The Examiners: Sharon Levine 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?

It would be easy to take “pot shots” at RBC’s (and the board’s) actions here. After all, we have the benefit of discovery, a trial, and a lengthy ruling. However, in doing so, we potentially miss the big-picture lesson offered by the Delaware Chancery Court’s carefully worded Rural/Metro opinion:  the importance of internal communications to, by and among board members and their advisers.

The Rural/Metro board contained seven members, including three independent directors and the company’s chief executive officer. However, three directors had personal reasons to favor a near-term sale. One operated a hedge fund that controlled 22% of Rural/Metro’s stock. Another hoped to exit the board on a high note, perhaps more likely with a fast sale. The third (Rural/Metro’s CEO) changed his perspective on the merits of a near-term sale after receiving, and perhaps reacting to, a performance review. The court notes that the “personal circumstances that confronted [these three directors]…helped shape the boardroom environment in which RBC operated.”

Although the board formed a special committee to consider a sale or other strategic options and to retain professionals, it neither authorized the special committee to begin a sale process nor challenged the special committee when it engaged RBC to pursue a sale. The court found information critical to the board’s decision-making process either not shared with board members or shared late in the process, leaving the board members uninformed. However, it is unclear from the facts of the opinion whether the board members were unfamiliar with what to expect when considering a fast sale transaction or if their deference to particular board members gave them a false sense of security (or some measure in between).

The court criticized RBC for, among other things, not disclosing to the board its continued interest in buy-side financing and plans to lobby the would-be purchaser of the company’s assets. However, without minimizing RBC’s failure to disclosure, given the board’s apparent lack of internal communication, it is unclear whether better disclosure would have made a practical difference in the decision-making process.

Rural/Metro arguably provides a wakeup call for corporate boards to reexamine their policies and processes, including: disclosure of individual interests, board member rotations, meeting requirements in special situations, requiring advisers to provide reports, information, and data timely and in a manner convenient for the board, and reminding directors to maintain a critical perspective when reviewing information presented by advisers or special committees.

Advisers should keep in mind that when not all board members bring the same skills to the boardroom, providing more data and allowing more time for all of the directors to participate fully in deliberations helps the process.

Sharon Levine is vice chair of Lowenstein Sandler LLP’s national bankruptcy, financial reorganization and creditors’ rights practice.

Bankruptcy Beat readers, what other lessons can corporate boards take from the Rural/Metro ruling?