In a 91-page post-trial opinion in In re Rural Metro Corporation Stockholders Litigation, the Delaware Court of Chancery held RBC Capital Markets, LLC liable for aiding and abetting breaches of fiduciary duty by the board of directors of Rural/Metro Corporation in connection with Rural’s acquisition by Warburg Pincus LLC. The case proceeded against RBC even though Rural’s directors, as well as Moelis & Company LLC, which had served as financial advisor in a secondary role, had settled before trial.
The Court found that RBC, in negotiating the transaction on behalf of Rural, had succumbed to multiple conflicts of interest. According to the Court, RBC, motivated by its contingent fee and its undisclosed desire and efforts to secure the lucrative buy-side financing work, prepared valuation materials for Rural’s board that made Warburg’s offer appear more favorable than it was. Because those valuation materials were included in Rural’s proxy statement, the Court found that RBC was also liable for aiding and abetting the board’s breach of its duty of disclosure.
In addition, the Court found that RBC had failed to provide interim valuation materials to Rural’s board or its special committee, and that the directors failed in their duty to be sufficiently informed to allow them to make a decision that the sale of the company would exceed “what the corporation otherwise would generate for stockholders over the long-term.” Lacking valuation information until the 11th hour, the directors “did not have a reasonably adequate understanding of the alternatives available to Rural, including the value of not engaging in a transaction at all.”
The Court also stressed that directors must maintain an “active and direct role” in the sale process “from beginning to end.” Where the financial advisor that was ultimately selected from among those interviewed had indicated at the outset that it would seek to provide stapled financing to potential buyers, Rural’s special committee was seen as failing to discharge its duty by failing to provide “guidance about when staple financing discussions should start or cease,” failing to make “inquiries on that subject,” and failing to impose a “practical check on [the investment bank’s] interest in maximizing its fees.”
Finally, the Court found that the potential for aiding and abetting liability for investment banks, which it characterized as “gatekeepers,” would “create 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 and conducting a sale process, rather than in a manner that falls short of established fiduciary norms.”
Despite its finding of liability, the Court stated that it is not yet in a position to determine an appropriate remedy. The Court also deferred ruling on plaintiffs’ request for fee-shifting, but it noted that, “given the magnitude of the conflict between RBC’s claims and the evidence, it seems possible that the facts could support a bad faith fee award.”