On March 14 2014 the Delaware Chancery Court found RBC Capital Advisors (RBC) liable for aiding and abetting the breach of fiduciary duty of the board of directors of Rural/Metro, stemming from the sale of the company to Warburg Pincus.

While the details of the court’s decision are contained in Vice Chancellor J. Travis Laster’s 91-page opinion, several salient points are important to understand:

  • Rural/Metro, one of the leading providers of ambulance service, made a decision in 2010 to expand its business and formed a Special Committee of the Board of Directors to explore strategic options.
  • One of the key options being advanced by RBC at the time was that the company could acquire its largest competitor, Emergency Medical Services (EMS). Although the acquisition failed, RBC formed the view that EMS’s acquirer might wish to eventually merge EMS with Rural/Metro.
  • The board subsequently authorized the Special Committee to explore a range of strategic options and to retain a financial advisor to assist. Critical to the court’s determination was the fact that the board did not authorize the sale of the company at that time.
  • Nonetheless, the only option explored by the Special Committee and its retained financial advisor, RBC, was the sale of Rural/Metro on an expedited timeline.
  • Of critical importance, as the court found, was that the board did not have a meaningful role in the ultimate sale decision and had authorized the sale based upon limited information. Most significantly, the board had scant valuation information even at the time it determined to sell the company. As for RBC, the court was particularly concerned by its decision to sell the company at the same time as the EMS sale, which had the effect of limiting the field of potential buyers. Moreover, RBC failed to disclose that it was seeking the buy-side role in the EMS sale, while simultaneously undertaking the sell-side role for Rural/ Metro. Finally, RBC failed to disclose that it was attempting to provide staple financing to Warburg for the acquisition, at the same time it was recommending that other potential bidders (including most significantly, the purchaser of EMS) be excluded because they could not meet the expedited timeline.
  • Both the members of the board and the secondary financial advisor settled the shareholder claims that had been brought against them, with the aiding and abetting claims against RBC proceeding to trial.
  • Following the trial, the court concluded that the board’s decision to approve the sale lacked reasonableness and that RBC knowingly participated in the board’s breach of its fiduciary duties by creating an unreasonable sale process and by failing to provide the board with adequate valuation information or proper disclosure of its alternate roles in the transactions.

LESSONS LEARNED

Whether one agrees or disagrees with the Delaware Chancery Court’s March 7 ruling in the Rural/Metro litigation, it cannot be disputed that the court delivered a very stern warning to financial advisors, investment bankers and other advisors in corporate America. And, while there is nothing in the court’s decision that would make it any less applicable to the myriad consultants advising distressed companies, owing to the different landscape and far more transparent process, many of the lessons from Rural/Metro have in fact been learned in the distressed market.

First, in the distressed market, often the range of options and timing are far more limited than available in healthy situations such as Rural/Metro. Moreover, with distressed companies, fiduciary duties have altered and the economic realities focus on fulcrum creditors (rather than equity holders). This group and its advisors are keenly focused on the efforts and compensation of the company’s professionals.

  1. In the distressed world, advisors generally proceed into the engagement recognizing that their engagement (and compensation) will be scrutinized in the relatively transparent chapter 11 environment. Advisors must satisfy the ‘disinterestedness’ standard, and all facets of their engagement will be scrutinized not only by their client, but by the United States Trustee, creditors’ committees and the ultimate arbiter, the bankruptcy court.
  2. Indeed, certain lessons learned by advisors in the distressed market would likely have avoided the Rural/ Metro situation. Finally, the advisor needs to ensure that it avoids even the appearance of a conflict. Not only will these steps avoid the situation addressed in Rural/Metro, but it will allow advisors to continue to serve their critical gatekeeping role.