RBC Capital Markets, LLC v. Jervis, No. 140, 2015 (Del. Nov. 30, 2015) (Valihura, J.)
In this en banc decision, the Delaware Supreme Court affirmed the principal legal holdings and final judgment of the Court of Chancery finding, among other things, that RBC Capital Markets, LLC (“RBC”) 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 private equity firm Warburg Pincus LLC (“Warburg”), and that RBC was liable to a class of Rural stockholders (the “Class”) for damages.
On June 30, 2011, an affiliate of Warburg merged with Rural. Rural common stockholders received $17.25 per share as a result of the merger. Stockholders of Rural filed suit alleging breaches of fiduciary duty by the Rural board of directors (the “Board”) for approving the merger and failing to disclose material information in Rural’s proxy statement. RBC, the primary financial advisor to the Board, and Moelis & Company LLC (“Moelis”), the secondary financial advisor to the Board, also were sued, for allegedly having aided and abetted the Board’s breaches of fiduciary duty. The lead plaintiff (“Plaintiff”), on behalf of the Class, settled with the Board and Moelis before trial.
In a post-trial decision issued on March 7, 2014, the Court of Chancery held that RBC was liable for aiding and abetting the Board’s breaches of fiduciary duty by, among other things, putting the Company in play without Board authorization, providing false and materially misleading information to the Board, and having an undisclosed conflict of interest in the transaction. The Court of Chancery also held that an exculpatory provision contained in Rural’s certificate of incorporation pursuant to Section 102(b)(7) of the Delaware General Corporation Law only covered the Rural directors and did not extend to the Board’s advisors.
In a subsequent post-trial decision issued on October 10, 2014, the Court of Chancery set the amount of RBC’s liability at $75,798,550.33, finding that RBC was responsible for 83% of the $91,323,554.61 in total damages that the Class suffered, which amount represented the difference between the value the Company’s stockholders received in the merger and Rural’s going concern value. The trial court also awarded pre- and post-judgment interest.
On February 12, 2015, the Court of Chancery issued a decision denying Plaintiff’s application to shift her attorneys’ fees to RBC based on RBC’s alleged misrepresentations in its pre-trial filings, holding that RBC’s litigation conduct did not rise to the necessary level of “glaring egregiousness.”
On appeal, RBC raised six issues: (1) whether the trial court erred by holding that the Board breached its duty of care under the enhanced scrutiny standard enunciated in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986); (2) whether the trial court erred by holding that the Board violated its fiduciary duty of disclosure by making material misstatements and omissions in Rural’s proxy statement; (3) whether the trial court erred by finding that RBC aided and abetted breaches of fiduciary duty by the Board; (4) whether the trial court erred by finding that RBC’s 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.
Plaintiff cross-appealed from the trial court’s decision denying her application for fee shifting.
The Supreme Court affirmed the Court of Chancery’s rulings on all of these issues.
First, the Supreme Court affirmed the trial court’s determination that the Rural directors breached their fiduciary duties by engaging in conduct that fell outside the range of reasonableness in connection with the sale of the Company, and that this was a sufficient predicate for finding aiding and abetting liability against RBC.
The Supreme Court rejected RBC’s argument that the business judgment rule—not Revlon—applied to the Board’s decision to explore strategic alternatives in December 2010. The Court concluded that “the most faithful reading of the record before us is that the Court of Chancery, as a factual matter, found that there was no exploration of strategic alternatives” but, rather, “the initiation of a sale process” “without Board authorization.” The Court also rejected RBC’s legal argument that Revlon was not triggered until a sale of the Company had become “inevitable,” holding that Revlon was triggered by the initiation of an active bidding process seeking a sale of the Company.
The Court also rejected RBC’s alternative argument that, assuming Revlon scrutiny applied, the decision to initiate the sale process in December 2010 was reasonable. The Court found that “the evidence fully supports the trial court’s findings that the solicitation process was structured and timed in a manner that impeded interested bidders from presenting potentially higher value alternatives,” agreeing with the trial court that “RBC designed the sale process to run in parallel with a process being conducted by [Emergency Medical Services Corporation (“EMS”), a Rural competitor], and 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,’ . . . [or] that there were material barriers, including confidentiality restrictions, that would have impeded or prevented a bidder from making an offer” for Rural.
The Court next rejected RBC’s contention that, pursuant to its recent decision in C & J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the post-signing market check cured any shortcomings of the sale process. The Court reasoned that the Board and stockholders were not fully informed because they were unaware of RBC’s conflicts and how they potentially impacted the Warburg offer, and that “[a] confluence of factors undercut the reliability and competitiveness of the Rural sale process,” including (1) the Company was just beginning to implement new growth strategies and the market did not understand its prospects, and (2) private equity firms were tied up in the EMS process and logical strategic bidders were focused on their own change of control transactions.
The Court rejected RBC’s final contention on this issue—that the trial court erred by finding a due care violation without finding gross negligence. The Court explained that, while gross negligence is required in order to sustain a monetary judgment against disinterested directors, “[t]hat does not mean, however, that if they were subject to Revlon duties, and their conduct was unreasonable, that there was not a breach of fiduciary duty.” The Court stated that, here, “[t]he Board violated its situational duty by failing to take reasonable steps to attain the best value reasonably available to the stockholders.”
Second, the Supreme Court affirmed the trial court’s conclusions that the Board violated its disclosure obligations because the Rural proxy statement contained false and misleading information about RBC’s incentives and false financial information that RBC presented to the Board.
The Court rejected RBC’s argument that the trial court incorrectly scrutinized whether the valuation analysis it performed was proper, and not whether that analysis was accurately described in the proxy statement, agreeing with the trial court that the proxy statement did not accurately represent RBC’s analysis and that the information RBC provided for the proxy statement about its analysis was material and false.
