In re Rural/Metro Corp. Stockholders Litigation: Delaware Chancery Court Holds Financial Advisor Liable for 83% of Damages to Stockholders in Connection with Aiding and Abetting Breaches of Fiduciary Duty by Board of DirectorsSullivan & Cromwell LLP - October 17, 2014
In an opinion issued on October 10, 2014, the Delaware Court of Chancery (VC Laster) determined post-trial that RBC Capital Markets, LLC (“RBC”), a financial advisor to Rural/Metro Corporation (“Rural”) in its 2011 sale, was liable for approximately $75.8 million in damages plus interest to stockholders for aiding and abetting breaches of fiduciary duty by the Rural board of directors. The opinion follows a March decision by the Delaware Court of Chancery in which VC Laster found after trial that RBC, the sole remaining defendant following the settlement of the case by the other Rural financial advisor (for $5 million) and the defendant Rural directors (for $6.6 million), had aided and abetted the Rural directors’ breaches of their duty of care and duty of disclosure by running a flawed sale process and by failing to disclose material information, including RBC’s potential conflicts of interest, in the proxy statement issued in connection with the merger, and that the breach had damaged Rural stockholders by causing Rural to be sold at a price below its fair value. Having determined in the earlier decision the inputs to the discounted cash flow model that would apply for determining Rural’s going concern value range, the Court found that the damage suffered by stockholders was $91.3 million, representing the difference between the value the stockholders received in the merger and Rural’s going concern value. Applying the Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”), the Court determined that RBC was entitled only to a limited (17%) contribution (or settlement credit) for damages suffered by the plaintiffs from joint tortfeasors—those who were not entitled to the exculpation provisions of 102(b)(7) of the DGCL—rather than to a pro rata contribution from all the settling defendants. Seemingly applying a non-Lyondell standard for breach of the duty of loyalty to the facts of the case, as in Chen v. Howard-Anderson decided earlier this year, the Court found that the chair of the Rural special committee and the CEO director would not have been entitled to exculpation had they not settled because they were motivated by personal interests and therefore failed to act in good faith.
The opinion once again highlights the importance of instituting and implementing sale processes that ensure that directors will not be second-guessed under the judicial lens of enhanced scrutiny. In that connection, boards should ensure that they are providing appropriate oversight of committees, management, and advisors, that the directors chosen for a special committee have been vetted for potential conflicts, and that directors are aware of any material conflicts that their bankers may have. At the same time, the opinion makes clear that Delaware will hold financial advisors responsible as experts upon which directors are entitled to rely without liability with respect to areas within their expertise. Financial advisors need to ensure not only that they keep boards fully informed with respect to their valuations of the target companies the boards serve but also that boards are aware of all potential conflicts that could reasonably be expected to affect a court’s view of the reasonableness of a sales process.