Column: High court affirms Rural/Metro: Should financial advisers worry? Frankel

Del Monte Pacific

02/12/2015 24:58

(The opinions expressed here are those of the author, a 
columnist for Reuters.) 
    By Alison Frankel 
    Dec 1 (Reuters) - There was good news and bad news for 
investment banks in Monday's hotly anticipated Rural/Metro 
opinion from the Delaware Supreme Court.  
    The bad: The state justices affirmed a $76 million judgment 
against RBC Capital Markets, finding that the bank manipulated 
Rural/Metro's 2011 sale process in an attempt to win a lucrative 
financing deal from the ambulance company's private equity 
acquirer. 
    The decision marks the first time the Delaware justices have 
held a financial adviser liable to shareholders for aiding and 
abetting a corporate board's breach of duty - certainly a scary 
prospect for banks. 
   On the other hand, the justices specifically repudiated 
language in the lower court's decision that called on banks to 
act as "gatekeepers" of corporate conduct in M&A deals. 
    "Adhering to the trial court's amorphous 'gatekeeper' 
language would inappropriately expand our narrow holding here by 
suggesting that any failure by a financial adviser to prevent 
directors from breaching their duty of care gives rise to an 
aiding and abetting claim against the adviser," the decision 
said. That should allay bankers' fears about their exposure to 
shareholders. 
    The big question, of course, is whether the Rural/Metro 
ruling will change the behavior of financial advisers. 
    As my Reuters colleague Tom Hals noted in his story Monday 
about the decision, corporations and their bankers have already 
become more transparent about bankers' potential conflicts, 
after a 2011 Chancery Court ruling suggested that Del Monte's 
financial adviser, Barclays, gave the board tainted advice to 
secure buy-side financing fees. Many banks now avoid such 
financing deals involving public corporation clients they're 
advising on M&A transactions. 
    But financial advisers will always run into conflicts 
between their institutional interests and the interests of their 
corporate board clients. If it's not buy-side financing fees, it 
will be something else. (Just ask Goldman Sachs.) Will the 
Rural/Metro decision keep banks from putting their own interests 
first? 
     
    FEAR OF LIABILITY 
    Interestingly, the two shareholder lawyers who led the case 
- Joel Friedlander of Friedlander & Gorris and Randall Baron of 
Robbins Geller Rudman & Dowd - offered different answers to that 
question. 
    Baron told me the Rural/Metro opinion, written by Justice 
Karen Valihura, sets a very high bar for aiding and abetting 
liability. 
    Shareholders first have to prove that the corporate board 
breached its duty to investors (although the Delaware justices 
did give plaintiffs a break by finding that board conduct should 
be scrutinized under the tough Revlon standard). 
    Then shareholders have to show financial advisers 
intentionally deceived their clients on the board - and that the 
deception caused real harm to investors. 
    In the Rural/Metro decision, Baron said, the Delaware 
justices "are saying over and over, you have to be bad guys 
doing bad things for selfish reasons." Baron told me it may 
still be too easy for financial advisers to get away with 
misbehavior. "For shareholders," he said, "maybe (aiding and 
abetting) shouldn't be such a tough standard." 
    Friedlander said, however, that the Rural/Metro ruling will 
force financial advisers - and their corporate board clients - 
to be vigilant about conflicts. 
    "The decision reveals a level of corruption in the process 
that people have to address," he told me. Fear of liability to 
shareholders, he predicted, will eliminate banks' most egregious 
disloyalty to clients. 
    The ruling also shows plaintiffs' lawyers that they can win 
shareholder claims against financial advisers, Friedlander said. 
And finally, he told me, the opinion should spur lawyers 
representing corporate boards to police bankers' potential 
conflicts. 
    That process has already begun, as Eric Klinger-Wilensky and 
Nathan Emeritz of Morris Nichols Arsht & Tunnell wrote in a 
forthcoming paper for Business Lawyer, "Financial Advisor 
Engagement Letters: Post-Rural/Metro Thoughts and Observations." 
Friedlander said the Supreme Court's affirmance means deal 
lawyers will continue to refine contracts between boards and 
their bankers. 
     
    DIALOGUE HAS CHANGED 
    It's worth pointing out that the Rural/Metro case may have 
also influenced the judges in Delaware Chancery Court. The court 
has recently taken a hard line on M&A class action settlements 
that give shareholders only enhanced disclosures in exchange for 
broad releases of their claims. 
    Early in the Rural/Metro litigation, plaintiffs' lawyers 
from Faruqi & Faruqi agreed to just such a settlement. 
Friedlander and Robbins Geller objected, and Vice-Chancellor 
Travis Laster eventually rejected the disclosure-only deal and 
appointed Friedlander and Baron to lead the case. The result was 
more than $100 million in recovery for shareholders. 
    In a soon-to-be-published paper for Penn's Institute for Law 
and Economics, Friedlander hypothesizes that Vice-Chancellor 
Laster's oversight of the Rural/Metro case deepened the judge's 
skepticism about disclosure-only settlements. Ultimately, he 
postulates, it was this case that "prompted a decisive break 
with an era of routine approval of disclosure settlements." 
    Or, as Baron put it: "The dialogue changed. The fact that 
the bank got caught changed it." 
    
 
 (Reporting by Alison Frankel. Editing by Alessandra Rafferty.) 
 ((alison.frankel@thomsonreuters.com)(+1 646 223 6491)(+1 917 
848 7493)(Reuters Messaging: 
alison.frankel.thomsonreuters.com@reuters.net)) 
 
Keywords: OTC RURAL/