The Royal Bank of Canada was ordered to pay $75.8 million in damages to former shareholders of Rural/Metro for failure to disclose conflicts of interest during a buyout. Rural/Metro is a Scottsdale, Arizona based company that provides ambulance and firefighting services to about 700 communities in 21 states. New York-based private equity firm Warburg Pincus bought out Rural/Metro for $17.25 per share following recommendations from RBC investment bankers. Rural/Metro shareholders sued over the buyout, alleging that the company accepted an improperly low offer from Warburg due to advice from conflicted RBC bankers.
Specifically, investment bankers at RBC urged Rural/Metro to sell the company “so they could reap as much as $60 million in fees while touting their work as the firm’s financial advisor to other companies mulling similar deals.” Providing these services to Rural/Metro permitted RBC’s investment bankers to convince Clayton, Dubilier & Rice “to allow the bank to provide $10 million in financing as part of the $3.2 billion acquisition of Emergency Medical Services Corp.” Furthermore, RBC bankers failed to disclose that they tried to provide “staple financing to Warburg as part of the deal.”
This decision is the latest in a series of rulings penalizing banks and investment firms for failing to disclose conflicts in buyout cases. In 2011, Vice Chancellor Laster, of Delaware’s Court of Chancery, similarly found improper action in a dispute between Del Monte Foods and Barclays Capital, which resulted in a payment of “$89.4 million to resolve claims that the deal had been improperly managed” following the company’s leveraged buyout. There, Barclays Capital was peddling “a Del Monte buyout to a number of private equity firms.”
At the center of these disputes is the practice of “staple financing,” which has become “increasingly common in the leveraged buyout boom.” Staple financing is when a seller and its financial advisers find and offer a financing package to potential purchasers. Although staple financing can maximize the sales price and facilitate a prompt sale, it allows banks to profit from both sides of a transaction, thereby raising loyalty concerns.