So, I won't break down the legal parts in too much detail of this because I am sure no one cares, but RBC had to pay around $75mm for its part in the allegedly deflated sale of Rural/Metro Corporation(Ambulatory service company) to Warburg. The max they could have made on the deal was $60mm if they were able to finance the purchase, but they only got the advisory fee of around $5mm. I will say that liability was based on RBC aiding and abetting a breach of the directors' duties to the shareholders. I am actually about to write a thirty page paper about this general topic(not the case). I'd love to get some perspective from WSO.
Essentially RBC did this: RBC wanted to advise Rural on the acquisition, finance the acquisition, and it also ran an auction for both Rural and AMR/EMS, which AMR/EMS is actually a competitor of Rural. Problems: Rural ended up being sold for less than it was worth as a stand-alone company. RBC didn't specifically disclose its desire to finance(and repeated efforts) Warburg's purchase to shareholders(used blanket disclosure though). RBC basically lowered its projections on Rural's value to give to directors to facilitate the sale, thus earning its fee. Didn't disclose that, obvi. Also, it ran the auction for RBC and AMR/ERS within a short period which didn't allow as many bidders as it otherwise would have. (The best value for shareholders would have been to have one firm buy both RBC and AMR/ERS because that firm could have paid more due to realized synergies)
There's a bit more to it, but that is the gist of it. It is around a 100 page opinion, and the appellate court had NONE of any of RBC's arguments. Did the best I could on the facts here, but it is a 100 page opinion, and I've only read it once, so apologies for any mistakes.
So what do you guys think in terms of just a purely business perspective? How should a situation like this be approached next time? Legal perspectives? Any other thoughts you have are appreciated as well.
Are you saying RBC got a $5mm fee on a $75mm deal or am I reading that wrong?
They got a 5mm fee on the deal but were responsible for 75mm dollars they had to pay to shareholders because the price was too low because of their actions! I'll update it thanks for pointing out that it isn't clear.
No one interested in discussing this at all?
One, nobody buys that you read the entire 100 page court opinion. Two, a $75mm fine for a bank of RBC's size isn't very notable.
I really did read it as I am writing my 30 page paper on it. It wasn't a fine, it was a shareholders suit. The fine isn't notable, but the implications are, at least in terms of what I know which is why I wanted to discuss it. I assume every IB tries to do all of the things that RBC did here. This comes very close to giving banks themselves a fiduciary duty to shareholders, without saying it explicitly.
Actually it is. When you usually read about legal suits, the banks themselves aren't actually paying for it. The clients are. This comes straight out of the P&L.
Not only that, this is a relatively small deal too. This could happen with a much greater penalty.
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