The Examiners: Richard A. Chesley 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?

Whether one agrees or disagrees with the Delaware Chancery Court’s March 7 ruling in the Rural/Metro case, it cannot be disputed that the court sounded a very stern warning to investment bankers and other advisers in corporate America. While there is nothing in the court’s decision that would make it any less applicable to the myriad advisers counseling distressed companies, many of the lessons from Rural/Metro have been learned in the distressed market.

First, the range of options and timing are far more limited in the distressed market than what is available in healthy situations such as Rural/Metro. With distressed companies, fiduciary duties shift and the economic realities focus on fulcrum creditors rather than equity holders. This group and its advisers are keenly focused on the efforts and compensation of the company’s professionals.

Furthermore, in the distressed world, advisers generally proceed into the engagement recognizing that their efforts (and compensation) will be scrutinized in the relatively transparent Chapter 11 environment. Advisers must satisfy the “disinterestedness” standard and all facets of their participation will be scrutinized not only by their client, but by the U.S. trustee, creditors’ committees and the ultimate arbiter: the bankruptcy court.

Indeed, certain lessons learned by advisers in the distressed market would likely have avoided the Rural/Metro situation:

• Clear authorization in the engagement from the board of directors and detailed reporting mechanics are critical.


• The scope of the engagement must be clearly delineated.


• The fee structure must be “agnostic” to align the advisers’ economic interests with that of the company.


• The adviser needs to avoid even the appearance of a conflict.

Not only will these steps avoid the situation addressed in Rural/Metro, but they will allow advisers to continue to serve their critical gatekeeping role.

Richard A. Chesley is the co-chair of DLA Piper’s restructuring practice, focusing on bankruptcy transactions both in the United States and internationally. He is based in Chicago.

Bankruptcy Beat readers, what other lessons should advisers to distressed companies take from the Rural/Metro ruling?

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