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March 10, 2014
INDEPENDENT ADVICE: BANK ASSAILED BY COURT OVER M&A CONFLICT OF INTEREST

The article “RBC Rapped Over ‘Staple Financing’ Advice” appeared in the Financial Times of London on 10 March 2014. This was also reported in The Globe & Mail”.

The ruling ought to underscore the value of an independent adviser in any M&A process. Unlike independent advisory firms such as Cheverny, the bulge bracket firms and Canada’s chartered banks will seek to not only offer M&A advice, but also lend to the client or its rivals (or in this case the buyer), invest in the securities of the client or its rivals and even advise rivals.

“RBC rapped over ‘staple financing’ advice (Financial Times of London, 10th March 2014)

A Delaware judge has ruled against Royal Bank of Canada over advice the lender gave in the 2011 buyout of an ambulance operator, in a decision that is likely to have far reaching consequences for Wall Street’s dealmakers.

In a ruling handed down on Friday, Judge Travis Laster said RBC had been negligent in its duty to shareholders of Rural/Metro Corporation, pushing for a quick sale to private equity firm Warburg Pincus rather than seeking a higher price.

At the same time as advising Arizona-based Rural/Metro on selling itself, RBC was vying to secure a role in providing debt finance to Warburg for its acquisition – a conflict the bank failed to reveal to the ambulance operator’s board, the judge found.
Mr Laster, a vice-chancellor in Delaware’s business court, said senior RBC bankers engaged in a “full-court press” to convince Warburg to include the bank on its financing package.

“While those fevered efforts were under way, RBC was simultaneously revising its valuation of Rural downward,” he said, adding: “RBC created the unreasonable process and informational gaps that led to the board’s breach of [fiduciary] duty”.

The judgment is the latest rap to the practice of “staple financing”, where a bank working to sell a business approaches prospective buyers with a pre-arranged financing offer “stapled” to the sales pitch.

The practice has come under scrutiny from lawmakers as part of a wider trend of US shareholders challenging the structuring of merger and acquisition transactions. In 2011, Barclays and Del Monte agreed to pay the food company’s shareholders almost $90m after a ruling found the bank, which had been hired to sell Del Monte, was conflicted because it also arranged financing for a group of buyers…

In the months after being taken over by Warburg Pincus, Rural/Metro, which also provides industrial fire-protection services to airports and oil refineries, struggled to win business. The company filed for bankruptcy protection in August 2013 with debts of $735m and in December undertook a restructuring that wipes out Warburg’s stake.”