The Examiners: Anders J. Maxwell on the Rural/Metro Ruling

What does the Delaware Chancery Court’s Rural/Metro ruling mean for advisers to distressed companies? Did the court reach the right conclusion?

Chancery Court is highly regarded in part for a tradition of addressing overarching legal principles and attention to due process. Rural/Metro follows in that tradition. The implications for financial advisers to both financially stable and distressed companies are significant. In Rural/Metro, the Court found that fiduciary responsibility extends through boards of directors to the advisers serving those fiduciaries. Specifically, the adviser was deemed by the Court to have aided and abetted the board in failing in its responsibilities to stockholders based on undertaking a sale process and supporting recommendations tainted by the adviser’s apparent conflicts of interest.

Rural/Metro reinforces at least three concerns that arise with distressed companies:

• The potential conflicts when arranging financing provided by adviser’s affiliates or, by extension, loan funds with pre-existing holdings in a case.
• Instances of debtors or other interested parties who sponsor a sale process under Section 363 of the Bankruptcy Code without adequate protection of the rights of others.
• Ill-founded, inconsistent or otherwise flawed valuations which cloud rather than clarify judicial review.

In short, Rural/Metro is a pointed reminder that advisers to distressed companies share responsibility for the integrity of the restructuring process.

Anders J. Maxwell is a managing director in the restructuring & recapitalization group at New York-based investment banking advisory firm Peter J. Solomon Co.

Bankruptcy Beat readers, do you see additional concerns that the Rural/Metro ruling raises?