Risk & Compliance

RBC Loses Appeal of $75M Class-Action Award

The Delaware Supreme Court upholds a verdict that found RBC Capital liable for misleading a client it was advising in a merger deal.
Matthew HellerDecember 1, 2015

In a setback for Wall Street advisers, the Delaware Supreme Court has upheld a $75 million award against a unit of Royal Bank of Canada over merger advice it gave to a client.

RBC Capital Markets represented the ambulance service Rural/Metro in its 2011 sale to the private equity firm Warburg Pincus. A trial judge last year found RBC liable to a class of Rural/Metro shareholders for aiding and abetting breaches of fiduciary duty by the company’s former directors.

Rejecting RBC’s appeal of that verdict, the Delaware high court agreed with Vice Chancellor Travis Laster that RBC persuaded Rural/Metro’s board to accept the offer from Warburg without telling the board it was lobbying for a role in Warburg’s financing of the transaction, which would generate larger fees for the bank than simply providing advice to Rural/Metro.

“Propelled by its own improper motives, RBC misled the Rural directors into breaching” their duty to get the best possible price for shareholders, the opinion said.

The case has raised concerns among banks that Delaware courts, a premiere venue for shareholder lawsuits, would make it easier for investors to sue them over advice on deals. In a similar case, a Delaware judge ruled in October that shareholders challenging Zale Corp.’s $690 million takeover by rival Signet Jewelers can sue Merrill Lynch for failing to disclose a possible conflict of interest to Zale’s board during the sale process.

“At issue is whether banks have undisclosed conflicts that cloud their advice, such as a long-standing and lucrative relationship with the buyer or a desire to participate in a deal’s financing,” the Wall Street Journal said.

Joel Friedlander, a lawyer for the RBC/Metro shareholders, said the Supreme Court had “properly found liability on the illicit manipulation of the board’s deliberative process for self-interested purposes.”

But the court gave banks some hope by shying away from making a sweeping revision of rules regarding adviser conflicts.

“Our holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial adviser to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting,” it cautioned.