No Fiduciary Duty (eToys Inc.) Representation and Warranty

Summary

This template may be used by underwriters’ counsel in a securities offering to explicitly state that there is no fiduciary relationship between the parties to an underwriting agreement. This is commonly referred to as a no fiduciary duty provision. This template includes practical guidance and drafting notes. No fiduciary duty provisions became standard after the 2005 decision of the New York Court of Appeals in the eToys Inc. litigation. See EBC I, Inc. v. Goldman, Sachs & Co. 799 N.Y.S.2d 170 (N.Y. 2005).) In EBC I, the Court ruled that an underwriter of a public offering of securities may owe a fiduciary duty to the issuer it is advising where, apart from the terms of the underwriting agreement, “…the underwriter and issuer created a relationship of higher trust than would arise from the underwriting agreement alone.” The Court held that the issuer in the case could properly assert a claim of breach of fiduciary duty against the lead underwriter for failure to disclose certain conflicts of interest concerning pricing of its initial public offering on the grounds that the issuer relied on the underwriter’s expertise and advice on the pricing of the offering. Although the issuer’s claim was ultimately dismissed in 2011 when the Court rejected its claim that the underwriter’s advice was sufficient to create a fiduciary duty, investment banks have continued to include no fiduciary duty provisions in their form underwriting agreements in an effort to minimize any potential liability to issuers. See EBC I, Inc. v. Goldman, Sachs & Co. 936 N.Y.S.2d 92 (App. Div. 2011). This template provision should be customized to the particular facts and circumstances of the company and the underwriting agreement. For a template of underwriting agreement, see Underwriting Agreement (Primary Offering). For more on IPOs generally, see Initial Public Offerings Resource Kit.