United States: Rural/Metro: Delaware Supreme Court Affirms $76 Million Award Against Financial Advisor

Holds That Financial Advisors Are Not Gatekeepers
Last Updated: December 31 2015
Article by Jeffrey L. Rothschild and John B. Cornelius

On November 30, 2015, the Delaware Supreme Court issued an opinion affirming the Court of Chancery's decision in In re Rural/Metro Corporation Stockholders Litigation. In the earlier decisions, the Court of Chancery found that Rural/Metro Corporation's primary financial advisor aided and abetted breaches of fiduciary duty by Rural/Metro's board in connection with the company's acquisition by a private equity firm, and held that the primary financial advisor was liable for approximately $76 million in damages, plus interest. Vice Chancellor Laster's decision sent shockwaves through the financial advisor community, both for the amount of the award and scope of its holding, including for its apparent shifting of responsibility for properly running a sale process from a board of directors to a financial advisor.

The Delaware Supreme Court's opinion is vital because it affirms both the award and the principal legal holdings, including that the primary financial advisor was liable for aiding and abetting a breach of the directors' fiduciary duties without finding gross negligence by the directors. The Delaware Supreme Court did break from the Court of Chancery's decision in a significant way as it pertains to the role of the financial advisor, however; VC Laster's characterization of financial advisors as "gatekeepers" with a quasi-fiduciary responsibility to monitor a board to ensure it has both adequate information and exercises due care was rejected by the Court. Rather, the Court found that the relationship between a financial advisor and a company or its board "is primarily contractual in nature" and "the parameters of the financial advisor's relationship and responsibilities with its client" are set forth in the contract between the parties, not through a vague "gatekeeper" function. The Court further narrowed VC Laster's decision by affirming that scienter is a requisite element of an aiding and abetting claim, and underscored that a financial advisor's failure to prevent directors from breaching their duty of care did not give rise to such a claim.


Rural/Metro was sold to a private equity firm in June 2011. The year prior, Rural/Metro was considering the acquisition of its primary competitor, American Medical Response, Inc. (AMR), a subsidiary of Emergency Medical Services Corporation (EMS). The board formed a special committee to oversee the process of formulating Rural/Metro's acquisition strategy as it pertained to AMR. The special committee was re-formed in October 2010 in response to an approach by potential acquirers of Rural/Metro, but the trial court found that the board did not authorize the special committee to pursue a sale of the company; instead, the board authorized the special committee to engage an advisor to review strategic alternatives and report its findings to the board. The special committee engaged the primary financial advisor and a secondary financial advisor in December 2010, and, the trial court found, proceeded to initiate an unauthorized sale process without the knowledge, oversight or approval of the full board and without ever considering strategic alternatives. The trial court found that the primary financial advisor steered the special committee to engage in a sale process designed to run in parallel with the sale of EMS, which had previously announced that it was exploring strategic alternatives, and that the primary financial advisor did not disclose to Rural/Metro that it planned to use its engagement by Rural/Metro to seek financing work from the bidders for EMS.

As we discussed in "Who's in Charge – Is the Board Responsible to Monitor Its Financial Advisor or Vice Versa?", VC Laster found that the directors breached their fiduciary duties in initiating the unauthorized sale process, for failing to be adequately informed as to Rural/Metro's value during the sale process, and for failing to provide proper oversight of the primary financial advisor (particularly as it pertained to the primary financial advisor's efforts to get on buy-side financing trees for the potential purchase of EMS, its attempts to provide staple financing to the private equity firm in the purchase of Rural/Metro, and its last-minute manipulation of its valuation metrics). The Court of Chancery further found that the board committed a disclosure violation by including materially misleading information in its proxy statement by indicating that the primary financial advisor had used "Wall Street research analyst consensus projections" in its precedent transaction analysis and that the board concluded that the primary financial advisor was given the right to offer staple financing because it could offer such financing on terms that "might not otherwise be available," neither of which was accurate. The primary financial advisor was found to have aided and abetted those breaches.

Revlon applies to a sale, not the evaluation of strategic alternatives

The parties agreed that Revlon was the correct standard of review, but disagreed as to when it applied. The primary financial advisor argued that the Court of Chancery erred in applying Revlon's enhanced scrutiny during the period when Rural/Metro was supposedly exploring strategic alternatives, and that Revlon applied only "when the sale of the Company became inevitable." The Delaware Supreme Court agreed that Revlon is not triggered by a company "being in play," but found that the special committee never "genuinely explor[ed] other strategic alternatives" and instead initiated a sale process in December 2010. The board, which subsequently "restated and ratified" the special committee's activities, rendered them acts of the company. As a result, Revlon applied from the outset of the special committee's unauthorized sale process. The Court further disagreed that Revlon would apply only at the end of a sale process and not during the course thereof, noting that such an argument "would allow the Board to benefit from a more deferential standard of review during the time when, due to its lack of oversight, the Special Committee and [the primary financial advisor] engaged in a flawed and conflict-ridden sale process." Further, the Court noted "[s]uch a result would potentially incentivize a board to avoid active engagement until the very end of a sale process by delegating the process to a subset of directors, officers, and/or advisors." While there is no bright-line test as to when Revlon duties are triggered, Delaware courts will analyze when a sale process was initiated in determining when Revlon applies – even if a special committee has commenced an unauthorized sale.

