A recent Delaware case finds a financial advisor liable for aiding and abetting breaches of fiduciary duty. After conclusion of a four-day trial, the Delaware Court of Chancery held RBC Capital Markets (“RBC”) liable for aiding and abetting breaches of fiduciary duty by the board of directors of Rural/Metro Corporation (“Rural”) in connection with Rural’s merger with an affiliate of Warburg Pincus LLC (“Warburg”). To support its opinion, the Court cited RBC’s failure to disclose its offers to provide debt financing to Warburg while it was serving as an advisor to Rural and that RBC was leveraging its financial advisor work on the Rural transaction to secure potential financing roles on other acquisitions relating to one of Rural’s largest competitors. RBC also issued a fairness opinion in connection with the merger, and the Court found that RBC engineered the fairness opinion to make the $17.25 per share offer by Warburg appear reasonable by manipulating certain aspects of their financial analysis. The ruling stated that “RBC’s actions resulted in stockholders voting on the merger based on a proxy statement that contained materially false disclosures and omissions about RBC’s valuation analyses and conflicts.”* Further, the Court rejected RBC’s argument that the waiver of conflicts of interest language in the engagement letter was sufficient to preclude an aiding and abetting claim, explaining that any conflict waiver must be knowing and unambiguous.
The amount of damages has not yet been determined by the Court; however, the shareholders originally claimed damages in excess of $151 million. While the 92-page opinion of the Court is wrought with examples of misconduct by RBC and the Board, this opinion is not an anomaly, and is the latest in a series of Delaware opinions addressing conflicts of interest of advisors in buyout situations. Given the Delaware Courts’ influence over corporate jurisprudence in all U.S. jurisdictions, M&A advisors should be rigorous in their disclosure of potential conflicts of interest at all stages of the engagement and consider how their other activities in the buyout market could impact their objectivity.
*In Re Rural/Metro Corp. Shareholders Litigation, CA6350, Delaware Chancery Court (Wilmington).