DealLawyers.com Blog

Ahead of our webcast today – “Rural/Metro and Claims for Aiding & Abetting Breaches of Fiduciary Duty” – I thought it would be good to report about how the case was discussed at last week’s M&A conference at Tulane. Here is a WSJ article with a recap:

A recent court ruling that put M&A bankers on high alert was the talk of the town as deal makers gathered in New Orleans this week–and it wasn’t all good talk. Lawyers and bankers spoke warily, and at times critically, of a decision that has landed RBC Capital Markets LLC on the hook for potentially millions of dollars in damages to shareholders of a company it advised on a 2011 buyout. Vice Chancellor J. Travis Laster found earlier this month that RBC’s desire to win fees both advising Rural/Metro Corp. and lending to its buyer, Warburg Pincus LLC, colored its advice to the board and shortchanged investors. RBC has defended its advice to the board and has said it is weighing its options.

The decision echoed loudly in New Orleans, where a few hundred lawyers, bankers, judges and advisers gathered this week at the Tulane Corporate Law Institute. One New York-based lawyer was distributing buttons with “Rural/Metro” encircled in a red “Ghostbusters” sign. On the sidelines, some advisers said quietly they hoped RBC would appeal. In particular, people pointed to the robustness of the auction–26 bidders were contacted; only Warburg submitted a final bid–and Mr. Laster’s decision to exclude from his analysis the fact that Rural/Metro filed for bankruptcy protection after Warburg bought it. “While no one would advocate bad behavior, the decision includes a number of novel applications of law that RBC can raise on appeal and that could result in a reversal,” said Kevin Miller of Alston & Bird LLP. Judges rarely find that boards failed to run a fair sales process. Rarer still is Mr. Laster’s ruling that a bank contributed to–in legal parlance “aided and abetted”–that failure. Because of a quirk of Delaware’s corporate law, directors themselves are typically immune from damages, while advisers can be targeted for millions of dollars.

Particularly troubling to some at Tulane was Mr. Laster’s description of banks in M&A deals as “gatekeepers” that have a duty to make sure boards are running good auctions. In his opinion, Mr. Laster fired a warning shot across the bow of other banks: Stay in bounds, or expect to get sued. “The threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs,” he wrote. “That’s a very striking point,” Paul Choi of Sidley Austin LLP said. “I’ve never read something like that in a Chancery Court opinion.”

Still, some said RBC’s actions as laid out by Mr. Laster were egregious. Last-minute changes to the bank’s fairness opinion had the effect of making Warburg’s offer look more fair, Mr. Laster found. One banker, when the bottom valuation range implied by a so-called discounted cash flow analysis fell above Warburg’s offer, wrote a colleague: “I thought we were going to try to reduce DCF?” “If they’re true, those are bad facts,” said one New-York based M&A lawyer.

They may be costly ones, too. Mr. Laster has not yet ruled on damages, but his opinion and subsequent court filings suggest Warburg may have underpaid by more than $200 million–an amount RBC could owe Rural/Metro’s former shareholders. RBC is likely to argue that the directors and Moelis & Co., which also gave a fairness opinion, are partly responsible, which could reduce RBC’s share of the payout.

And here’s a DealBook article about a Tulane panel on activists…