RBC Judge Finds Conflicts Tainted Rural/Metro BuyoutJef Feeley
Royal Bank of Canada officials’ conflicts of interest tainted a $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 buyout firm Warburg Pincus LLC, Delaware Chancery Court Judge Travis Laster concluded in a ruling. RBC officials also didn’t 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 $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 U.S. ambulance service operator and provider of emergency room doctors. Investors are seeking as much as $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 March 7 decision 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 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.
Gillian McArdle, an spokeswoman for Toronto-based RBC, didn’t respond to phone and e-mail messages yesterday seeking comment on Laster’s ruling in the Rural/Metro case.
Since Delaware is the corporate home of more than half of the U.S.’s 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 yesterday in a phone interview.
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 $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 Dec. 17. It raised $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 lowball 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 $11.6 million to settle investors’ claims they didn’t get enough for their shares.
Lawyers for Rural/Metro shareholders contend RBC investment bankers pushed company executives to put the nationwide ambulance service up for sale so they could reap as much as $60 million in fees while touting their work as the firm’s financial adviser to other companies mulling similar deals.
RBC’s bankers used their efforts in the Rural/Metro sale to persuade Clayton Dubilier & Rice in 2011 to allow the bank to provide $10 million in financing as part of the $3.2 billion acquisition of Emergency Medical Services Corp, investors’ lawyers said in court filings.
Former Rural/Metro investors allege RBC’s drive for fees prompted the bankers to mislead the company’s board about the emergency services firm’s valuation to make Warburg’s offer look better.
Investors also contended RBC bankers’ financial interests in convincing Rural/Metro directors to sell the company so they could secure a role in financing the EMS deal put them in a conflicted status. The bankers’ decision not to disclose their interests in the Rural/Metro deal raised question about the impartiality of their advice, according to shareholders.
The RBC bankers also didn’t tell Rural/Metro board members 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 purchase financing.
Anthony Munoz, an RBC banker, testified during a four-day trial in Wilmington last year that some of his colleagues continued to talk to Warburg officials about providing financing for the buyout in late March 2011 while Rural/Metro’s board was deciding whether to sell. Those discussions weren’t disclosed to Rural/Metro directors, he said.
“Our disclosure to them was that we were not participating in their financing,” Munoz testified according to a court transcript.
In his decision, Laster found RBC bankers put on a “full-court press” to persuade Warburg officials to include the bank in its financing package for the Rural/Metro buyout while telling its client they weren’t part of the buyer’s lender group.
RBC’s bankers also knew the lender “was not disclosing its interest in obtaining a role financing the acquisition of EMS or how it intended to use the Rural process to capture the EMS financing business,” the judge said.
Former Chief Chancery Court Judge Leo Strine criticized Goldman Sachs Group Inc. officials’ role as advisers to oil-pipeline operator El Paso Corp. in a $21.1 billion purchase by rival Kinder Morgan Inc. in 2012. The judge said Goldman had conflicting interests in the deal because it had two designees on Kinder’s board at the time.
El Paso shareholders argued Goldman’s conflicts raised questions about the quality of the firm’s advice to El Paso directors about Kinder’s bid. Strine found Goldman executives handling of the conflicts was “disturbing” and “inadequate.”
Strine, now the Delaware Supreme Court’s chief justice, also found Douglas Foshee, El Paso’s chief executive officer at the time, also had conflicting interests because he’d considered pursuing a management buyout while negotiating with Kinder.
The Rural/Metro 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).