have the appearance of compromising, the bank’s ability to provide independent financial advice to its clients or impair the bank’s ability to satisfy the legitimate expectations of those clients.
Conflicts of interest in investment banking:
- The bank or an affiliate has more than one client who is interested in the outcome of a transaction or potential transaction
- The bank or an affiliate is a lender to, or investor in, one of the parties to a transaction or potential transaction
- The bank knows material non-public information about a party or potential party to a transaction that it is unable to share with its client.
How to Avoid Conflicts of Interest
- To mitigate reputation and legal risks associated with transactional conflicts of interest, it is a good idea to avoid:
- Providing financial advisory services for any transaction to two competing interests
- Making equity investments in any transaction with two competing interests
- Providing or arranging financing in connection with a take-over of a client
- Advising a client in connection with an unsolicited bid from another client