Royal Bank of Canada has been ordered by the Delaware Supreme Court to pay more than $75m for giving tainted advice on a 2011 buyout deal, a decision that is likely to have far reaching consequences for Wall Street’s dealmakers.
The court upheld a 2014 ruling that found RBC had “aided and abetted breaches of fiduciary duty by former directors”, who should have secured the best deal possible for shareholders of Rural/Metro Corporation, when it was sold to Warburg Pincus, the private equity firm.
In last year’s ruling, Judge Travis Laster said that the Canadian investment bank had pushed to close a quick sale rather than advising the seller to seek a higher price. The trial uncovered evidence that RBC had slanted its analysis and advice to secure lucrative financing assignments. RBC failed to disclose that it was also trying to secure a role in providing debt finance to Warburg for its acquisition. Rural/Metro, an ambulance operator, was sold for $728m.
RBC said in a statement: “We are disappointed with the court’s determination but respect its decision.”
The RBC case had drawn particular interest because the size of judgment was more than 10 times the fee of about $5m that RBC earned on the transaction.
The decision to uphold the ruling is likely to send shockwaves across Wall Street as dealmakers are concerned about Delaware judges’ zeal to come after them for giving bad advice on deals.
While shareholder lawsuits against boards of selling companies have become commonplace in Delaware, the legal home of most US companies, deal advisers have generally escaped financial sanction. However, in recent years, lawsuits have increasingly targeted bankers over potential conflicts of interest.
In last year’s ruling the court said that “the threat of liability” would add pressure on “gatekeepers” — a code for bankers — to give sound advice on transactions to boards. The Delaware Supreme Court rejected such characterisation in its ruling on Monday.