The Wall Street Journal reports on a growing phenomenon – in the wake of cases like RBC Capital Mkts., LLC v. Jervis, 2015 Del. LEXIS 629 (Del. Nov. 30, 2015), corporate boards considering M&A deals are rooting out investment banking conflicts by turning to smaller boutique firms to advise them.

My off the cuff reactions –

First, I find this notable if only because board directors are shielded from personal liability both by exculpatory clauses in corporate charters, and by D&O insurance. Scholars frequently argue that the lack of personal liability blunts the potential deterrent effects of shareholder lawsuits; I am fascinated to see a real-world demonstration that the lawsuit threat remains potent. It’s particularly striking in this instance because ultimately it is the conflicted banks – not the directors – who risk liability, and yet the directors are the ones who are exhibiting concern. This is a salutary result: the directors, of course, are the ones who have a fiduciary duty to protect shareholders. (But cf. Andrew F. Tuch, Banker Loyalty in Mergers and Acquisitions) But it’s not necessarily what one would have expected given the liability regime. The WSJ piece suggests that boards’ concerns stem from their fears that their corporations will be responsible for the banks’ legal fees, but I wonder if it’s more that lawsuits, especially ones that appear meritorious, really do have a shaming effect that shouldn’t be underestimated.

Second, to avoid conflicts, directors are hiring smaller, boutique advisory firms. In the post Dodd Frank world, many have questioned whether large mega banks are financially viable, and have suggested that breakups may be inevitable; chalk this up as another datapoint.

Finally, though, it’s worth pointing out that there is a legitimate question about how much shareholders will ultimately benefit. To the extent boutique firms are hired as secondary advisors to work with larger banks, is there a risk that the additional fees will cancel out any cost savings? And of course, there’s the standard argument that large banks’ connections and knowledge of industry is a benefit to their clients. We’ve seen this argument before – everywhere from the “revolving door” to independent directors to industry arbitrators to farcical questions about whether Supreme Court nominees have an opinion on Roe v. Wade – and it comes down to the claim that a loss of objectivity is the price of expertise. The problem is, it’s still not clear where the right balance lies.