Problems with the sale of the Canadian ambulance service have led to one of the strongest sanctions of an investment bank, let alone a board, that this outside observer can remember coming from a Delaware court. But for real insight, let's outsource to Steven Davidoff and Matt Levine:
in Rural Metro, RBC [the bank] seems to have had all the conflicts with none of the benefits. Rural Metro was thinking about selling itself at around the same time that a larger competitor, Emergency Medical Services Corporation, was also up for sale. RBC was not involved in the EMS deal, but hoped that it could get an assignment financing the EMS acquisition. According to the opinion, RBC concocted a plan: "if Rural engaged in a sale process led by RBC, then RBC could use its position as sell-side advisor to secure buy-side roles with the private equity firms bidding for EMS." The quid pro quo would be, you hire us to finance your EMS bid, and we will give you the inside track on the Rural Metro sale.
[T]his deal reads to me less like a story of the financing deal overwhelming the M&A advice, and more like a story of how investment banking is a sales business. From this opinion, you get the sense that RBC's efforts to drum up business, whether financing or advisory, were persistent and intense and occupied most of the attention of RBC's most senior bankers. Meanwhile, its actual execution efforts were sort of halfhearted and not all that well thought out.....
And here's Davidoff:
To find the investment bank liable, however, the judge also had to find misdeeds committed by the Rural/Metro board. Vice Chancellor Laster held that the Rural/Metro Board had breached its fiduciary duties because Mr. Shackelton and RBC effectively put the company up for sale without full board authorization and that the board had failed to properly supervise RBC. He also concluded that the Rural Metro board did not have an “adequate understanding of the alternatives available to Rural” and that its decision to accept the Warburg offer was not reasonable because of a lack of sufficient information.
The judge has yet to calculate damages, but they could be as much as $250 million, despite the fact that RBC was never retained to do the financing and earned only its $5 million fee.
Instead, perhaps we should rethink how companies are sold and who is held liable when things go wrong. The Rural/Metro case shows how skewed the incentives can be, and how the checks and balances can too easily go wrong. Next time, there may not be a bank that can be put on the hook so easily. In other words, the directors may once again get away with wrongdoing, and shareholders will be left with nothing.
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