Dear Ethics Lawyer explores: “Potential Waiver of Multiple Bidder Conflict” —

• “Q. Dear Ethics Lawyer, I am a banking lawyer who frequently handles acquisitions of banks or branches of banks. Recently, a family-owned bank group in our region has quietly let it be known that it would entertain offers to sell. One of our clients, let’s call them Bank A, contacted me a few days ago to assist them in preparing the legal documents for a bid to purchase it involving a combination of cash and stock. Today another prospective client, Bank B, has contacted one of my partners to assist them in preparing a bid.”
• “I seem to recall from one of your prior columns that this could be a conflict. If so, can’t we just get waivers from both bank groups to allow us to use separate teams of lawyers to assist each bid, each walled off from the other? We won’t be advising on the amount of either bid; our role in each will simply be to prepare a legal offering package, and if successful (in which case, we’d only be representing one of them), the acquisition documents.”
• A: Under Rule 1.7(a)(2), a ‘material limitation’ conflict exists when there is a ‘significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client.’ Here, your firm would be assisting two clients in a ‘zero sum’ bidding war, that only of them can win. And even though you indicate that you will not be determining the amount of the bid, you will have knowledge of each bid’s amount and perhaps other terms and conditions that if known by one or the other of your prospective clients could be used to enhance their bid to the detriment of the other. This is a conflict as you suspect.”
• “Your follow-up question about obtaining a waiver to allow two separate walled-off teams of lawyers to independently advise the two clients in making their respective bids presents an interesting scenario, but one that you should approach very carefully, if at all. As with other concurrent conflicts, ‘material limitation’ conflicts are waivable by the affected clients, i.e., the representation can be undertaken, if the four elements set forth in Rule 1.7(b) are met. As applied to this situation, Rule 1.7(b)(2) and (3) are met or do not apply, leaving 1.7(b)(1) and (4) to satisfy. Rule 1.7(b)(1) requires that the lawyers involved reasonably believe that they will be able to provide competent and diligent representation to each affected client. So, for example, you should consider whether each of your teams could be effectively and completely walled off from the other (as to communications, files, documents, etc.) but still have the necessary expertise and strength to meet the competence and diligence standards. This determination carries risk of a losing bidder later claiming that they were not given the same resources or that some ‘leak’ in the ‘wall’ occurred. Equally as important, you also must consider whether the lawyers can truly do their best for each client, given their own and the firm’s respective economic and other interests in maintaining them as clients. This element must be considered carefully and is another source of risk.”
• “Perhaps even more significantly, Rule 1.7(b)(4) requires that each client give informed consent, confirmed in writing. ‘Informed consent’ is defined in Rule 1.0(e) as ‘agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.’ It is difficult to see why either entity would agree for their law firm to advise a competing bidder. In addition, this requirement may well present a catch-22 in the situation you describe. In order to obtain informed consent from each of these clients to the ‘separate team’ representation, you would need to advise each about the existence and identity of the other as a prospective bidder, yet Rule 1.6 prohibits you from revealing information pertaining to the representation of either of them without their consent. Thus, even asking for informed consent would reveal the existence of another bidder in a way that either or both may not wish to have disclosed.”

“With LMEs Primed for Growth, Will Consolidation Among Clients and Firms Come With Risk?” —

• “Liability management has the hallmarks of a sought-after practice. Better still, it’s primed for growth, thanks to a robust demand for debt and interest rates that remain elevated after initial COVID-era increases. ‘At the end of the day, this practice is going to grow. It’s been growing at an exponential rate that is almost hard to describe when you look at it,’ said Sullivan & Cromwell capital solutions practice co-head Ari Blaut. ‘It’s kind of a rocket ship.’”
• “But the contentious nature of some coercive liability management exercises (LMEs) exposes the practice to an industry trend that may require extra care in the future: consolidation.”
• “Although LME work is largely concentrated among a handful of top firms, those firms are among a cohort that is pulling away from the rest of the Am Law 100 in terms of size, profitability and market dominance.”
• “The consolidation trend for firms and clients increases the potential for conflicts of interest as a small cadre of law firms increasingly represents a shrinking number of private capital firms, some of whom may be clients in some matters and counterparties in others.”
• “Liability management isn’t unique in its ability to present such conflicts, which exist in other transactions and litigation as well, and many firms have become adept at managing ethical conflicts through waivers.”
• “But business conflicts could prove trickier with LMEs, especially in coercive transactions where some lenders run the risk of major losses.”
• “‘Whenever you have nonconsensual LME these days you have to think there is a real litigation risk,’ Blaut said. ‘People are going to file it whether or not they necessarily have a leg to stand on. Part of it is nobody wants to be on the losing end of something.’”
• “After such a conflict led Kirkland & Ellis to change course with its LME practice this winter — a move that preceded the departures of LME specialist David Nemecek and six other LME partners to Simpson Thacher & Bartlett — top LME practitioners urged caution in firms’ choice of clients and methods of negotiation.”
• “‘We touch almost all these institutions on the credit side, and we may have relationships with others,’ said Gibson, Dunn & Crutcher global business restructuring chair Scott Greenberg. ‘If it’s a true conflict where we can’t be adverse to a sponsor, we’ll pass on the mandate.’”
  No Windmill Dunks”
• “While leading LME practitioners acknowledged the risk of conflicts, they broadly said such conflicts can be avoided by effectively screening new matters for potential conflicts at the outset.”
• “‘We do bring in conflict counsel on a lot of our LME deals, and we are very careful when we take on these matters in making sure clients know what conflict counsel is there to do, what we can and can’t do from a conflicts perspective, and to make sure we comply with our engagement letters,’ Blaut said. ‘It’s no different from any other transaction.’”
• “Additionally, LME lawyers urged the need to handle contentious deals as respectfully and professionally as possible.”
• “‘There are repeat players in this, and I do think that your reputation is important,’ said Justin Lee, global head of liability management and strategic capital solutions at Weil, Gotshal & Manges. ‘The way you handle yourself, the way you roll out deals, the way you thoughtfully engage with counterparties is always going to be important.’”