June 24 (Bloomberg) -- Royal Bank of Canada should pay hefty damages for undisclosed conflicts of interest that tainted a $438 million buyout of Rural/Metro Corp. by a private-equity firm, a shareholder lawyer said.
A judge ruled in March that bankers at RBC Capital Markets misled Rural/Metro directors about the ambulance company’s value, seeking to drive a quick sale to buyout firm Warburg Pincus LLC and generate fees for the bank. The possible damages Royal Bank faces shouldn’t be cut because of other defendants’ settlements in the case, Joel Friedlander, an attorney for Rural/Metro shareholders, told Delaware Chancery Court Judge Travis Laster at a hearing today in Wilmington.
Royal Bank’s failure to disclose its conflicting interests in the $17.25-a-share sale was “pretty egregious,” Friedlander said. “There has to be a reckoning,” he said.
Laster’s March 7 decision about Royal Bank’s handling of the Rural/Metro deal was another 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 $5.3 billion sale because it also arranged financing for buyer KKR & Co. without telling Del Monte’s directors.
Royal Bank contends that settlements with other defendants involved in the buyout mean the Toronto-based bank should be on the hook for substantially less than the more than $203 million shareholders of Scottsdale, Arizona-based Rural/Metro seek in damages.
The bank, Canada’s second-largest lender by assets, should only be liable for a “pro-rata share” of damages given other defendants already have paid more than $11 million in settlements, Alan Stone, one of Royal Bank’s lawyers, told Laster.
Royal Bank’s damages over the conflict claims should total no more than $24.4 million based on its share of the liability in the case, Royal Bank’s lawyers said in court filings.
Rural/Metro’s former directors and Moelis & Co., an investment bank that also advised the company in the Warburg deal, agreed to pay a total of $11.6 million to settle investors’ claims over the buyout.
Rural/Metro provides ambulance and firefighting services to about 700 communities in 21 states. Two years after buying the company, Warburg officials put it into bankruptcy to cut its debt and smooth the way for a cash infusion.
The company, which also offers industrial fire-protection services to airports, oil refineries and factories, won court approval of its restructuring plan in December 2013. It raised $135 million in new funding as part of the Chapter 11 case.
Rural/Metro shareholders sued over the buyout, claiming the board accepted Warburg’s lowball offer after getting advice from conflicted RBC bankers, who botched the effort to shop around the emergency services company to other bidders.
The shareholders said RBC investment bankers pushed Rural/Metro executives to sell so they could reap as much as $60 million in fees while touting their work as financial adviser to other companies considering similar sales.
Royal Bank officials also didn’t tell Rural/Metro directors they’d sought to provide so-called staple financing to Warburg as part of the deal. Warburg rejected RBC’s offer to provide some of the financing.
Laster said he would rule later on whether Royal Bank should be liable for the full damage award, which could top $240 million with interest.
The case is In re Rural/Metro Corp. Shareholders Litigation, CA6350, Delaware Chancery Court (Wilmington). The bankruptcy is In re Rural/Metro, 13-bk-11952, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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