By Jonathan Stempel
March 9 (Reuters) - A Delaware judge said Royal Bank ofCanada should be held liable to former shareholders ofRural/Metro Corp because it failed to disclose conflicts ofinterest that tainted the $438 million buyout of the ambulanceoperator.
Bankers at RBC Capital Markets were so eager to collecthigher fees that they convinced Rural/Metro directors to sellthe company in June 2011 to private equity firm Warburg PincusLLC at an unreasonably low $17.25 per share, wrote ViceChancellor J. Travis Laster of the Delaware Chancery Court.
Former Rural/Metro Corp shareholders are seeking about $172million from Toronto-based RBC, representing the differencebetween the buyout price and what they believe the company wasworth, according to published reports.
In a 91-page decision dated March 7, Laster, who presidedover a four-day civil trial in the case last May, said RBCbankers also concealed their efforts to provide financing tofund the buyout and other transactions, offering the opportunityfor "additional and far greater" fees that they coveted.
"RBC created the unreasonable process and informational gapsthat led to the board's breach of duty," Laster wrote. "Underthe circumstances, RBC's aiding and abetting of the board'sbreaches of fiduciary duty harmed Rural's stockholders."
Given how RBC misled Rural/Metro directors, "this is not acase where a board's independent sense of the value of thecompany is sufficient to carry the day," the judge added.
Laster said he would decide later how much RBC should payformer Rural/Metro shareholders in damages, including possiblydamages for bad faith.
The decision may make it easier for shareholders to pursuelawsuits claiming they were short-changed in buyouts.
Delaware is the corporate home of more than half of thelargest U.S. companies, in part because its laws are oftenconsidered more friendly to companies than laws of other states.
"We have reviewed the opinion and are considering ouroptions," RBC spokeswoman Sanam Heidary said. "This process isnot yet over so we can not comment further."
Lawyers for the shareholders did not immediately respond onSunday to requests for comment.
Last year, Rural/Metro directors and another adviser to thecompany, Moelis & Co, agreed to pay a combined $11.6 million tosettle related litigation, without admitting wrongdoing.
In February 2011, Laster delayed a shareholder vote on thebuyout of Del Monte Foods Co by a consortium led by KKR & Co after concluding that Barclays Plc's BarclaysCapital unit had a conflict of interest by advising Del Montewhile also providing financing for the buyers.
Del Monte and Barclays agreed the following October to pay$89.4 million to settle that case.
Founded in 1948, Rural/Metro provides ambulance and fireprotection services in about 700 cities and towns in 21 U.S.states.
The Scottsdale, Arizona-based company filed for bankruptcyprotection in August 2013 after struggling with accounting andbilling problems, including what it called "an acute deficiencyof cash receipts compared with cash expenditures," as well astoo much debt.
It emerged from Chapter 11 protection in December aftercutting debt in half and winning a $135 million infusion frombondholders.
The case is In re: Rural Metro Corp Stockholders Litigation,Delaware Chancery Court, No. CA-6350.
Barclays (BARC)