RBC Capital Mkts., LLC v. Jervis

129 A.3d 816

RBC Capital Markets, LLC, Defendant Below, Appellant/Cross–Appellee,

v.Joanna Jervis, Plaintiff Below, Appellee/Cross–Appellant.

No. 140, 2015

Supreme Court of Delaware.

Submitted: September 30, 2015

Decided: November 30, 2015

Myron T. Steele, Esquire, and T. Brad Davey, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Counsel: Alan J. Stone, Esquire (Argued), Daniel M. Perry, Esquire, Benjamin E. Sedrish, Esquire, Milbank, Tweed, Hadley & McCloy LLP, New York, New York, for Appellant/Cross–Appellee RBC Capital Markets, LLC.

Joel Friedlander, Esquire (Argued), and Jeffrey M. Gorris, Esquire, Friedlander & Gorris, P.A., Wilmington, Delaware; Of Counsel: Randall J. Baron, Esquire, and David Knotts, Esquire, Robbins Geller Rudman & Dowd LLP, San Diego, California, for Appellee/Cross–Appellant Joanna Jervis.

Jack B. Jacobs, Esquire, Sidley Austin LLP, Wilmington, Delaware; Of Counsel: A. Robert Pietrzak, Esquire, Andrew W. Stern, Esquire, Daniel A. McLaughlin, Esquire, and Cameron Moxley, Esquire, Sidley Austin LLP, New York, New York; John K. Hughes, Esquire, Sidley Austin LLP, Washington, D.C., Amicus Curiae for Securities Industry and Financial Markets Association.

Before HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices; and JOHNSTON, Judge,^* constituting the Court en Banc.

VALIHURA, Justice:

I. INTRODUCTION

Pending before this Court is an appeal and cross-appeal arising out of a final judgment of the Court of Chancery finding that RBC Capital Markets, LLC ("RBC" or "Appellant") aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corporation ("Rural" or the "Company") in connection with the sale of the Company to an affiliate of Warburg Pincus LLC ("Warburg"), a private equity firm. The Court of Chancery issued four opinions which form the basis of this appeal.

First , on March 7, 2014, the Court of Chancery issued a post-trial decision and held RBC liable to a class of Rural stockholders (the "Class") for aiding and abetting breaches of fiduciary duty by Rural's board of directors (the "Liability Opinion" or "Rural I ").¹

Second , on October 10, 2014, the Court of Chancery issued a decision setting the amount of RBC's liability at $75,798,550.33, constituting 83% of the $91,323,554.61 in total damages that the Class suffered, which represented the difference between the value the Company's stockholders received in the merger and Rural's going concern value (" Rural II ").² The trial court awarded pre- and post-judgment interest at the legal rate from June 30, 2011 until the date of payment.

Third , on December 17, 2013, after Rural filed a suggestion of bankruptcy, the Court of Chancery granted Joanna Jervis's ("Jervis" or "Lead Plaintiff") motion to bar consideration of a declaration from Stephen Farber, who joined the Company as its Chief Financial Officer on June 25, 2013, two years after the transaction, in which he presented reasons for the entity's subsequent financial turmoil (the "Farber Declaration").

Finally , Lead Plaintiff filed a fee application with the Court of Chancery, seeking to shift attorneys' fees for RBC's alleged misrepresentations in its pre-trial filings. The Court of Chancery, on February 12, 2015, denied the application. On February 19, 2015, the Court of Chancery entered its Final Order and Judgment.

RBC raises six issues on appeal, namely, (1) whether the trial court erred by holding that the board of directors breached its duty of care under the enhanced scrutiny standard enunciated in Revlon ; (2) whether the trial court erred by holding that the board of directors violated its fiduciary duty of disclosure by making material misstatements and omissions in Rural's proxy statement, dated May 26, 2011; (3) whether the trial court erred by finding that RBC aided and abetted breaches of fiduciary duty by the board of directors; (4) whether the trial court erred by finding that the board of directors' conduct proximately caused damages; (5) whether the trial court erred in applying the Delaware Uniform Contribution Among Tortfeasors Act ("DUCATA"); and (6) whether the trial court erred in calculating damages.³

On her cross-appeal, Jervis argues that the Court of Chancery erred in holding that fee shifting requires a finding of "glaring egregiousness."

In this decision, we AFFIRM the principal legal holdings of the Court of Chancery.

