Bankers just got handed a painful, and necessary, reminder about conflicts of interest. A $76 million penalty against RBC Capital Markets for working both sides of a deal is the latest blow to skewed loyalties. Even with recent knocks against Goldman Sachs and Barclays, however, it isn’t clear the message is reaching Wall Street.
The facts are depressingly familiar. While advising ambulance operator Rural/Metro on its $440 million sale in 2011, RBC was also pitching to finance the buyer, private equity firm Warburg Pincus. Delaware Vice Chancellor Travis Laster ruled in March that the lure of loan and advisory fees – and the potential for touting the transaction to win similar clients – led the bank to advocate a lowball offer. Rural/Metro shareholders, the judge said last week, deserved an extra $76 million.
Barclays ran into similar trouble in 2011 when Laster ruled the UK-based bank had a conflict advising Del Monte on a sale while also financing the buyers. The bank and Del Monte paid some $90 million to settle. And in 2012, Goldman coughed up its $20 million fee for helping pipeline operator El Paso sell itself to Kinder Morgan. Turns out Goldman owned a $4 billion stake in the buyer, which then-Chancellor Leo Strine found “furtive” and “troubling.”
When Delaware courts – and especially Strine – talk, M&A practitioners usually listen. Obeying is a different question. Potential conflicts have long been a part of the merger world, and Goldman and other banks tend to make the most of them.
What’s more, the legal hurdles to holding deal practitioners liable can be daunting. In fact, the ruling against RBC was a rare case to connect directly a bank’s conflicts to investor losses. It relied on the relatively novel theory that the adviser had aided and abetted the board’s breach of a duty to shareholders.
Even a multimillion-dollar penalty, of course, may not mean much in comparison with the hefty fees provided by mega-deals. Getting zinged from the bench, however, won’t help build or preserve a reputation with clients. Banks deserve to be chewed out over conflicts. Fortunately, Delaware courts seem more than up to the task.