(FROM THE WALL STREET JOURNAL 9/30/15)
By Liz Hoffman
When lawyers for RBC Capital Markets enter a Delaware courtroom Wednesday, Wall Street rivals will be watching closely.
The Delaware Supreme Court is slated to hear RBC's appeal of a 2014 ruling that found its bankers pushed a client, ambulance operator Rural/Metro Corp., into an unfair sale in an effort to collect higher fees.
The ruling was a landmark finding against a bank for merger advice, and lawyers credit it with inspiring a slew of lawsuits accusing other financial advisers of errors or conflicts that shortchanged stockholders, including against Bank of America Merrill Lynch, Deutsche Bank AG and Goldman Sachs Group Inc.
If the judgment against RBC is upheld, it will owe more than $100 million in damages, many times its $4.5 million fee for advising Rural/Metro.
An affirmation would also be an encouraging sign for others pursuing similar claims and could send a chill through an investment-banking community that is reaping rich rewards for deal advice and funding in a near-record year for mergers.
In a sign of the stakes, a major Wall Street trade group has weighed in, and retired Delaware Supreme Court justices Myron Steele and Jack Jacobs have been hired as lawyers in the case. A ruling is expected by the end of the year.
If Rural/Metro is upheld, "the fear across the industry is that it will be open season" on bankers, said H.H. Sean Wee, a partner at Manatt, Phelps & Phillips LLP.
The dispute stems from the 2011 sale of Rural/Metro to private-equity firm Warburg Pincus LLP. In March 2014, J. Travis Laster, a judge in the Delaware Court of Chancery, found that RBC steered Rural/Metro into a rushed sales process while secretly lobbying the winning bidder for a role financing the deal.
"Rather than pushing for the best deal possible for Rural, RBC did everything it could to get a deal, secure its advisory fee, and further its chances for additional compensation," Mr. Laster found.
In appeal papers, RBC, a unit of Royal Bank of Canada, says Mr. Laster misconstrued its actions and improperly found that shareholders were shortchanged. It notes Rural/Metro went bankrupt in 2013.
Mr. Laster, known as a tough critic of investment banks, took broad aim at the industry in his RBC ruling. He articulated a legal theory under which banks could be sued for "aiding and abetting" a failure by directors to get the highest price for shareholders.
Banks have traditionally insulated themselves from such liability. Carefully negotiated engagement letters characterize them as independent contractors, and their opinions as to a deal's fairness are couched in caveats and qualifiers. Plaintiffs' lawyers regularly sue over mergers, but only recently have begun adding banks as defendants.
In the past year, at least 14 lawsuits have accused banks of giving tainted deal advice, according to a review of filings.
The Rural/Metro ruling "drew a direct line" between bankers and investors -- one that lawyers have been quick to exploit, said Andrew Tuch, a law professor at Washington University in St. Louis.
The Securities Industry and Financial Markets Association, the largest trade group for banks and brokers, filed a brief in the case, saying the ruling "injects an unprecedented level of uncertainty into the M&A marketplace."
Bank of America Merrill Lynch was sued for its role advising Zale Corp. in its 2014 sale to Signet Jewelers Ltd., after earlier pitching Signet on the same deal. Deutsche Bank faces allegations that its client, PLX Technology Inc., was improperly sold in 2014 for too little to Avago Technologies Ltd. Both banks have denied any wrongdoing and the cases are pending.
At the time of the PLX sales process, Deutsche Bank was advising Avago on another transaction and had collected $56 million in fees from the company over the prior two years -- facts it didn't disclose to the PLX board until the day before it delivered its fairness opinion, according to court and regulatory filings.
Deutsche Bank also didn't disclose that one of its bankers who was working for Avago on the other deal sat on the bank committee that approved the fairness opinion for PLX, the plaintiffs allege.
"By withholding that information, [Deutsche Bank] had reason to know that by allowing the directors to proceed in an unknowing fashion, that they were breaching their duties," Mr. Laster said at a Sept. 3 hearing at which he declined to dismiss allegations against Deutsche Bank. Certain PLX executives and directors are also accused of conflicts that tainted the sales process and have denied wrongdoing.
Other lawsuits home in on alleged errors. Goldman Sachs has been sued for its role advising Tibco Software Inc. The firm's buyer was given an incorrect share count and ended up underpaying for Tibco by roughly $100 million, according to court filings. Goldman has denied wrongdoing.