RBC Capital Markets, LLC v. Jervis

Rule of Law:

A financial advisor may be held liable for aiding and abetting a board's breach of its duty of care if the advisor knowingly participates in the breach. Such knowing participation is established when the advisor, acting with scienter, misleads the board or creates an informational vacuum by exploiting its own conflicts of interest for financial gain.

Facts:

• In late 2010, Rural/Metro Corporation's Special Committee, led by Christopher Shackelton, hired RBC Capital Markets, LLC (RBC) as its primary financial advisor to explore strategic alternatives, including a potential sale.
• Unbeknownst to the full Rural board, RBC planned to leverage its advisory role with Rural to secure lucrative buy-side financing roles from private equity firms that were simultaneously bidding for Rural's competitor, EMS Corporation.
• RBC designed and initiated a sale process for Rural that ran concurrently with the EMS sale process, a structure that it knew would disadvantage potential bidders for Rural, many of whom were preoccupied with the larger EMS deal.
• Key board members, including Special Committee Chair Shackelton and Eugene Davis, had personal financial and professional motivations that inclined them towards a near-term sale of Rural.
• Throughout the process, RBC failed to provide the Board with timely or adequate valuation information and did not disclose the full extent of its conflicts, including its active and persistent efforts to secure a financing role from the eventual buyer, Warburg Pincus, even during final price negotiations.
• On the weekend the merger was approved, RBC's deal team manipulated its financial analyses—by altering precedent transaction multiples and lowering EBITDA figures—to make Warburg's $17.25 per share offer appear more favorable.
• The Rural board, unaware of RBC's last-minute lobbying of Warburg or its manipulation of the valuation metrics, approved the merger just hours after receiving the altered financial presentation.
• The subsequent proxy statement sent to Rural's shareholders contained materially misleading information based on RBC's flawed financial analysis and omitted disclosures regarding the full extent of RBC's conflicts of interest.

Procedural Posture:

• Joanna Jervis, on behalf of a class of former Rural/Metro Corporation stockholders, sued Rural's directors, its primary financial advisor RBC Capital Markets, and its secondary advisor Moelis & Company in the Delaware Court of Chancery.
• Prior to trial, the plaintiff class reached settlement agreements with the individual director defendants and with Moelis.
• The case proceeded to a bench trial in the Court of Chancery solely against the remaining defendant, RBC.
• Following trial, the Court of Chancery issued a decision holding RBC liable for aiding and abetting the Rural board's breaches of its fiduciary duties of care and disclosure.
• In a subsequent opinion on damages, the Court of Chancery ordered RBC to pay the plaintiff class $75,798,550.33 plus interest.
• RBC, as Appellant, appealed the final judgment of the Court of Chancery to the Supreme Court of Delaware. Jervis, as Appellee, filed a cross-appeal challenging the trial court's denial of her motion for attorneys' fees.