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(Article from Securities Law Alert, December 2014)

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Delaware Chancery Court Holds Financial Advisor Liable for Aiding and Abetting Fiduciary Duty Breaches

In a post-trial decision dated March 7, 2014, the Delaware Chancery Court held financial advisor RBC Capital Markets, LLC “liable for aiding and abetting breaches of fiduciary duty by the Board” of Rural/Metro Corporation (“Rural”) in connection with Rural’s 2011 acquisition by Warburg Pincus LLC (the “Merger”). In re Rural Metro Corp. S’holdr. Litig., 88 A.3d 54 (Del. Ch. Mar. 7, 2014) (Laster, V.C.) (Rural I).

Plaintiffs contended that Rural’s directors, including the company’s President and CEO (the “individual defendants”), had “breached their fiduciary duties in two ways: first, by making decisions that fell outside the range of reasonableness during the process leading up to the Merger and when approving the Merger (the ‘Sale Process Claim’), and second, by failing to disclose material information in the definitive proxy statement … that [Rural] issued in connection with the Merger (the ‘Disclosure Claim’).” In re Rural/Metro Corp. S’holdrs. Litig., 2014 WL 5280894 (Del. Ch. Oct. 10, 2014) (Laster, V.C.) (Rural II). Plaintiffs also asserted aiding and abetting claims against RBC, Rural’s lead financial advisor, as well as Moelis & Company LLC, Rural’s secondary financial advisor. Shortly before trial, Rural’s directors and its secondary financial advisor settled plaintiffs’ claims. The case proceeded to trial against RBC only.

In its decision following trial, the Rural I court rejected RBC’s claim that “the exculpatory provision in Rural’s certificate of incorporation should apply equally to a party charged with aiding and abetting a breach of fiduciary duty.” Rural I, 88 A.3d 54. The court found that “[t]he literal language of Section 102(b)(7) only covers directors; it does not extend to aiders and abettors.”[1] Deeming Section 102(b)(7)’s structure “rational,” the court expressed its view that “the prospect of aiding and abetting liability for investment banks who induce boards of directors to breach their duty of care creates a powerful financial reason for the banks to provide meaningful fairness opinions and to advise boards in a manner that helps ensure that the directors carry out their fiduciary duties when exploring strategic alternatives.”

With respect to the Sale Process Claim, the Rural I court found that the individual defendants had breached their fiduciary duties, and that RBC had aided and abetted those breaches, in two respects. First, the court held that “the initiation of a sale process in December 2010 fell outside the range of reasonableness.“ The court found that RBC and Christopher Shackelton, one of Rural’s directors, had “unilaterally put Rural into play” without board authorization. The court further determined that RBC had timed the Rural sale process to run in parallel with the sale of Emergency Medical Services Corporation (“EMS”), Rural’s only national competitor in the ambulance business. Significantly, the court found that RBC “did not disclose that proceeding in parallel with the EMS process served RBC’s interest in gaining a role on the financing trees of bidders for EMS.”

Second, the Rural I court determined that the Board had “failed to provide active and direct oversight of RBC” during Rural’s final negotiations with Warburg. At the time the Board approved the merger, “the Board was unaware of RBC’s last minute efforts to solicit a buy-side financing role from Warburg, had not received any valuation information until three hours before the meeting to approve the deal, and did not know about RBC’s manipulation of its valuation metrics.” The court concluded that “[u]nder [these] circumstances, the Board’s decision to approve Warburg’s bid lacked a reasonable informational basis and fell outside the range of reasonableness.” Moreover, the court found that “RBC [had] created the unreasonable process and informational gaps that led to the Board’s breach of duty.”

The court determined that “RBC’s actions [had] led to (i) an ill-timed sale of Rural that did not capture value attributable to its acquisition strategy; (ii) a mismanaged sale process that generated only one final bid by a bidder that knew it had the upper hand in bidding and price negotiations; and (iii) uninformed board approval based on manipulated valuation analyses.” Had it not been “for RBC’s actions,” the court concluded that “a fully-informed Board would have had numerous opportunities to achieve a superior result.”

As to the Disclosure Claim, the court found that the plaintiffs had “proved at trial that the Proxy Statement contained materially misleading disclosures in the form of false [financial] information that RBC [had] presented to the Board.” The court underscored that RBC had provided the Board with “false” information “in connection with its precedent transaction analyses,” and this “false information was repeated in the Proxy Statement.” The Rural I court found that as a result of these disclosure violations, Rural’s “[s]tockholders were denied the information necessary to make an informed decision whether to seek appraisal.”

After finding RBC liable on its aiding and abetting claims, the court concluded that it was “not yet in a position to determine an appropriate remedy.”

Delaware Chancery Court Holds That (1) the Delaware Uniform Contribution Among Tortfeasors Act (DUCATA) Does Not Bar Contribution for All Intentional Torts, and (2) A Credit Under DUCATA Is Not Available for a Director’s Settlement If the Director Would Have Been Exculpated Under a Section 102(b)(7) Provision

On October 10, 2014, the Chancery Court issued an opinion determining RBC’s liability for damages and addressing RBC’s entitlement to a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”). In re Rural/Metro Corp. S’holdrs Litig., 2014 WL 5280894 (Del. 2014) (Laster, V.C.) (Rural II).

The Rural II court addressed two significant questions under DUCATA.[2] First, the court held that DUCATA “does not establish a bright-line rule barring contribution for all intentional torts.” The court found that “[t]he literal meaning of the words of DUCATA permits contribution among all tortfeasors.” The Rural II court also found persuasive the District of Delaware’s decision in McLean v. Alexander (McLean II), 449 F. Supp. 1251 (D. Del. 1978), rev’d on other grounds, 599 F.2d 1190 (3d Cir. 1979). There, the District of Delaware held that an accounting firm found liable for securities fraud and common law fraud in connection with the sale of a closely held company could bring a claim for contribution against defendants who had previously settled their claims with plaintiffs. Finding “no limitation expressed within the terms of” DUCATA, the court concluded that “all wrongdoers may properly share in the apportionment of damages via claims for contribution.” McLean II, 449 F. Supp. 1251.

Second, the Rural II court held that in order to claim a settlement credit under DUCATA with respect to a director’s liability, a non-settling defendant must establish that the director was not exculpated under a Section 102(b)(7) provision. The court observed that the issue of “[h]ow Section 102(b)(7) affects a right of contribution presents a question of first impression.” However, the court emphasized that “Delaware decisions interpreting DUCATA have long held that if a statute or common law doctrine would prevent a party from being held liable for money damages for the underlying harm based on the claim being asserted, then the party is not a joint tortfeasor against whom an action for contribution will be available.” Citing the Delaware Supreme Court’s decision in Lutz v. Boltz, 100 A.2d 647 (Del. Super. Ct. 1953), the Rural II court held that “if the director defendants would have been entitled to exculpation, then RBC could not obtain contribution from them and” therefore could not “claim the settlement credit.”