The Examiners: Lisa Donahue 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?

The judge weighed a lot of evidence and testimony in reaching his conclusion, so I am not in a position to second-guess the decision. However, the broader context of this case and the substantial amounts of money involved remind us of one enduring message:  Conflicts matter.

As we look at the institutional lessons of this case, three things stand out. First, communication and disclosure of potential conflicts are fundamental in the financial-services industry and, in particular, the restructuring business. This isn’t news, but it is a reminder that the communication around potential conflicts need to be clear, complete and well-documented.

The second lesson is that extra care is required when conflicting roles are actually present. When a duty of loyalty runs to multiple parties in a case, things can get tricky, as we see in Rural/Metro. Your firm cannot harbor bias for or against either side, regardless of how the outcome influences your economics in the case. Firms need policies and protocols for risk management of conflicts. In some instances, the conflicts may be so opposed that dual roles simply cannot be reconciled.

A final lesson is that even if you think you are in good order on disclosure and actual conflict management, it may not be enough. Any aggrieved party can potentially bring an action if it doesn’t like the outcome, and facts presented in an unfavorable light may influence a judge’s decision and public perception. So, regardless of the outcome in court, substantial economic and reputational damage can still be done.

The bottom line here is that conflicts do still matter and, while the desire to accept conflicting roles in a slower restructuring market may be great, the risks can sometimes be significant.

Lisa Donahue is global leader of the turnaround and restructuring services group at business-advisory firm AlixPartners LLP and is based in New York. Follow her on Twitter at @LisaJDonahue.

Bankruptcy Beat readers, in the face of potential conflicts, how do you balance the need to generate business against the need to protect your professional reputation?