The Delaware Chancery Court recently held a respected investment banking firm liable for aiding and abetting breaches of fiduciary duty by the target company board in connection with an allegedly flawed sale process. The investment banker’s problems stem from alleged undisclosed conflicts of interest, including its purported push to participate in the buy-side financing syndicate for the transaction at the same time the banker was representing the seller in the final price negotiations.
In re Rural Metro Corporation Shareholders Litigation, No. 3650-VCL, 2014 WL 971718 (Del. Ch. March 7, 2014), will send chills through the investment banking community. The Rural Metro case, following in the wake of the Chancery Court’s El Paso, Atheros and Del Monte decisions, demonstrates the Delaware Court’s heightened sensitivity to investment bankers’ potential conflicts of interest that may compromise their loyalty and objectivity.1
Boards should carefully consider potential conflicts of interest when selecting financial advisors and should specifically discuss and consider imposing limits upon the sell-side financial advisor’s ability to provide staple financing or otherwise participate in buy-side financing.
1 In re El Paso Corp. S’holder Litig., 41 A.3d 432, 439 (Del. Ch. 2012); In re Atheros Commc’ns S’holder Litig., No. 6124-VCN, 2011 WL 864928 (Del. Ch. March 4, 2011); In re Del Monte Foods Co. S’holder Litig., 25 A.3d 813, 830-31 (Del. Ch. 2011).