The Examiners: Mark Roe 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?

Bankers were said to be in an uproar about the Delaware Chancery Court’s recent decision nailing bankers with serious conflicts of interest while advising their clients that a proposed deal to sell the company was fair.

The reactions may tell us as much about the sad state of fairness opinions as about the Delaware Chancery Court. The court reports:  RBC pronounced a single bidder’s bid fair and the bid succeeded.  At the same time, “senior bankers at RBC were engaged in a full-court press to convince [the buyer] to … include RBC in the financing package;” a potential bidder (distracted by a related deal) said it would bid if the sale were postponed; others (also distracted by another deal) showed interest with some prices exceeding the sale price; several directors were looking for post-sale employment at the buyer’s firm; and the adviser lowered its valuation at the last minute, making the buyout price seem better than it had looked before.

If these facts are business-as-usual, the Delaware court should be criticized not for nailing the adviser, but for having long pushed to make fairness opinions a check on board conflicts in buyouts. The main check is a market test—killed in this deal by the unwillingness to wait until likely bidders could bid. Without a strong market test, and without a non-conflicted adviser’s opinion, then maybe the deal wasn’t a good one for the company. Market tests and suitable professional opinions have been embedded in Delaware law for decades.

Critics also faulted the court for not giving RBC a pass because the buyout target failed after the buyout, indicating in retrospect that the price wasn’t low. But bankers shouldn’t be second-guessed if the stock price soars unexpectedly after the deal—and shouldn’t be let off the hook if post-deal results are bad.  The fairness opinion measures the best guess at the time of the deal.

The court’s biggest fault might be the length of the opinion, which maybe deterred too many bankers who are criticizing it and reporters from reading it through.  The facts the judge reports make the decision a strong one, not to be criticized by anyone other than conflicted bankers.

Mark Roe is a professor of law at Harvard Law School in Cambridge, Mass.

Bankruptcy Beat readers, do you think the fairness opinion is little more than the deal world’s equivalent of a paid-for voucher?