A Royal Bank of Canada sign in downtown Toronto.MARK BLINCH/Reuters
If only RBC Capital Markets had fully disclosed all of its actions when advising Rural/Metro Corp. By withholding some facts, the lawsuit against the investment bank looks much more clear cut.
To recap: Royal Bank of Canada's U.S. investment-banking arm was dinged by a Delaware court this weekend for failing to disclose that it bid to finance Warburg Pincus LLC, the private equity firm that bought Rural/Metro, all while advising Rural/Metro's board on the acquisition.
Shareholders argued that RBC's dreams of earning financing fees from Warburg Pincus persuaded the bank to tell Rural/Metro that the private equity firm's bid was its best bet, even though another bidder was interested but asked for more time. Had shareholders known this, they may have voted down the Warburg Pincus deal.
However shady it may seem, RBC's actions aren't necessarily illegal. Scores of deals have been inked with what is known as staple financing: the act of advising an acquisition target, all while financing the buyer.
Also keep in mind that the plaintiffs also have some holes in their arguments. Even if RBC had given the other bidder more time, there was no guarantee it would have resulted in a higher acquisition price.
And even if a higher bid came through, there's no proof that it would have resulted in a better long-term outcome for Rural/ Metro. In 2013 the company filed for bankruptcy protection because it couldn't handle the debt burden imposed on it by Warburg Pincus. A higher bid may have added even more debt.
Yet even with all these grey areas, the judge simply couldn't look past the fact that RBC did not disclose all of its actions, meaning shareholders didn't have full information in the proxy circular.
Given who presided over the trial, RBC couldn't afford to have such a big crack in its case. Vice-Chancellor J. Travis Laster of Delaware's Court of Chancery has a history of taking on investment banks for doing something similar to what RBC did.
Most famously, he ruled against investment bank Barclays and Del Monte Foods in a $5-billion private buyout because Barclays allowed bidders Kohlberg Kravis Roberts and Vestar Capital to team up on a deal, despite having promised Del Monte that it would not permit such a partnership. By teaming up, the firms didn't have to bid against each other, thereby ruling out a bidding war.
The end result: RBC is being held liable for "aiding and abetting breaches of fiduciary duty" by Rural/Metro's board of directors. Damages have yet to be determined.