March 20, 2014
Vice Chancellor Laster Holds Third Party Financing Firm Liable for Aiding and Abetting Breaches of Fiduciary Duties
By Sara E. Bussiere
In In re Rural Metro Corporation, C.A. No. 6350-VCL (Del. Ch. Mar. 7, 2014), Vice Chancellor Laster found a third-party financial advisor, RBC Capital Markets, LLC (“RBC”), liable for aiding and abetting breaches of fiduciary duties of the Board of Directors (“Board”) of Rural/Metro Corporation (“Rural” or the “Company”) during the Company’s merger with Warburg Pincus LLC (“Warburg”). Rural is a Delaware corporation that provides ambulance and fire protection services.
At the Board’s regular meeting in December 2010, the Board authorized a special committee (the “Special Committee”) to retain advisors and present a recommendation to the Board about whether the Company should pursue its own growth plan, a sale of the Company, or a transaction involving American Medical Response (“AMR”), Rural’s only competitor. The Board did not authorize the Special Committee to pursue a sale of the Company. Around the same time, private equity firms were looking to acquire Emergency Medical Services (“EMS”), AMR’s parent company, and some of those firms believed AMR should be separated from EMS.
RBC recognized that a sell-side position with Rural would help them secure a buy-side position with the firms seeking to acquire EMS. As a result, RBC actively pursued a role in the sale of Rural. In addition to RBC’s own economic interests in facilitating a sale of Rural, the Court found that Rural’s Special Committee was tainted with self-interest. Eventually, RBC and the Special Committee actively pursued a sale of the Company, despite not having Board approval to do so.
During this process, RBC and the Special Committee ignored several red flags. First, the firms that were pursuing EMS would be limited by confidentiality agreements as part of the EMS process and therefore, could not simultaneously engage in acquisition negotiations with Rural. This conflict dramatically reduced the pool of potential bidders. Second, JP Morgan advised against such a “near-term sale” and recommended postponing a sale until Rural’s growth plan played out. Third, of the twenty-one firms that received bid instructions from RBC, fifteen declined to participate and only one showed an interest in the acquisition. No one shared these red flags with the Board. At the end of the sale process, Warburg was the only firm that made a final bid. Meanwhile, the Court found that RBC continued to pursue its own economic interests in the deal by secretly lobbing Warburg for a buy-side financing role. Warburg declined RBC’s offers.
The Board convened on March 27, 2011 to review Warburg’s proposal and approve the sale. RBC did not distribute valuation materials - based in large part on its continued efforts to obtain a financing role with Warburg - until less than twelve hours before the deadline to approve Warburg’s offer. In addition, the materials contained inaccurate and misleading information.
The Board approved the merger. Shortly thereafter, Plaintiffs filed an action alleging the Board “breached their fiduciary duties by approving the merger and by failing to disclose material information in the Company’s definitive proxy statement.” In re Rural Metro Corp., C.A. No. 6350-VCL, slip op. at 1 (Del. Ch. Mar. 7, 2014). The individual directors settled with Plaintiffs before trial. Plaintiffs also brought claims against RBC for aiding and abetting the Board’s breaches of fiduciary duties. The parties tried those claims, at the conclusion of which the Court held RBC liable for aiding and abetting. The Court found that Plaintiffs proved the four elements of an aiding and abetting claim – (1) existence of a fiduciary duty; (2) breach of that fiduciary duty; (3) knowing participation in the breach by the non-fiduciary defendants; and (4) damages proximately caused – for breaches of fiduciar
In In re Rural Metro Corporation, C.A. No. 6350-VCL (Del. Ch. Mar. 7, 2014), Vice Chancellor Laster found a third-party financial advisor, RBC Capital Markets, LLC (“RBC”), liable for aiding and abetting breaches of fiduciary duties of the Board of Directors (“Board”) of Rural/Metro Corporation (“Rural” or the “Company”) during the Company’s merger with Warburg Pincus LLC (“Warburg”). Rural is a Delaware corporation that provides ambulance and fire protection services.
At the Board’s regular meeting in December 2010, the Board authorized a special committee (the “Special Committee”) to retain advisors and present a recommendation to the Board about whether the Company should pursue its own growth plan, a sale of the Company, or a transaction involving American Medical Response (“AMR”), Rural’s only competitor. The Board did not authorize the Special Committee to pursue a sale of the Company. Around the same time, private equity firms were looking to acquire Emergency Medical Services (“EMS”), AMR’s parent company, and some of those firms believed AMR should be separated from EMS.
RBC recognized that a sell-side position with Rural would help them secure a buy-side position with the firms seeking to acquire EMS. As a result, RBC actively pursued a role in the sale of Rural. In addition to RBC’s own economic interests in facilitating a sale of Rural, the Court found that Rural’s Special Committee was tainted with self-interest. Eventually, RBC and the Special Committee actively pursued a sale of the Company, despite not having Board approval to do so.
During this process, RBC and the Special Committee ignored several red flags. First, the firms that were pursuing EMS would be limited by confidentiality agreements as part of the EMS process and therefore, could not simultaneously engage in acquisition negotiations with Rural. This conflict dramatically reduced the pool of potential bidders. Second, JP Morgan advised against such a “near-term sale” and recommended postponing a sale until Rural’s growth plan played out. Third, of the twenty-one firms that received bid instructions from RBC, fifteen declined to participate and only one showed an interest in the acquisition. No one shared these red flags with the Board. At the end of the sale process, Warburg was the only firm that made a final bid. Meanwhile, the Court found that RBC continued to pursue its own economic interests in the deal by secretly lobbing Warburg for a buy-side financing role. Warburg declined RBC’s offers.
The Board convened on March 27, 2011 to review Warburg’s proposal and approve the sale. RBC did not distribute valuation materials - based in large part on its continued efforts to obtain a financing role with Warburg - until less than twelve hours before the deadline to approve Warburg’s offer. In addition, the materials contained inaccurate and misleading information.
The Board approved the merger. Shortly thereafter, Plaintiffs filed an action alleging the Board “breached their fiduciary duties by approving the merger and by failing to disclose material information in the Company’s definitive proxy statement.” In re Rural Metro Corp., C.A. No. 6350-VCL, slip op. at 1 (Del. Ch. Mar. 7, 2014). The individual directors settled with Plaintiffs before trial. Plaintiffs also brought claims against RBC for aiding and abetting the Board’s breaches of fiduciary duties. The parties tried those claims, at the conclusion of which the Court held RBC liable for aiding and abetting. The Court found that Plaintiffs proved the four elements of an aiding and abetting claim – (1) existence of a fiduciary duty; (2) breach of that fiduciary duty; (3) knowing participation in the breach by the non-fiduciary defendants; and (4) damages proximately caused – for breaches of fiduciar