The Examiners: Carol Flaton 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?

As with the 2011 Del Monte and 2012 El Paso/Kinder Morgan decisions, the recent Chancery Court ruling is a reminder to all advisers (in distressed situations and otherwise) of the courts’ evolving views and that advisers must conduct themselves as they already know they should—professionally and prudently. This conduct includes:

• adhering to confidentiality agreements
• disclosing all conflicts
• ensuring all internal processes are well-founded, thorough and consistently executed
• dispensing advice prudently

In-court restructurings benefit from judicial oversight and approval, causing the range of advisory behavior to be far narrower and generally without issue (i.e., bankruptcy judges are asked to evaluate and approve DIP financings, 363 sales, disclosure statements and plans of reorganization as well as rule on other key issues that arise).

Out-of-court restructurings, however, like regular M&A and financing transactions, are not subject to the same level of real-time scrutiny—unless, of course, they are challenged. Thus in an out-of-court restructuring, an advisory firm, without appropriate oversight from its client or with a less-than-prudent culture, could conduct itself in a manner that subsequently may be challenged. The message to those advisers would certainly not be a new one; beyond following the letter of the law, reputation is key to long-term success and is built on a strong foundation of professionalism, accountability and a disciplined internal culture. As the courts continue to refine the rules of the road through their rulings, advisers will, as necessary, need to adjust their ways of doing business.

Carol Flaton is a managing director of Zolfo Cooper, a global financial advisory and interim management firm, and is based in New York.

Bankruptcy Beat readers, how have the Rural/Metro ruling and other rulings impacted advisers on out-of-court restructurings?