In Rural Metro, the Delaware Chancery Court held that RBC Capital Markets, LLC, as financial advisor to the Rural Metro (Target), had aided and abetted Target’s directors in breach of their fiduciary duties in connection with its sale to Warburg Pincus (Buyer). This is the latest in a string of cases in recent years taking financial advisors to task for undisclosed conflicts of interest and taking boards to task for not identifying or managing those conflicts.
According to the opinion, RBC had, among other things, (i) recommended that the sale process of Target be commenced and be run in parallel with a sale process of Emergency Medical Services Corporation (EMS), a direct competitor of the Target that had already commenced (when RBC knew or should have known the EMS process would effectively preclude buyers already participating in the EMS process from bidding on Target due to confidentiality obligations and when Target’s process could have been deferred until after the EMS process was completed); (ii) failed to disclose to the Target’s board RBC’s intention to capture financing work (and fees) from bidders on EMS by leveraging activities it was taking on behalf of Target; (iii) created an “informational vacuum” by not providing the Target board with valuation materials until the final board meeting, only hours before the merger was approved; and (iv) provided a “skewed” valuation analysis of Target that “contained outright falsehoods” all in order to further its own opportunity for fees not only from Target but also for providing financing to potential buyers of Target and EMS. As a result, the Court ruled that RBC had aided and abetted breaches of the Target directors’ fiduciary duties. The Court also found that exculpation provisions on directors’ liabilities provided under Section 102(b)(7) of the Delaware General Corporation Law do not extend to financial advisors, and that a generalized conflict acknowledgment in a financial advisor’s engagement letter would not operate to preclude such aiding and abetting claims.
This case highlights the importance of sell-side financial advisors disclosing conflicts of interest, providing valuation materials to the board early in the process and otherwise providing relevant information to the board it is supposed to be advising. Boards of directors should not, however, assume that the financial advisors will do so. Rather, the Court makes clear that it is critical that a board must “act reasonably to learn about actual and potential conflicts faced by directors, management, and their advisors” as part of its discharge of its “active and direct duty of oversight” of the entire sales process, and manage any conflicts accordingly.