In RBC Capital Markets, LLC v. Joanna Jervis, No. 140, 2015 (Del. Nov. 30, 2015), the Delaware Supreme Court affirmed a judgment holding a financial advisory firm liable for $76 million in damages for aiding and abetting a board of directors’ breach of fiduciary duty in connection with the sale of the company. The $76 million award constitutes the vast majority of the total damages claimed on behalf of the company’s shareholders.
Background. In 2011, a special committee of the board of directors of Rural Metro Corporation selected RBC to analyze the company’s strategic future. RBC recommended a sale of the company, but failed to disclose that it was hoping to capitalize on the sale by also representing companies providing financing on the buy side of the deal. After the sale, stockholders brought suit against the board and RBC for proposing a sale that undervalued Rural/Metro. All defendants except RBC settled before trial.
Applying the Revlon standard to the board’s actions, the Court of Chancery held that the board breached its duty of care by failing to monitor the sale process, and that RBC aided and abetted this breach. The court found that the financial advisor’s conflicts were material information not adequately disclosed to the board, and that the board did not appropriately oversee its financial advisor. For these reasons, the court upheld the lower court’s decision.
Significance. The court’s decision does not represent a sea change in Delaware law. First, the court stated that its decision is limited to the unique facts of the Rural/Metro sale. The court’s 105-page opinion contains a detailed description of the facts, which underscores the court’s own guidance that its holding is case-specific.
Second, the decision is not a fundamental re-think of aiding and abetting liability. The court expressly rejected the lower court’s assertion that a financial advisor should act as a “gatekeeper,” and stated that the “narrow” holding in the case did not mean that any failure by a financial advisor to prevent directors from breaching their duty of care gives rise to an aiding and abetting claim against the advisor.
Third, the opinion provides useful guidance for how directors should consider conflicts in the engagement of advisory services. “[D]irectors need to be active and reasonably informed when overseeing the sale process, including identifying and responding to actual or potential conflicts of interest. But, at the same time, a board is not required to perform searching and ongoing due diligence on its retained advisors in order to ensure that the advisors are not acting in contravention of the company’s interests, thereby undermining the very process for which they have been retained. A board’s consent to a conflict does not give the advisor a ‘free pass’ to act in its own self-interest and to the detriment of its client. Because the conflicted advisor may, alone, possess information relating to a conflict, the board should require disclosure of, on an ongoing basis, material information that might impact the board’s process.”
The court did not shut the door on engaging conflicted advisors and in fact explicitly addressed that situation: “[D]irectors [should] be especially diligent in overseeing the conflicted advisor’s role in the sale process... For instance, the board could, when faced with a conflicted advisor, as a contractual matter, treat the conflicted advisor at arm’s-length, and insist on protections to ensure that conflicts that might impact the board’s process are disclosed at the outset and throughout the sale process.”
Finally, the court emphasized the requirement that an aider and abettor act withscienter, making such a claim “among the most difficult to prove.” The court stated that in this case, the financial advisor was “propelled by its own motives” when pushing for a sale of Rural/Metro, and was looking out for its own interests when it aided and abetted the directors’ breach of fiduciary duty. If anything, the court took pains to say that the unusual facts in this case satisfied that requirement when many ordinary actions of financial advisors would not.
The decision nevertheless highlights the court’s concern that conflicted financial advisors have an informational advantage when it comes to knowledge of their real and potential conflicts of interests and thus should disclose all conflicts. It also potentially opens the door for entrepreneurial plaintiffs to attempt claims against financial advisors and other outside professional services providers, which will be subjected to the customary legal standards already in place.