Recent Suits Address Who is Responsible for Whom

by David Cosgrove

Earlier this month, an attorney argued to the Delaware Supreme Court that the activities of corporate directors could not be expected to be monitored by bankers giving investment advice. Wall Street is paying attention to the case, as this kind of an expansion of the fiduciary obligation could leave advisors with millions of dollars of damage exposure stemming from a merger deal.

According to the suit, the RBC bankers gave faulty advice to Rural’s board of directors, which led to its undervaluation, making a private equity takeover more attractive. Additionally, RBC was accused of failing to disclose its potential role in the financing of the takeover. [1]

The Court of Chancery rejected RBC’s claim that its current $76 million liability to shareholders (83 percent of the total $91.3 million loss determined to have been suffered) should be reduced, given the breaches of duties committed by Rural / Metro Corp.’s board of directors and its financial advisors. The Court concluded that RBC was attempting to seek a contribution from the entity on which it perpetrated the fraud and denied the argument. [2]

Bankers are, “really just not equipped for (this sort of monitoring). That would really not be very good policy,” claims Alan J. Stone, whose firm, Milbank Tweed Hadley & McCloy LLP, is representing RBC Capital Markets in the lawsuit filed against it by shareholders of the ambulance company Rural / Metro Corp. [3]

The Securities Industry and Financial Markets Association (SIFMA) contended the lower court had, “departed from precedent by holding the adviser partly responsible for an alleged breach of the fiduciary duty of care by a corporate board that was its client.” It urged the Delaware Supreme Court to, “free RBC from liability for its advice on the private equity buyout, arguing the lower court misconstrued the role financial advisors play.” [4]

Also in Delaware, a judge dismissed a class action suit brought about by shareholders of the Zale Corp. jewelry chain against Merrill Lynch. While the original suit named Zale’s board, as well as Signet Jewelers who had purchased its rival, as defendants, only Merrill remained in the case. Judge Parsons of the Court of Chancery determined Merrill may be liable for shareholder loss, due to its failure to disclose a potential conflict. The bank had made a presentation to Signet a month prior to being hired by Zales in which it discussed the acquisition of Zales for $17 to $21 a share, with a final sale price of $21. [5]

Judge Parsons demanded Merrill defend its role in the sale, only to rescind that order the following day, claiming a Supreme Court ruling had clarified the standards of review in such a case. Four weeks later, Merrill argued the demand made of it should be dismissed, based upon this Supreme Court clarification. According to the “Opinion Summary” in re Zale Corp Stockholders Litigation, the suit was thrown out with prejudice because 1) the wrong standard of review had been applied, and 2) Plaintiffs had not shown the Director Defendants’ breach of their own care to be reasonably conceivable. [6]

Much of Wall Street is eagerly awaiting the outcome of these two important cases. Food for thought.


[1] Rajamani, M. (2015, October 1) Bankers Not Liable for Board Actions, Del. Justices Told [electronic format]


[2] Rajamani, M. (2015, October 1) Bankers Not Liable for Board Actions, Del. Justices Told [electronic format]


[3] Rajamani, M. (2015, October 1) Bankers Not Liable for Board Actions, Del. Justices Told [electronic format]


[4] Rajamani, M. (2015, October 1) Bankers Not Liable for Board Actions, Del. Justices Told [electronic format]


[5] Hals, T. (2015, October 29) Unusual Ruling Ends Class Action vs Merrill Lynch Over Zale Deal 


[6] In re Zale Corp. Stockholders Litig. (n.d.) [electronic format] Retrieved from