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Dec. 4 — A Delaware Supreme Court ruling affirming that the Royal Bank of Canada (RBC) was liable for aiding and abetting Rural/Metro Corp. directors' breaches of fiduciary duty provides important guidance for boards looking to get deals done, attorneys told Bloomberg BNA.
While corporate directors themselves often are shielded from individual liability for breaches of duty by exculpatory charter provisions, the case suggests ways in which boards can avoid financial adviser conflicts and costly litigation, Lawrence Hamermesh, a professor from Widener University Delaware Law School, told Bloomberg BNA Dec. 4.
In a Nov. 30 opinion, the state high court affirmed four chancery court rulings finding RBC liable to Rural/Metro stockholders for aiding and abetting the board's breaches of duty in connection with a $438 million buyout (30 CCW 361, 12/2/15).
In an interview, Hamermesh said that the decision represents a resurrection of Revlon‘s enhanced standard of review—which he said has become “dead-letter” law.
In this case, the court found that Revlon could be used for purposes of holding RBC liable for aiding and abetting the board's underlying breaches of duty, even though the directors were shielded from a damages award, he observed.
The court concluded that the directors breached their duties even without being disloyal and without engaging in grossly negligent behavior, Hamermesh noted. Instead, the court reasoned that breaches were predicated upon the board “not running an auction in a way that comported within the bounds of reasonableness,” which is a considerably less deferential inquiry than the business-judgment rule, he said.
Hamermesh said that when hiring investment bankers, directors have an obligation to take reasonable steps to determine throughout the transaction that the advisers are not conflicted, or ensure that the board fully understands all material conflicts.
He added that a “rapidly developing” area in deal making is determining what kind of disclosures are reasonable to expect and what is too much to ask for.
Similarly, former Delaware Supreme Court Justice Henry duPont Ridgely, who now is senior counsel with DLA Piper, and John L. Reed, the partner in charge of DLA Piper's Delaware litigation practice, told Bloomberg BNA in a joint Dec. 2 e-mail that directors must be active and informed when overseeing the sale process. “This includes requiring disclosure by the financial advisor at the outset and on an ongoing basis of material conflicts that might impact the board's process,” they said.
“Permissive language in an engagement letter allowing a financial advisor to explore staple financing is not enough to satisfy this disclosure obligation,” the DLA Piper attorneys continued. “While a board may consent to conflicts, directors must be especially diligent in overseeing a conflicted advisor's role in the sale process.”
Ridgely and Reed also said that the RBC case is instructive as to when enhanced scrutiny under Revlon begins. They noted that the RBC decision involved an unusual fact scenario in that the bank was engaged to sell Rural/Metro without board authorization, and the board later ratified that action. “Enhanced judicial scrutiny under Revlon is triggered not only when a board decides to sell the company but even earlier, if the board ratifies unauthorized action by a CEO and special committee to initiate an active bidding process,” they said.
Moreover, the DLA Piper attorneys said that under Revlon, once a company is for sale, a board has a “situational duty” derived from the duties of care and loyalty to maximize the sale price of the company.
“Delaware courts will examine the overall course of action to determine whether that course of action was reasonable under the circumstances as a good faith attempt to secure the highest value reasonably available,” they said.
In other takeaways, Ridgely and Reed noted that directors breach their duty of disclosure by falsely representing the financial advisers' analysis and by not fully disclosing “unquestionably material” information that the financial advisers were using the sale process to pursue financing business with a bidder.
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