The Examiners: Perry Mandarino 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?

There has always been a high bar for full disclosure and independence among advisers to distressed companies, particularly in bankruptcy cases. For example, the Bankruptcy Code and Federal Rule of Disclosure 2019 mandate the complete identification of various relationships that can be considered sensitive and may raise even the faintest potential conflicts of interest. An adviser’s disinterestedness is essential to providing advice and executing his or her fiduciary role.

A relationship with a counterparty doesn’t render the adviser incapable of providing independent advice and delivering excellent services. When giving a client advice, it’s imperative for an adviser to provide transparency of the situation and the various options for exploring solutions. This requires not only a high level of understanding with regard to potential courses of action and related outcomes, but also a clear position of objectivity. Not every scenario can be predicted at the time of retention, but the onus is on the adviser to stay current about the facts of an engagement. Most professional organizations, especially regulated organizations, have processes in place to monitor conflicts. The adviser makes the disclosure; the clients and courts will then have all facts available to make the appropriate judgment.

The business, investment and regulatory environments are complex ecosystems where various advisers and clients can find themselves working together on some transactions while sitting at the opposite end of the table in other situations. The restructuring community operates in a complex and intertwined financial world, but it’s a small community. Advisers often have relationships spanning multiple organizations involved in distressed situations.

Ultimately, it’s all about putting the client first. And, that always starts with full disclosure and transparency of potential conflicts and relationships. The Rural/Metro ruling serves as a reminder that this approach always wins out over the long term.

Perry Mandarino is the U.S. Business Recovery Services leader for PricewaterhouseCoopers, based in New York. Follow him on Twitter at @Perrymandarino.

Bankruptcy Beat readers, when it comes to disclosure of potential conflicts, how far should advisers go?