The Responsibilities of Banks in Financing Tender Offer Takeovers of Customers

• Published in: The University of Chicago law review 1981-04, Vol.48 (2), p.439-461
• Main Author: Patterson, Roger
• Format: Article
• Language: English
• Subjects: Bank loans; Banking; Banks; Comments; Confidentiality; Conflicts of interest; Court decisions; Customers; Disclosure; Fiduciary responsibility; Financing; Information; Legal duty; Privileged communications; Responsibilities; Retail banking; State banks; State court decisions; Stockholders; Target company; Tender offers
• ISSN: 0041-9494; 1939-859X
• DOI: 10.2307/1599469

Tender offers are often used to allow takeover of a firm which has refused a merger bid. They require a great deal of capital to offer shareholders a premium, and conflicts can arise when the bank approached for financing is also a creditor of the target, since the target may claim the bank owes a duty of loyalty and of nondisclosure. Such financing should not be prohibited because the shareholders of the target probably suffer no injury. Even if injury can be shown, however, other considerations do not support prohibition. Banks ordinarily have a duty to disclose material information not in the possession of the other party, unlike in the ordinary arm's length bargain, but they also have a fiduciary duty not to disclose confidential customer information. Analysis of the duty of disclosure shows that it is less costly to impose it than not to impose it. However, the duty to avoid disclosure of confidential customer information does not automatically lead to the conclusion that banks should refrain from financing tender offers in the situation described. While most bankers agree that ethical duties require them to refrain from such financing, analysis of the dislocative costs shows that the duty to refrain should not be imposed. On the other hand, the duty to refrain from disclosing confidential customer information should be enforced even in the context of such financing, given all parties' expectations. This does not mean, however, that banks should be prohibited from using the confidential information in making their decisions regarding the financing, since the costs of such a duty would far outweigh any equitable benefits.