Blog

October 14, 2014
THE VALUE OF INDEPENDENT ADVISER: RBC PENALISED FOR AIMING TO ADVISE SELLER WHILST FINANCING A BUYER

There are many value-added reasons for hiring an independent M&A adviser. One of them is highlighted in the attached Reuters Breakingviews article, published 13 October 2014.

Entitled “RBC Case gives bankers a needed conflicts reminder” it discusses a penalty levied on Canada’s largest investment bank by the Delaware Court of Chancery. Certainly the team at Cheverny is aware of cases wherein a large, integrated investment bank (with advisory, share trading and loan-making arms) sought to provide sell-side M&A advice even as it offered loans to several potential private equity buyers (so-called “stapled financing”) to fund an acquisition. Total fee and interest income from stapled financing typically exceeds M&A sell-side fees by a wide margin, thereby creating a potential conflict of interest that might place the interests of the buyer ahead of those of the seller. An independent adviser working alongside a large, integrated investment bank can ensure that such conflicts do not creep into a process.

Bankers just got handed a painful, and necessary, reminder about conflicts of interest. A $76-million (U.S.) penalty by a Delaware judge against Royal Bank of Canada’s U.S. investment arm for working both sides of a deal is the latest blow to skewed loyalties. Even with recent knocks against Goldman Sachs and Barclays, however, it isn’t clear the message is reaching Wall Street.

The facts are depressingly familiar. While advising ambulance operator Rural/Metro Corp. on its $440-million sale in 2011, RBC was also pitching to finance the buyer, private equity firm Warburg Pincus LLC. Delaware Vice-Chancellor Travis Laster ruled in March that the lure of loan and advisory fees – and the potential for touting the transaction to win similar clients – led the bank to advocate a lowball offer. Rural/Metro shareholders, the judge said last week, deserved an extra $76-million.

Barclays Bank PLC ran into similar trouble in 2011 when Judge Laster ruled that the U.K.-based bank had a conflict advising Del Monte Foods Co. on a sale while also financing the buyers. The bank and Del Monte paid some $90-million to settle. And in 2012, Goldman Sachs Group Inc. coughed up its $20-million fee for helping pipeline operator El Paso sell itself to Kinder Morgan. Turns out Goldman owned a $4-billion stake in the buyer, which then-chancellor Leo Strine found “furtive” and “troubling.”

When Delaware courts – and especially Judge Strine – talk, mergers and acquisitions practitioners usually listen. Obeying is a different question. Potential conflicts have long been a part of the merger world, and Goldman and other banks tend to make the most of them.

What’s more, the legal hurdles to holding deal practitioners liable can be daunting. In fact, the ruling against RBC was a rare case to connect directly a bank’s conflicts to investor losses. It relied on the relatively novel theory that the adviser had aided and abetted the board’s breach of a duty to shareholders.

Even a multimillion-dollar penalty, of course, may not mean much in comparison with the hefty fees provided by mega-deals. Getting zinged from the bench, however, won’t help build or preserve a reputation with clients. Banks deserve to be chewed out over conflicts. Fortunately, Delaware courts seem more than up to the task.”