Royal Bank of Canada officials’ conflicts of interest tainted a US$438 million buyout of Rural/Metro Corp and the national ambulance service’s former investors deserved more for their shares, a judge ruled.
Bankers at RBC Capital Markets misled Rural/Metro directors in 2011 about the company’s value to push the board into a quick sale to buy out firm Warburg Pincus LLC, Delaware Chancery Court Judge Travis Laster concluded in a ruling. RBC officials also did not tell directors they were touting their financial-adviser work on the deal to secure financing roles on other acquisitions, the judge said.
Those conflicts led Rural/Metro investors to be shortchanged in the US$17.25-a-share deal, Laster found. The judge said he would decide later how much in damages RBC must pay former stockholders of the company, the largest US ambulance service operator and provider of emergency room doctors.
Investors are seeking as much as US$172 million from Canada’s second-largest lender by assets, according to court filings.
“The combination of RBC’s behind-the-scenes maneuvering” and its bankers’ failure to disclose their conflicting interests clouded the deal, Laster said.
“For improper motives of its own,” RBC misled Rural/Metro directors and prevented the board from getting the best price for investors, he said.
The decision reached on Friday is the latest in a series of Delaware corporate-law rulings reining in banks’ and investment firms’ conflicts in buyout cases.
Laster ruled in 2011 that Barclays PLC had conflicting interests while serving as Del Monte Foods Co’s adviser in a US$5.3 billion sale, because it also arranged financing for buyer KKR & Co without telling Del Monte’s directors.
Since Delaware is the corporate home of more than half of the US’ publicly traded companies and 63 percent of Fortune 500 firms, chancery court rulings resonate beyond the state’s borders, Larry Hamermesh, a Widener University professor who specializes in corporate law issues, said in a telephone interview on Saturday.
Laster’s ruling is a stark reminder that “directors have the right to expect disclosure of significant conflicts” by their advisers, Hamermesh said.
If bankers withhold conflicting interests in a deal, that “can raise loyalty questions and may mean they have to pay damages,” he said.
Scottsdale, Arizona-based Rural/Metro provides ambulance and firefighting services to about 700 communities in 21 states. Its directors sold the company to New York-based Warburg, a private-equity firm, for US$438 million in March 2011.
Rural/Metro sought bankruptcy protection from creditors in Delaware last year to cut its debt and arrange a cash infusion. The company, which also offers industrial fire-protection services to airports, oil refineries and plants, won court approval of its restructuring plan on Dec. 17 last year. It raised US$135 million in new funding as part of the Chapter 11 case.
Rural/Metro shareholders sued over the buyout, claiming the company’s board accepted a low-ball offer from Warburg after getting advice from conflicted RBC bankers, who botched the effort to shop around the emergency services company to the highest bidder.
Rural/Metro directors and Moelis & Co, an investment bank that also advised the company in the Warburg deal, agreed to pay a total of US$11.6 million to settle investors claims that they did not get enough for their shares.