The Court also rejected RBC’s contentions that its last-minute efforts seeking to provide staple financing to Warburg were not material and did not need to be disclosed in the proxy statement, and that the disclosure of RBC’s potential conflict was sufficient. The Court agreed with the trial court that the proxy statement contained false and misleading information about RBC’s incentives, emphasizing that, “[w]hen viewed in conjunction with the potential fees RBC was to receive for its financing services, the investment bank’s pursuit of Warburg’s financing business was demonstrative of a conflict that was unquestionably material, and necessitated full and fair disclosure for the benefit of the stockholders.”
Third, the Supreme Court affirmed the Court of Chancery’s determination that RBC aided and abetted the Board’s breaches of fiduciary duty, agreeing with the trial court’s “narrow holding” that “[i]f [a] third party knows that the board is breaching its duty of care and participates in the breach by misleading the board or creating [an] informational vacuum, then the third party can be liable for aiding and abetting.” In so doing, the Court rejected RBC’s arguments that a third party cannot “knowingly participate” in a corporate board’s exculpated breach of the duty of care or a breach that is not “inherently wrongful,” that a third party cannot knowingly participate in a breach of the duty of care when it “misleads directors into breaching their” fiduciary obligations, and that a third party cannot be liable for aiding and abetting without having agreed to a joint course of conduct with the primary actor. The Court explained that “[i]t is the aider and abettor that must act with scienter,” and that, “[t]o establish scienter, the plaintiff must demonstrate that the aider and abettor had ‘actual or constructive knowledge that their conduct was legally improper.’” The Court held that the record evidence supported the trial court’s finding that “RBC acted with the necessary degree of scienter and can be held liable for aiding and abetting,” stating that “[t]he manifest intentionality of RBC’s conduct—as evidenced by the bankers’ own internal communications—is demonstrative of the advisor’s knowledge of the reality that the Board was proceeding on the basis of fragmentary and misleading information.”
Fourth, the Supreme Court rejected RBC’s argument that, because of Moelis’s financial analysis and involvement in the negotiations, the trial court erred in determining that RBC proximately caused the harm suffered by the Company’s stockholders from the Board’s approval of the sale of the Company at a price below fair value and the stockholders’ approval of the deal based on false and misleading information in the proxy statement. The Court explained that “[t]he Board’s receipt of Moelis’s financial analysis—which the Special Committee treated as ‘secondary’ to that of RBC—does not remedy RBC’s improper conduct, nor destroy the causal link between RBC’s actions, the Board’s failure to satisfy itself of its fiduciary obligations, and the harm suffered by the Company’s stockholders.” The Court also stated that “Moelis’s fairness opinion does not cure RBC’s aiding and abetting of the Board’s breach of the duty of disclosure[,] . . . [because] [h]ere, the stockholders went to the ballot box on the basis of the deficient Proxy Statement, the insufficiency and misleading nature of which was due to RBC’s failure to be forthcoming.”
The Court emphasized that its holding was “a narrow one that should not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting a breach of the duty of care.” Importantly, the Court rejected the trial court’s dictum describing financial advisors in mergers and acquisitions as “gatekeepers.” The Supreme Court stated: “In particular, the trial court observed that ‘[d]irectors are not expected to have the expertise to determine a corporation’s value for themselves, or to have the time or ability to design and carryout a sale process. Financial advisors provide these expert services. In doing so, they function as gatekeepers.’” The Court criticized this description as “not adequately tak[ing] into account the fact that the role of a financial advisor is primarily contractual in nature, is typically negotiated between sophisticated parties, and can vary based upon a myriad of factors,” and stated that “[r]ational and sophisticated parties dealing at arm’s-length shape their own contractual arrangements and it is for the board, in managing the business and affairs of the corporation, to determine what services, and on what terms, it will hire a financial advisor to perform in assisting the board in carrying out its oversight function.” The Court continued: “The banker is under an obligation not to act in a manner that is contrary to the interests of the board of directors, thereby undermining the very advice that it knows the directors will be relying upon in their decision making processes. Adhering to the trial court’s amorphous ‘gatekeeper’ language would inappropriately expand our narrow holding here by suggesting that any failure by a financial advisor to prevent directors from breaching their duty of care gives rise to an aiding and abetting claim against the advisor.”
Fifth, the Supreme Court rejected RBC’s argument that the trial court erred by applying a quasi-appraisal remedy when calculating damages, reasoning that the Court of Chancery has “broad discretionary powers in fashioning a remedy and making its award of damages.”
Sixth, the Court held that the trial court properly applied DUCATA. The Court affirmed the trial court’s pro rata allocation of fault and its having assigned 83% of the responsibility for the damages to the Class to RBC, rejecting RBC’s argument that the statute’s use of “pro rata” required an “equal” allocation of responsibility for damages to each joint tortfeasor. The Court also held that the Section 102(b)(7) exculpatory provision in Rural’s charter did not shield RBC from liability, agreeing with the trial court that the statutory provision does not extend to third parties such as RBC. The Court also affirmed the trial court’s determination that the doctrine of unclean hands precluded RBC from seeking a settlement credit for the disclosure claim or for the sale process claim relating to the Board’s final approval of the merger, agreeing with the trial court that “RBC forfeited its right to have a court consider contribution . . . by committing fraud against the very directors from whom RBC would seek contribution.”
Lastly, the Court affirmed the trial court’s denial of Plaintiff’s application for fee shifting, concluding that the trial court did not abuse its discretion either by applying a “glaring egregiousness” standard in order for Plaintiff’s fees to be shifted to RBC or by finding that this standard had not been met.
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