Risk & Compliance

Merrill Can’t Ditch Suit Over Advice to Zale

A Delaware judge finds investors may sue Merrill for failing to disclose a potential conflict during Zale's sale to Signet Jewelers.
Matthew HellerOctober 2, 2015

A Delaware judge has ruled that shareholders challenging Zale Corp.’s $690 million takeover by rival Signet Jewelers can sue Merrill Lynch for failing to disclose a possible conflict of interest to Zale’s board during the sale process.

Zale agreed in February 2014 to be acquired by Signet for $21 per share. Investors allege in a class action they were short-changed, in part because Merrill never told Zale’s board that a month before it was hired by the board it made a presentation to Signet’s chief financial officer about acquiring Zale for $17 to $21 a share.

Given its advice to Signet‘s management, Merrill Lynch could not credibly have asked Signet to pay more than $21 a share, the plaintiffs allege.

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The bank argued that the presentation to Signet created no conflicts of interest. But in a ruling Thursday, Delaware Chancery Court Vice Chancellor Donald Parsons denied Merrill’s motion to dismiss the investors’ claims that it aided the board in breaching its fiduciary duty.

“I find it reasonably conceivable that this undisclosed conflict hampered the ability of Merrill Lynch and, consequently, the board to seek a higher price for Zale‘s stockholders,” he explained.

Reuters said the ruling was the latest from the Delaware court, a premiere venue for shareholder lawsuits, to potentially expose a Wall Street bank to damages over a merger deal. Last year, shareholders of Rural/Metro won $76 million in damages against a unit of Royal Bank of Canada for misleading the Rural Metro board in the sale of the ambulance company to Warburg Pincus in 2011.

Merrill made its presentation to Signet a day after Signet’s CEO approached a Zale director about a deal. Jeffrey Rose, a managing director at Merrill, was a senior member of both the team that made the presentation to Signet and the team that eventually was engaged to advise the Zale board during the merger process.

Merrill said it disagreed with Chancellor Parsons’ ruling. “The investment banking presentation at issue created no conflict of interest and had no impact on Bank of America Merrill Lynch’s efforts on Zale’s behalf,” Bill Halldin, a Merrill spokesman, said.