Delaware court told bad policy to hold bankers liable in M&A

By Tom Hals
DOVER, Del., Sept 30 (Reuters) - The Delaware Supreme Court
was told on Wednesday that it would be bad public policy to
allow a closely watched ruling to stand that found investment
bankers could be held liable for the decisions of the corporate
boards they advise.
RBC Capital Markets is seeking to reverse a 2014 ruling by
the Court of Chancery, the nation's premier venue for corporate
disputes, that found it manipulated the sale of ambulance
company Rural/Metro and had to pay $76 million to compensate the
firm's shareholders.
The lower court found RBC was liable for its role in
advising the Rural/Metro board and convincing it to rush into a
buyout that undervalued the company.
RBC, a unit of Royal Bank of Canada RY.TO , never disclosed
it was also trying to win the more lucrative role of providing
financing to the buyer, private equity firm Warburg Pincus.
"You can't expect bankers to monitor the activity of
directors. That's not very good policy," said RBC's attorney,
Alan Stone.
Shareholders argued the lower court ruling by Delaware Judge
Travis Laster has changed Wall Street behavior for the better,
with directors policing investment bankers' potential conflicts.
"Maybe Delaware law under-enforces the conduct of bankers,"
said Joel Friedlander, who represents the class of Rural/Metro
shareholders.
The Securities Industry and Financial Markets Association
have called the lower court ruling a "sea change" and warned it
would create "unprecedented" uncertainty in the merger market by
changing the rules for investment banks. ID:L1N1201YN
Both sides urged the five justices to focus on the facts of
the underlying case.
Stone said Rural/Metro ran a thorough sale process that he
said produced the best deal for shareholders.
Friedlander said the four-day trial produced a clear record
that showed "RBC committed fraud on the board and fraud on the
stockholders and fraud on the court."
The court's five justices focused on whether the lower court
had to find gross negligence and whether RBC could be found
liable for aiding the board's breach of its fiduciary duties.
Justice Karen Valihura questioned if RBC was protected by
the terms of its engagement letter, while Justice Collins Seitz
pressed if RBC was insulated because the board also hired Moelis
& Co, which had no conflicts.
Friedlander said the engagement letter did not matter in
this case, and he dismissed the practice of hiring a second
unconflicted banker as a way to provide cover to work both sides
of a deal, as RBC did with Rural/Metro.
Supreme Court Chief Justice Leo Strine disqualified himself
from the case. Strine originally oversaw the Rural/Metro case
before he was elevated to the high court in 2014.