On October 10, Vice Chancellor J. Travis Laster of the Delaware Chancery Court issued an opinion ordering RBC Capital Markets LLC (“the Bank”) to pay USD $75.8 million of a $91.3 million damages award to a class of former Rural/Metro Corp. shareholders. The damages opinion was preceded by the court’s finding in March that the Bank, along with Rural/Metro’s directors, and their other financial advisor Moelis & Co. LLC, were liable for breaches of their respective duties in connection with the sale of the company to Warburg Pincus LLC. The Bank was found to have deliberately undervalued the company, advising the board to accept Warburg’s offer, without disclosing that it was simultaneously seeking to finance Warburg’s takeover.
In apportioning 83% of the damages to the Bank, Vice Chancellor Laster rejected the Bank’s argument that it was entitled to contribution from the other defendants. The court found that while the directors breached their duties in approving the disclosures in the proxy statement and the merger, “they did so because [the Bank] misled them.” Applying the doctrine of “unclean hands” the court held that “[if the Bank] were permitted to seek contribution for these claims from the directors, then it would be taking advantage of the targets of its own misconduct.” The opinion is significant in a number of respects, notably that it signals an expansion of the scope of liability in the Chancery Court – perhaps the most important U.S. court with respect to shareholder litigation and corporate governance issues – for banks serving as investment advisers. Indeed, in his March 10 opinion, Vice Chancellor Laster wrote that “[t]he threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs.” The judgment against the Bank, along with the finding of liability as to the Rural/Metro directors, may well incentivize similarly situated litigants to settle, potentially at a premium, to limit their exposure to large judgments.