Alert April 22, 2014

Delaware Case Continues High Scrutiny of Investment Bankers in Mergers and Acquisitions


In a decision on March 7, 2014, the Delaware Court of Chancery found RBC Capital Markets, LLC liable for aiding and abetting breaches of fiduciary duty by the Board of Directors of Rural/Metro Corporation in connection with the sale of Rural to Warburg Pincus LLC. The case highlighted the conflicts of interest facing RBC given its multiple roles in the transaction and provides important guidance for both investment banks and boards of directors.

RBC was engaged by a Special Committee of Rural’s Board of Directors to pursue a potential sale of Rural. The Rural sale process was launched at the same time that Emergency Medical Services Corporation, parent company of Rural’s chief competitor, American Medical Response, was also being marketed for sale. The Court concluded that RBC’s desire to provide acquisition financing, not only to bidders for Rural, but also to bidders for EMS, motivated it to run a sale process for Rural that did not result in the highest price. 

The Court also concluded that because Rural’s Board of Directors did not manage the process more actively, including by ensuring RBC’s conflicts did not skew the process, the directors had breached their fiduciary duties. Although Rural’s directors had previously settled the claims against them, the finding that they had breached their fiduciary duties resulted in liability for RBC for aiding and abetting the breach.

The Court concluded that RBC’s desire to provide acquisition financing motivated it to induce Rural to put itself up for sale while EMS was also seeking buyers. According to the Court, RBC believed its role as sell-side advisor to Rural would give it an edge as acquisition financier to the ultimate buyer of EMS.  However, the contemporaneous auction of EMS caused a number of logical bidders for Rural to decline participation in the Rural process in order to focus on acquiring EMS.

The Court also found that RBC did not timely provide the Rural Board with the financial information it needed to make an informed decision, including an analysis of the value of Rural if it did not engage in a transaction at all. The financial information RBC did provide came less than an hour and a half before the meeting at which the Board approved the sale of Rural to Warburg.

In finding RBC liable for aiding and abetting breach of fiduciary duty, the Court noted that the potential for liability would provide investment banks with a powerful reason for taking care in how they advise boards of directors in considering strategic alternatives. Boards themselves should also take note of this decision and its implications for managing investment banker conflicts.