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Third-party advisors, boards involved in deals need to be more careful after Delaware ruling

A recent court ruling in Delaware shows the risks associated with advice given by third-party advisors when it comes to merger and acquisition deals.

The ruling by a Delaware Court of Chancery judge last month against RBC (Royal Bank of Canada) Capital Markets will lead to corporate boards and financial advisors being more careful in the acquisition process.

In March, it was found that RBC had conflicts of interest when it came to a $438 million deal in 2011 when a company acquired Rural/Metro Corp, a large ambulance service business.

The judge in the case, Travis Laster, held a third-party advisor, RBC, liable for aiding and abetting a fiduciary breach by the company's board of directors. RBC had provided advice in the sale of Rural/Metro to Warburg Pincus, a private equity firm.

“This is a significant decision,” Steven Haas, an attorney with Hunton & Williams who handles many merger and acquisitions and corporate governance matters, said in an interview on Wednesday. “Boards are being held responsible for the conduct of their advisors.”

That means they likely need to be more proactive regarding the advisors. “The court said financial advisors were gatekeepers,” Haas explained. One lesson from the case is that directors really need to know what is happening during an entire buyout process.

In addition, financial advisors now have more pressure on them to disclose a possible conflict of interest.

On a practical level, the decision may lead to financial advisors limiting the number of services they provide to a company, Haas said, explaining they will simply conclude that the “risk outweighs the benefits.” 

There is now “heightened risk” for investment banks, he adds. They will need “to evaluate their potential exposure when determining what business to go after,” Haas said in a statement. “It might signal the end of stapled financing for publicly traded companies – advising sellers while offering financing to buyers and collecting fees for both.” 

It is noteworthy, too, that large commercial banks are companies which have a lot of potential relationships – making matters more difficult for them, in light of the recent ruling, Haas said.

The case involved a major bank, RBC, and it was a post-trial opinion – two factors which are seen as significant.

Meanwhile, the Rural/Metro case showed that the company's board of directors “was unaware that RBC Capital Markets was making a play for Warburg's business on the financing side – and the directors were not actively involved in the sale negotiations,” Bloomberg News reported. 

Bankers at RBC Capital Markets also “misled Rural/Metro directors in 2011 about the company’s value to push the board into a quick sale to … Warburg Pincus... RBC officials also didn’t tell directors they were touting their financial-adviser work on the deal to secure financing roles on other acquisitions, the judge said,” according to the report. 

The decision also comes as financial advisors are coming under a lot of scrutiny by Delaware courts over the past few years. 

When considering future impact of the decision, Haas predicts, “We probably will see more claims against third parties.” Mostly, they will be aimed at financial advisors but lawyers could be another targeted group.

Already, mergers and acquisitions in general are a frequent target of lawsuits. Last year, 97.5 percent of public mergers and acquisitions worth more than $100 million were sued an average of seven times each, according to InsideCounsel.

Investors were reportedly seeking $172 million from RBC, because the investors got shortchanged in the deal.

 

Related stories: 

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Inside the role of IP in M&A transactions

Is the frivolous M&A litigation party winding down?

 

Contributing Author

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Ed Silverstein

Ed Silverstein is a veteran writer and editor for magazines, websites and newspapers. A graduate of Harvard's Kennedy School of Government, he has won several...

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