On November 30, 2015, the Delaware Supreme Court issued a much-anticipated opinion in RBC Capital Markets, LLC v. Jervis, No. 140, 2015, 129 A.3d 816 (Del. 2015). The Supreme Court unanimously affirmed the Court of Chancery’s decisions in In re Rural/Metro Corp. Stockholders Litigation, which held a financial advisor liable for aiding and abetting a board’s breaches of fiduciary duty during a sale of control transaction. In so ruling, the Supreme Court confirmed the viability under Delaware law of aiding-and-abetting claims based on breaches of the duty of care. The Supreme Court stressed, however, that the requirement of establishing scienter on the part of the alleged aider and abettor makes such claims “among the most difficult to prove,” and described its holding as “a narrow one,” arising from the “unusual facts” of the case.
Background
On March 28, 2011, Rural/Metro Corporation (Rural) entered into a merger agreement with Warburg Pincus LLC, a private equity firm, to sell Rural for $17.25 per share. Stockholder plaintiffs brought class claims for breach of fiduciary duty against the board, alleging that the sale process was not reasonable under Revlon, and that the proxy statement issued in connection with the merger was materially misleading. The plaintiffs included claims against Rural’s financial advisors — RBC Capital Markets, LLC (RBC) and Moelis, LLC — for aiding and abetting the board’s breaches of fiduciary duty.
Days before trial, Moelis and the board agreed to pay $5 million and $6.6 million, respectively, to settle the claims against them. The case proceeded to trial, with claims pending against RBC alone. In March 2014, the Court of Chancery issued its post-trial opinion, finding RBC liable for aiding and abetting the board’s breaches of the duty of care. In re Rural/Metro Corp. Stockholders Litig., 88 A.3d 54, 63 (Del. Ch. 2014).
In his opinion, Vice Chancellor J. Travis Laster found that in December 2010 the board formed a special committee to explore strategic alternatives, including the possible acquisition of a business owned by its chief competitor, Emergency Medical Services (EMS). The court went on to find, however, that the board had not expressly authorized the special committee to initiate a sale process at that time. Nevertheless, the court found that the special committee proceeded as if Rural was for sale and interviewed several financial advisors, ultimately selecting RBC to serve as its primary financial advisor. According to the court, RBC pitched the board on the efficacy of coordinating the timing of the Rural sale with the sale of EMS but did not disclose its plan to use the Rural engagement as an “angle” to provide financing to potential bidders for EMS.
The court held that RBC’s desire to obtain financing work for the EMS acquisition also drove it to favor certain bidders in the Rural sale process. Specifically, the court found that RBC’s “two-track” auction process enabled it to prioritize EMS bidders so they would include RBC in their financing trees. The court also explained that RBC continued to drive this dual track process despite receiving negative feedback about its timing and design. The vice chancellor found that this “faulty design prevented the emergence of the type of competitive dynamic among multiple bidders that is necessary for reliable price discovery,” as many of the large private equity firms were “sidelined” because of the EMS process, and the timing was not right for the logical strategic bidders. As a result, Warburg (which had withdrawn from the EMS process) was able to price its offers aggressively.
The court also found that in the last days before the merger was approved, RBC unsuccessfully lobbied Warburg to provide “stapled financing” for the Rural acquisition. The court held that during this time, RBC purposely manipulated its fairness analysis in order to make the Warburg offer look more attractive. Moelis and RBC provided written financial analyses, and RBC orally opined that the merger was fair to the Rural stockholders at $17.25 per share, or roughly $437 million equity value. According to the court, the board had never before received any valuation for the company and received these analyses just three hours before...
