DOVER, Del. (Reuters) - The Delaware Supreme Court was told on Wednesday that it would be bad public policy to allow a closely watched ruling to stand that found investment bankers could be held liable for the decisions of the corporate boards they advise.
RBC Capital Markets is seeking to reverse a 2014 ruling by the Court of Chancery, the nation’s premier venue for corporate disputes, that found it manipulated the sale of ambulance company Rural/Metro and had to pay $76 million to compensate the firm’s shareholders.
The lower court found RBC was liable for its role in advising the Rural/Metro board and convincing it to rush into a buyout that undervalued the company.
RBC, a unit of Royal Bank of Canada, never disclosed it was also trying to win the more lucrative role of providing financing to the buyer, private equity firm Warburg Pincus.
“You can’t expect bankers to monitor the activity of directors. That’s not very good policy,” said RBC’s attorney, Alan Stone.
Shareholders argued the lower court ruling by Delaware Judge Travis Laster has changed Wall Street behavior for the better, with directors policing investment bankers’ potential conflicts.
“Maybe Delaware law under-enforces the conduct of bankers,” said Joel Friedlander, who represents the class of Rural/Metro shareholders.
The Securities Industry and Financial Markets Association have called the lower court ruling a “sea change” and warned it would create “unprecedented” uncertainty in the merger market by changing the rules for investment banks.
Both sides urged the five justices to focus on the facts of the underlying case.
Stone said Rural/Metro ran a thorough sale process that he said produced the best deal for shareholders.
Friedlander said the four-day trial produced a clear record that showed “RBC committed fraud on the board and fraud on the stockholders and fraud on the court.”
The court’s five justices focused on whether the lower court had to find gross negligence and whether RBC could be found liable for aiding the board’s breach of its fiduciary duties.
Justice Karen Valihura questioned if RBC was protected by the terms of its engagement letter, while Justice Collins Seitz pressed if RBC was insulated because the board also hired Moelis & Co, which had no conflicts.
Friedlander said the engagement letter did not matter in this case, and he dismissed the practice of hiring a second unconflicted banker as a way to provide cover to work both sides of a deal, as RBC did with Rural/Metro.
Supreme Court Chief Justice Leo Strine disqualified himself from the case. Strine originally oversaw the Rural/Metro case before he was elevated to the high court in 2014.
Reporting by Tom Hals in Wilmington, Delaware; Editing by Noeleen Walder and Tom Brown