Decision Note: Delaware Chancery Court Finds Financial Advisor Liable for Inadequate Merger Price

3/7/2014 - In a recent noteworthy decision, Vice Chancellor Travis J. Laster of the Delaware Court of Chancery addressed the issue of aiding and abetting liability for investment banks in the context of a merger.  After a four-day trial in a case challenging the Warburg Pincus acquisition of Rural/Metro for inadequate consideration, the Chancery Court found RBC Capital, Rural/Metro’s investment bank, liable for aiding and abetting the company’s directors in breaching their fiduciary duties to Rural/Metro’s shareholders.  After finding that the sales process was defective under an enhanced scrutiny standard of review, the Court then held that RBC knowingly participated in, and in fact induced, those breaches.

Vice Chancellor Laster held RBC liable because it failed to inform the Rural/Metro board that senior bankers at RBC were also pressing Warburg (the acquiring company) to use RBC's staple financing or include RBC in its financing package.  The Court also found that, at the same time, RBC was unreasonably revising its valuation of Rural/Metro downward in order to consummate the deal.  Even though RBC did not ultimately provide staple financing to Warburg, in Vice Chancellor Laster’s view, RBC was liable for aiding and abetting because it knew that the Rural/Metro board was uninformed about RBC’s communications with Warburg, and because it failed to disclose the information to Rural/Metro in order to benefit from closing the deal, collecting its contingent fee, and receiving additional, and far greater, compensation for providing buy-side financing to Warburg.

Vice Chancellor Laster had previously rejected as inadequate a disclosure-only settlement of the case after other shareholders objected on the basis that discovery had revealed these conflicts of interest.  The post-trial opinion did not specify damages, but noted that the plaintiffs claimed the transaction undervalued Rural/Metro by approximately $175 million.