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Phil Rupprecht

Phoenix Asset Protection Attorney Phil Rupprecht  

In addition to serving his own high net worth clients, Phil Rupprecht is a valuable resource for other attorneys, financial planners and tax professionals in shielding their clients' accumulated wealth from avoidable risk through the innovative use of domestic and offshore planning strategies.

Heather Macre

Phoenix attorney Heather Macre  

Heather Macre's practice encompasses commercial litigation and health care law, plus bankruptcy, complex bankruptcy motion practice, bankruptcy-related litigation and appeals.

 

What Happens in Delaware Doesn’t Stay in Delaware:
The Rural/Metro Decision’s 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.

Background

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 buyer.

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 sale.

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 in full.

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.