Financial Advisor Found Liable For Aiding And Abetting Director Breaches Of Fiduciary Duties In Connection With Cash-Out Merger

In a 91-page post-trial decision, Chancellor Travis Laster found RBC Capital Markets LLC ("RBC") liable for aiding and abetting breaches of fiduciary duty in connection with RBC's role as a financial advisor in the 2011 $438 million buyout of Rural/Metro Corporation ("Rural"). RBC is the investment banking arm of the Royal Bank of Canada and acted for Rural, the target company.

The ruling turned in part on findings that RBC had multiple conflicts of interest and had sought to participate in providing buy-side financing. The court did not set a damages award at this time, but left that open to further submissions by the parties. However, the court did state as follows with respect to the testimony of two RBC managing directors who testified at trial: "Their accounts at times strained credulity, and the plaintiffs successfully impeached their testimony on multiple occasions." Decision at 1.

Key Practice Points

The decision highlights a number of key practice points:

When a board is considering strategic alternatives, and constitutes a Special Committee for that purpose, the board's mandate and the scope of the Special Committee's authority must be made very clear. When relying on a Special Committee, a board must ensure it is adequately informed of the Special Committee's process. Board members and Special Committee members should take their roles seriously and should not be mere passive observers. They should be actively engaged in the process. As well-established in other recent cases, such as In re El Paso Corp. S'holder Litig., 41 A.3d 432, 439 (Del. Ch. 2012) and In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813, 830-31 (Del. Ch. 2011), directors must provide active and direct oversight by acting reasonably to learn about actual and potential conflicts faced by directors, management, and their advisors. A board and a Special Committee must insist on full disclosure of possible conflicts of interest on the part of its respective financial advisors, and must monitor the services performed by the financial advisor(s). As the court recognized, "such information is material to stockholders when deciding to vote on a merger and whether to seek appraisal." Decision at 81. For financial advisors, care must be taken in issuing fairness opinions and the way fairness opinion committees are constituted (including ensuring appropriate care is taken with internal drafts of valuation materials). Also, conflict waiver language in engagement letters needs to be explicit and conflicts must be adequately disclosed. Staple financing, while not prohibited, will get increasing scrutiny in the Delaware courts. Hiring a second financial advisor to provide a second fairness opinion, who is not offering staple financing, is not enough to avoid this scrutiny. With respect to shareholder litigation and disclosure-only settlements, Delaware courts are increasingly pushing back on such quick settlements for attorneys' fees. Here, the court rejected such a settlement and replaced plaintiffs' counsel after first counsel sought such a settlement. Key Facts

RBC served as Rural's primary financial adviser in the merger of Rural with a subsidiary of Warburg Pincus LLC ("Warburg"). Rural was a public company, and the merger resulted in Rural's shareholders receiving $17.25 in cash per share.

The plaintiffs initially asserted claims that the directors of Rural breached their fiduciary duty in approving the merger for an inadequate price, and in failing to disclose material information in the company's proxy statement, and also named as defendants Rural's financial advisors. Prior to the trial, the defendant Directors settled for $6.6 million, and a secondary advisory firm (Moelis & Company) settled the claims asserted against them for $5 million. As a result, RBC remained the lone defendant at trial.

In August 2010, RBC first approached Rural's CEO, Michael DeMino, and an outside director, Christopher Shackelton (who soon became Chairman of the Board), about the possibility of Rural acquiring a competitor, AMR. In response, Rural created a Special Committee with Shackelton as chair and two other outside directors to oversee an approach to AMR. While that transaction did not proceed, the Special Committee was reformed in response to an unsolicited acquisition offer that Rural had received.

In December 2010, RBC again approached Shackelton and DeMino about rumors that EMS, AMR's parent, was also in play. RBC told them that a number of private equity firms were looking for an industry partner and had mentioned Rural as one. The Board ultimately authorized the Special...