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What Happens in Delaware Doesn’t Stay in Delaware:
The Rural/Metro Decisions Wider Impact on Advisors
While the RBC Capital Markets opinion limits
exposure for financial advisors, this case sets a precedent for finding that all
advisors can be liable for aiding and abetting breaches of fiduciary duties,
even if the board that they advised is not.
By Philip R. Rupprecht and
Heather A. Macre
On November 30, 2015, the Delaware Supreme Court sent a
cautionary message to professional advisors with its decision in
RBC Capital Markets, LLC v. Jervis.
The Court affirmed the Court of Chancery, which assessed $76 million against RBC
for aiding and abetting breaches of fiduciary duties committed by the directors
of Scottsdale-based Rural/Metro.
Many financial (and other) advisors were watching the case
closely, as the Court of Chancery had cast financial advisors as “gatekeepers”
with a quasi-fiduciary duty to monitor corporate boards, to ensure that those
boards were well-informed and exercising due care. The opinion softened this
stance, abandoning the “gatekeeper” language. Nevertheless, this decision should
concern the financial, and possibly broader, advising industry.
Unlike Las Vegas, what happens in the Delaware courts does not
stay in Delaware.
The case arose from the sale of ambulance company Rural/Metro
Corporation to a private equity firm, Warburg Pincus. Initially, the Rural/Metro
board decided to investigate several options, including a possible sale or
merger with its largest rival, EMS. The board created a subcommittee to explore
the sale or merger. Instead, the subcommittee usurped the board’s power and put
the company on the road to a private equity sale. RBC was engaged to advise the
subcommittee and board and to help set a sale price that would maximize the
value to stockholders. However, RBC pushed for a sale (to the exclusion of other
options) and created a sale process that ran parallel to the bidding on the sale
to EMS, thereby depressing the number of bids for Rural/Metro. In addition, RBC
provided inadequate and misleading information to the board at the last minute
and failed to disclose that it was also pursuing financing for the eventual
A group of Rural/Metro stockholders sued Rural/Metro’s directors
and its two financial advisors, all of whom settled except for RBC.
The lower court found that Rural/Metro’s directors breached
their fiduciary duties by failing to properly monitor the process. The court
also held that RBC aided and abetted that breach and was 83% liable due to its
knowing manipulation of the sale process, the offering materials and the proxy
statement, and its undisclosed pursuit of an engagement on both sides of the
The Delaware Supreme Court largely agreed. Justice Karen
Valihura wrote the 105-page opinion, which focused on how RBC created and
exploited conflicts, failed to disclose those conflicts, and created an
“information vacuum” that misled and misinformed Rural/Metro’s board. However,
the Court specifically stated that financial advisors such as RBC should not be
treated as “gatekeepers” and that its ruling was narrow, resulting from extreme
circumstances, nondisclosures, and conflicts of interest.
In a lengthy footnote, the Court opined that RBC was under an
obligation not to act in a manner that is contrary to the interests of the board
of directors, thereby undermining the very advice that it knew the directors
would be relying upon in their decision making processes.
Caution for Financial and Legal Advisors
So, where does this leave financial advisors and others who
advise boards? The ruling suggests that certain tools, which previously might
have been viewed as promotional and therefore subject to broad latitude as
opinion pieces, must be taken seriously. Pitch materials and valuation metrics,
must be complete, accurate and timely.
While the opinion certainly limits exposure for financial
advisors, this case sets a precedent for finding that all advisors can be liable
for aiding and abetting breaches of fiduciary duties, even if the board that
they advised is not.
Helpfully, the Delaware Supreme Court focused on RBC’s lack of
disclosure and the terms of its engagement letter, providing some guidance. The
decision underlines the importance of conflict management for financial advisors
and the value of detailed engagement letters that address both current and
future conflicts. When they do arise, conflicts should be disclosed promptly and
Financial firms may also need to re-run or revise conflicts
checks as deals move forward and more is known about possible bidders or buyers.
Similarly, any involvement in buy-side financing should be disclosed if the
financial advisor wishes to remain on both sides. Further, if buy-side financing
creates a situation where a financial advisor cannot act in the best interests
of its clients, the advisor should withdraw.
As in most cases, the best policy remains one of complete and
careful disclosure and transparency.