Aiding and Abetting requires scienter

The Delaware Supreme Court affirmed the Court of Chancery's holding that the financial advisor was liable for aiding and abetting the breach of the director's fiduciary duties. In particular, the Court noted that the primary financial advisor "knowingly induced the breach [of the directors' fiduciary duties] by exploiting its own conflicted interests to the detriment of Rural and by creating an informational vacuum." The key element is scienter. The Court stated that to be liable for an aiding and abetting claim, "[t]he aider and abettor must act 'knowingly, intentionally, or with reckless indifference'...with an 'illicit state of mind.'" The Court affirmed that the primary financial advisor acted with scienter because, as we described in our prior article "From Bad to Worse – Rural/Metro Financial Advisor Hit With $75.8 Million in Damages", it knowingly failed to (i) disclose its conflicts with respect to seeking buy-side financing for bidders of EMS, (ii) provide the board with information about Rural/Metro's value (including the manipulation of the valuation analysis) and (iii) inform the board of its repeated attempts to seek a buy-side financing role with the private equity acquirer of the company. "The manifest intentionality of [the primary financial advisor's] conduct...is demonstrative of the advisor's knowledge...[and] [p]ropelled by its own improper motives, [the primary financial advisor] misled the Rural directors into breaching their duty of care." The Court further underscored that its holding should be read narrowly, however, and "not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting a breach of the duty of care." Rather, the Court noted that the scienter standard make such an aiding and abetting claim very difficult to prove, and that its ruling was based on the "unusual facts proven at trial."


The Delaware Supreme Court's decision confirms that financial advisors may be held liable for aiding and abetting a breach of directors' fiduciary duties – even without a finding of gross negligence on the part of the directors. The Court's opinion further reinforces the trend noted in our earlier article, " The Importance of Oversight: Recent Trends in Delaware Financial Advisor Liability," regarding the necessity of financial advisor transparency and disclosure of conflicts of interest, and underscores that financial advisors should proactively monitor and disclose to their client boards potential conflicts throughout a sale process. Additionally, the decision reaffirms that directors must be vigilant and informed during a sale process, including by ongoing inquiry into potential conflicts of interests of its financial advisors.

Another vital takeaway from the Court's decision from a financial advisor perspective is that the Court found that they are not "gatekeepers." In its prior decision, the Court of Chancery provided dictum noting that financial advisors "function as 'gatekeepers'" that provide expert services to "[d]irectors [that] are not expected to have the expertise to determine the corporation's value for themselves, or to have the time or ability to design and carryout a sale process." The Court rejected such broad language, noting "the role of a financial advisor is primarily contractual in nature" and that "[a]dhering to the trial court's amorphous 'gatekeeper' language would inappropriately expand our narrow holding here by suggesting that any failure by a financial advisor to prevent directors from breaching their duty of care gives rise to an aiding and abetting claim against the advisor." In so doing, the Court curtailed the ability of future litigants to make claims based upon the "amorphous 'gatekeeper'" concept. At the same time, financial advisors should continue to ensure that their client boards are informed of material information, particularly as it pertains to the financial advisor's conflicts of interest – knowingly creating an "informational vacuum" will still subject a financial advisor to potential aiding and abetting liability.

Finally, the Court rejected the notion that the secondary financial advisor's independent financial analysis cut the proximate causal link, "in part, because the supposedly conflict-cleansing bank was paid on the same contingent basis as the primary bank." Similar to the secondary financial advisor in In re El Paso Corporation Shareholder Litigation, where the purportedly conflict-cleansing financial advisor was only paid if El Paso was purchased by Kinder Morgan, in this instance the Court intimated that the secondary financial advisor's compensation arrangement gave it a reason to share similar incentives with the primary financial advisor and to prefer a sale of the company. As a result, it failed to cleanse the defective sale process and deficient proxy disclosures. The Court noted that a compensation arrangement that pays a percentage of the deal value upon consummation of the transaction would have a "salutary effect of aligning the interests of the advisor with those of its client in attempting to obtain the best value." We believe that a secondary financial advisor compensated based upon an incentive fee tied to a higher offer coming out of a go-shop period, however, would likely be acceptable to the Court, and that such a fee arrangement, along with the secondary financial advisor performing its own independent financial analysis, would likely lead to the desired "cleansing" effect on a deficient process, in certain circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.