For Bear Stearns shareholders, Christmas came on Easter Monday, when JP Morgan announced that it would pay $10 per Bear Stearns share, rather than $2 per share, as initially agreed, valuing Bear at around US$2.4 billion. To secure the deal, Bear Stearns issued JP Morgan with 95 million shares, giving it a 39.5% stake in the near-insolvent investment bank.
The bid increase is believed to have been spurred by a legal blunder committed by JP Morgan’s lawyers from Wachtell, Lipton, Rosen & Katz. As explained by Steven Davidoff in the New York Times, under the original agreement between JP Morgan and Bear, if Bear shareholders rejected down the deal, JP Morgan may still have been legally liable to guarantee Bear’s debts. This put JP Morgan in a slightly unenviable position of “effectively allowing Bear to seek a higher bid while still forcing JP Morgan to honor its guarantee.” When he heard the news, JP Morgan boss, Jamie Dimon, was apparently “apoplectic”.
What is most surprising though is the fact that the error was ostensibly committed by the esteemed firm of Wachtell, Lipton, Rosen & Katz. While Wachtell isn’t well known in Australia, it is the bluest of blue chip law firms in the United States. While not a mega-firm size wise (it has only 200-odd lawyers, compared with several thousand at Skadden Arps), Wachtell has been the most respected law firm in Wall Street since the 1980s. Wachtell senior partner, Marty Lipton, played a leading role in Wall Street takeover-mania in the 1980s. Lipton tended to act for large companies who had come under attack by corporate raiders, like Ronald Perelman or Carl Icahn. Lipton is credited with inventing the “poison pill” (or ‘Shareholder Rights Plan’), which is a legal mechanism to prevent a hostile takeover.
Wachtell, which was established by Lipton with fellow NYU students in 1965 is believed to be one of the most lucrative law firms in the world. Partners earned (on average) US$3.5 million in 2004 (admittedly, remuneration at Wachtell pales in comparison to investment banks or hedge funds).
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It is difficult to imagine who would be more furious at the blunder – hard hitting JP Morgan boss, Jamie Dimon, or the “Dean of the Takeover bar”, Marty Lipton.
In Wachtell’s defence, the mistake is certainly not the first time a lawyer has erred. While many place them on a sort of intellectual pedestal, lawyers are certainly not immune from making catastrophic errors. At the top-tier firm where I once worked, legend had it that an overworked articled clerk once mistakenly sent a fax intended for their client (a bidder) to opposing counsel. The fax contained a higher valuation of the target company which then required the bidder to increase their offer by many millions of dollars.
Yes, lawyers make many mistakes, even those who charge $500 per hour. Admittedly, most mistakes don’t cost US$1.8 billion.