II. FACTS

As a preliminary observation, we note that, at oral argument before this Court, counsel for RBC emphasized that RBC "intentionally made appellate arguments that do not require this Court to review findings of fact." Although RBC has chosen to avoid any direct and specific challenge to the facts as found by the trial court, this Court, nevertheless, has examined the appellate record in its entirety.

A. The Key Players

Rural is a Delaware corporation headquartered in Scottsdale, Arizona. Founded in 1948, the Company is a leading national provider of ambulance and private fire protection services that serves more than 400 communities across 22 states. Its ambulance business offers emergency and non-emergency transports under contracts with government organizations, hospitals, nursing homes, and other healthcare entities. Rural's shares traded on NASDAQ from July 1993 until the merger closed on June 30, 2011. Upon closing, each publicly held share of Rural common stock was converted into the right to receive $17.25 in cash.

Before the merger, the board of directors had seven members: Christopher S. Shackelton, Eugene I. Davis, Earl P. Holland, Henry G. Walker, Robert E. Wilson, Conrad A. Conrad, and Michael P. DiMino (the "Board"). Of the Board's seven members, the trial court, in Rural I, determined that Wilson, Davis, Holland, Conrad, Walker, and Shackelton were "facially, independent, disinterested, outside directors." DiMino was Rural's President and CEO. Wilson did not vote on the merger.

Shackelton, Davis, and Walker comprised the special committee (the "Special Committee" or "Committee"). Shackelton was its Chair. The trial court found that Shackelton played the most significant role, and that Davis and Walker generally deferred to Shackelton.

On April 8, 2013, all parties filed pre-trial opening briefs and all defendants were headed for trial. On April 25, 2013, plaintiffs advised the Court of Chancery of an agreement in principle to settle with Moelis for a payment of $5 million to the Class. On April 29, 2013, the individual defendants advised the Court of Chancery that they had also reached an agreement in principle to settle for a contemplated payment of $6.6 million to the Class. Thus, the case proceeded to trial solely against RBC.

B. The Company's Business Plan

In May 2010, the Board hired Michael P. DiMino as the Company's new President and CEO and gave him a mandate to grow the Company. To carry out his mandate, DiMino developed new growth strategies. As discussed in the Company's public filings, Rural planned to:

Increase Revenue Through Strategic Growth. Flexibility in our capital structure allows us to actively pursue acquisitions of ambulance transport businesses and to consolidate business in the fragmented ambulance transport market. We will pursue acquisitions that are accretive to our profitability, leverage our strengths and complement our existing national footprint.

Increase Revenue Through Organic Growth. We believe our proven track record of high-quality patient care, meeting and exceeding contract expectations and progressive public/private partnering arrangements aimed at assisting communities to achieve their cost structure goals, creates opportunities for us to increase revenue by winning competitive bids for emergency ambulance services. Additionally, we will increase non-emergency ambulance service revenue within existing and contiguous service areas by leveraging our community name recognition and record of service excellence to gain preferred provider status with local hospital systems, nursing homes and other healthcare facilities.

Increase Revenue Through New Market Non–Emergency Contracts. We believe we can increase revenue by entering new markets where we do not have an emergency transportation presence. We will enter new markets through preferred provider agreements with local and regional hospitals and healthcare systems for non-emergency general transportation services. We believe our name recognition and service excellence in our existing markets will allow us to gain entrance into new markets to provide non-emergency services to larger scale customers.

The trial court concluded that "[t]he evidence at trial demonstrated that Rural's growth strategy was reasonable and achievable."⁴ However, at trial, DiMino also testified about the risks facing the Company in late 2010 and early 2011, which included potential difficulties integrating acquisitions and changes in the sources of payments for the Company's services. The Company's public filings detailed these risks.

RBC was hired by the Special Committee as Rural's primary financial advisor in connection with the Company's decision to explore strategic alternatives in late 2010. Anthony Munoz, a Managing Director at RBC, was Rural's lead banker. Marc Daniel, RBC's lead M & A banker, participated in the Rural sale process alongside Munoz. Moelis & Company LLC ("Moelis") was brought on as Rural's secondary financial advisor. Richard D. Harding, a Managing Director, was Rural's contact at Moelis.

Before being engaged by the Company, RBC had, according to the Board minutes, a "significant (and satisfactory) track record with the Company in relation to debt financing transactions and other advisory matters." In addition to maintaining a relationship with Rural, RBC also had an "active dialogue" with Warburg, the Company's eventual acquirer, which extended beyond Warburg's participation in the Rural sale process. Sean Carney, a partner at Warburg, was the point person for Warburg's Rural acquisition team.

The Special Committee was first...