In re Rural Metro Corp.
2014 Del. Ch. LEXIS 36, 88 A.3d 54, 2014 WL 1053140 (2014)
Rule of Law:
A financial advisor can be held liable for aiding and abetting a board of directors' breach of fiduciary duty of care, even when the directors themselves are exculpated from monetary damages, if the advisor knowingly participates in the breach by misleading the board or creating an informational vacuum for its own improper financial motives. This also extends to aiding and abetting breaches of the duty of disclosure through false or incomplete information regarding valuations and conflicts of interest.
Facts:
- Rural/Metro Corporation (Rural), a national ambulance and fire protection service provider, had its shares traded on NASDAQ.
- In August 2010, the Board formed a Special Committee, chaired by Robert Shackelton, to oversee an approach to acquiring American Medical Response (AMR), Rural's lone national competitor.
- In October 2010, the Board reformed the Special Committee to respond to an interest in acquiring Rural from a consortium, but discussions ended when a partner withdrew.
- In December 2010, rumors circulated that EMS (AMR's parent company) was exploring strategic alternatives, prompting Shackelton to discuss strategic alternatives for Rural and the Board to reactivate the Special Committee to retain advisors.
- Shackelton and RBC Capital Markets, LLC (RBC) unilaterally initiated a sale process for Rural, prioritizing engagement with private equity firms involved in the EMS process, without full Board authorization.
- Multiple private equity firms expressed limitations or declined to participate in Rural's parallel sale process, and J.P. Morgan advised deferring a sale to allow Rural's growth plan to mature.
- On March 22, 2011, Warburg Pincus offered to acquire Rural for $17.00 per share as the sole final bidder, while CD&R (the successful bidder for EMS) indicated it could pay a higher price due to synergies but needed an extension for its final bid, which the Special Committee denied.
- On March 26, 2011, senior RBC bankers made a final push to secure buy-side financing work from Warburg Pincus and simultaneously manipulated RBC's internal valuation analyses downward to make Warburg's $17.25 bid appear more attractive.
Procedural Posture:
- Rural/Metro Corporation merged with an affiliate of Warburg Pincus LLC on June 30, 2011.
- Stockholders filed class action lawsuits in Delaware and Arizona, alleging breach of fiduciary duties by the Rural board of directors and aiding and abetting by RBC Capital Markets, LLC and Moelis & Company LLC.
- The Delaware action was consolidated, and Beatriz Llorens was appointed lead plaintiff.
- Llorens and the defendants entered into a Memorandum of Understanding to settle for supplemental disclosures and an agreement not to oppose a fee application.
- Rural's stockholders approved the merger.
- The court conducted a hearing on the fairness of the settlement on January 17, 2012, where Joanna Jervis objected, arguing conflicts of interest were revealed during discovery.
- The disclosure-only settlement was rejected as inadequate, and Jervis's counsel took over the case, filing an amended complaint adding claims against Moelis and RBC.
- The directors settled before trial for $6.6 million, and Moelis & Company LLC settled for $5 million.
- The case proceeded to trial against RBC Capital Markets, LLC.
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Issue:
Can a financial advisor be held liable for aiding and abetting a board of directors' breach of the duty of care and duty of disclosure, even if the directors are protected by an exculpatory provision under Delaware law, when the advisor knowingly misleads the board or manipulates information for its own financial gain?
Opinions:
Majority - Laster, Vice Chancellor
Yes, a financial advisor can be held liable for aiding and abetting a board of directors' breach of the duty of care and duty of disclosure, even if the directors are protected by an exculpatory provision, when the advisor knowingly misleads the board or manipulates information for its own financial gain. The court found that RBC knowingly participated in the Board's breach of fiduciary duty of care by creating an unreasonable sale process and informational vacuum for its own financial interests. RBC initiated a parallel sale process with the EMS auction without full Board authorization, driven by its desire to secure buy-side financing roles with EMS bidders. This strategy was flawed and known to be problematic, but RBC prioritized its own fee generation over Rural's best interests. RBC withheld critical information from the Board, including its own valuation analysis until hours before the merger vote, and actively manipulated its valuation metrics to make Warburg's bid seem more favorable. The court cited Arnold IV to support the principle that a third party can be liable for aiding and abetting a breach of the duty of care, noting that the Delaware Supreme Court affirmed such a claim even when directors were exculpated. The court also held that RBC aided and abetted breaches of the duty of disclosure by presenting false valuation analysis in the Proxy Statement and failing to fully disclose its significant conflicts of interest, thereby depriving shareholders of material information needed for an informed decision. RBC’s engagement letter, which broadly acknowledged that RBC might provide financing, was deemed insufficient as a non-reliance disclaimer to preclude a claim for failing to disclose specific material conflicts.
Analysis:
This case significantly clarifies the scope of aiding and abetting liability for financial advisors in Delaware, particularly in the context of directors protected by exculpatory provisions. It underscores the 'gatekeeper' role of investment banks and reinforces that advisors cannot actively mislead or create informational voids for personal gain without facing liability, even if the underlying directorial breach is one of care. The ruling places a heavy burden on financial advisors to act with utmost transparency and fidelity to their client boards, ensuring that the process for selling a company is fair and reasonably designed to maximize shareholder value, uninfluenced by the advisor's own ulterior motives. It will likely lead to increased scrutiny of investment bank disclosures regarding potential conflicts and their internal processes for valuation and client advice.
