Vice Chancellor J. Travis Laster's flaying of Barclays Capital for its conduct in the sale of Del Monte Foods Co. has garnered significant attention for its suspicion of stapled financing. Laster's opinion in the case has spurred vigorous debate on when a seller's investment bank may provide financing to a buyer. The settlement of a recent shareholder suit arising from the $1.3 billion sale of RehabCare Group Inc. to Kindred Healthcare Inc. suggests that defense lawyers don't want to risk testing Laster on the issue -- even in cases with favorable facts.

RehabCare and Del Monte share a significant fact: In both cases, the seller took advice from the same investment bank that provided financing to the buyer. But RehabCare's board was far more engaged in the sale process than Del Monte's and thus in a better position to defend against a lawsuit. Even so, RehabCare may not have wanted to risk a harsh ruling or the possible delay of a deal that came at a 37% premium to its stock price on Feb. 7, the day before the transaction was announced.

Instead, RehabCare agreed to pay its shareholder plaintiffs $2.5 million, make additional disclosures, reduce the breakup fee on the deal from $26 million to $13 million and eliminate the requirement for a three-business-day period during which Kindred has the right to match a superior proposal. One lawyer not involved in the case calls the settlement harsh, but notes that RehabCare announced the deal just a week before the Del Monte opinion came down. "It is clear that the Del Monte decision impacted the Kindred settlement negotiations and terms," the lawyer adds.

According to RehabCare's May 12 supplemental disclosure with the Securities and Exchange Commission, Kindred and RehabCare began discussing a deal in late 2007. Kindred offered $25 a share in cash and stock, but RehabCare rejected the offer. Barry Blake, then at J.P. Morgan Chase & Co., advised Kindred on the talks; he moved to Citigroup Global Markets Inc. two years ago and is advising RehabCare in the current deal.

Last August, RehabCare's board, alarmed by a drop in the company's stock, decided to reopen talks with Kindred after concluding that the rival post-acute healthcare services company was the only "logical strategic acquirer." The board consulted with Citigroup in reaching that decision and the next month hired the bank as its financial adviser. Citi canvassed the private equity world for another bidder, a search that yielded a few preliminary offers at between $25 and $30 a share but nothing more.

Meanwhile, according to the prospectus, "throughout 2010" Citi discussed potential acquisitions with Kindred and provided "acquisition financing to Kindred." In October, Kindred CEO Paul Diaz asked Citi to run the numbers on a possible takeover of RehabCare, a task the bank performed after getting approval from RehabCare CEO John Short. Diaz told Short that he'd be willing to pay $32 to $34 in cash per RehabCare share, at which point the RehabCare board set up a special committee to handle the negotiations and eventually extracted $35 a share in cash and stock.

The committee focused on certainty of financing as a key issue. In December, it asked J.P. Morgan, Morgan Stanley and Citi to bid for the financing work that a sale of RehabCare to Kindred would require. Citi agreed to set up a Chinese wall between its M&A and financing teams and told RehabCare it would need to hire a second bank to provide a fairness opinion. RehabCare ended up tapping RBC Capital Markets, and Citi reduced its own fee by the full amount of RBC's fees and expenses.

According to the supplemental filing, "The RehabCare special committee concluded that CGMI's participation in the financing syndicate could enhance the certainty of Kindred's ability to finance the transaction and increase competition among lenders, which could lead to Kindred securing more favorable financing terms." The special committee ended up choosing J.P. Morgan to lead the financing but allowed both Morgan Stanley and Citi to participate as well.

The supplementary disclosure fails to make absolutely clear whether the RehabCare board knew in August 2010 that Blake had advised Kindred in the companies' earlier talks, though the board clearly knew in October that Citi was doing work for Kindred on a possible purchase of RehabCare. And while in the Del Monte case Barclays asked the board for permission to provide financing to the bidders before the deal was signed, the RehabCare board requested that Citi pitch for the financing work on that deal. In theory, an informed board should be able to waive such a conflict and allow its bank to provide acquisition financing. But the RehabCare settlement is another piece of evidence that suggests boards will be chary of doing so.

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David Marcus is senior writer at Corporate Control Alert.