Shareholders Prevail at Trial Over Rural/Metro Buyout
In a case that The New York Times wrote “shows just how greedy investment bankers can be,” plaintiffs prevailed in a March 7, 2014 post-trial decision where Delaware Vice Chancellor J. Travis Laster found defendant RBC Capital Markets (“RBC”) liable for aiding and abetting Rural/Metro Corporation’s board of directors’ fiduciary duty breaches in the $438 million buyout of Rural/Metro by Warburg Pincus LLC (“Warburg”).
Legal action over Rural/Metro’s buyout by Warburg in 2011 began in Delaware Chancery court and Arizona when shareholders charged that the company was being sold at an inadequate price. The case was consolidated, and the Delaware plaintiff and counsel named as lead. After that, lead plaintiff entered into an agreement to settle the action in exchange for supplemental disclosure by Rural/Metro and defendants’ agreement not to oppose plaintiff’s fee application. Shareholders approved the merger, and a fairness hearing was held in January 2012. The Arizona plaintiff (Joanna Jervis) and her counsel (Robbins Geller Rudman & Dowd LLP and Bouchard, Margules & Friedlander, P.A.) objected to the settlement as inadequate and argued that it did not take into account evidence of defendants’ conflicts of interest. The judge agreed and rejected the settlement, and in a rare move, named Jervis as the new lead plaintiff and named her attorneys at Robbins Geller and Bouchard, Margules as lead counsel.
Lead counsel filed a new amended complaint, adding RBC and financial advisors Moelis & Company as defendants. As the case neared trial in 2013, Moelis settled for $5 million and the Rural/Metro defendant directors settled for $6.6 million, leaving RBC as the remaining defendant.
Robbins Geller presented evidence at trial demonstrating that RBC aided and abetted a pair of Rural/Metro directors whose desire to have the company sold very quickly was motivated by separate factors that put them at odds with Rural/Metro’s (and its shareholders’) best interests. RBC wanted the merger to be concurrent with one where Emergency Medical Services (“EMS”), the parent of Rural/Metro’s rival, American Medical Response, was up for sale with some of the largest private equity shops showing interest. Even as RBC stood to gain $5.1 million from advising Rural/Metro in a buyout, they stood to gain $14-$20 million more if they could help finance one of the purchasers of Rural/Metro, and perhaps another $14-$35 million by financing an EMS purchaser. Indeed, RBC began putting Rural/Metro “in play” before the Board as a whole ever authorized such action. Judge Laster agreed, writing that not only did this action fall outside the range of reasonableness, but that it was exacerbated by RBC’s motivation to have Rural/Metro in play at the same time as EMS. As Judge Laster noted, “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.”
This turned out to be an even worse situation for Rural/Metro, because the entities in the running for EMS would find it extremely difficult, if not impossible, to put in bids on Rural/Metro due to confidentiality agreements, leaving less well-heeled potential purchasers with smaller bids to scrabble over Rural/Metro. In fact, the purchaser of EMS wrote that they were interested in bidding on Rural/Metro, and asked that Rural/Metro’s final decision be put off until after the EMS deal closed. Ultimately they were refused, the bidding for Rural/Metro proceeded, and only Warburg submitted a “final” bid, at $17.00 per share, eventually increased to $17.25. As Judge Laster wrote, “RBC did not disclose that it was continuing to seek a buy-side role providing financing to Warburg.” RBC even “worked to lower the analyses in its fairness presentation so Warburg’s bid looked more attractive.” Also, “[r]ather than pushing for the best deal possible for Rural, RBC did everything it could to get a deal, secure its advisory fee, and further its chances for additional compensation from Warburg.”
When it became evident that Warburg was not planning to use RBC’s services in financing the purchase, RBC redoubled its efforts, going so far as giving Warburg information about the mindset, competing views and internal dynamics of Rural/Metro’s boardroom. Laster wrote that “[n]o one ever told the Board that its bankers had helped Warburg by giving . . . this information,” or that senior bankers at RBC “spent March 26, 2011, making a final push to get a role in Warburg’s financing, including by offering to fund a $65 million revolver” of credit to a different Warburg branch. “There was no conceivable upside for Rural from RBC’s last-minute lobbying,” noted Laster.
While its bankers were trying to ingratiate themselves with Warburg, RBC’s M&A team was trying to make Warburg’s offer of $17.25 look better by lowering the analyses of Rural/Metro’s worth in the fairness opinion. When RBC finally gave Rural/Metro their “board book,” there were less than 12 hours left before Warburg’s offer expired. Laster found it “conflicted with RBC’s earlier advice, contravened the premises underlying the Board’s business plan . . . and contained outright falsehoods. . . . The evidence at trial demonstrated persuasively that the fair value of Rural’s stock at the time of the sale exceeded the $17.25 per share that Warburg was willing to pay.” Further, “[t]he combination of RBC’s behind the scenes maneuvering, the absence of any disclosure to the Board regarding RBC’s activities, and the belated and skewed valuation deck” was cited by Laster when he observed that “[b]ecause RBC misled the Board,” the Board’s valuation of Rural/Metro was skewed, and that “plaintiffs proved that ‘the adequacy of the decision making process [and the] information on which the directors based their decision’ fell outside the range of reasonableness. . . . On the facts of this case, RBC acted with the necessary degree of scienter and can be held liable for aiding and abetting.” Laster added that “RBC created the unreasonable process and informational gaps that led to the Board’s breach of duty. . . . [B]ut for RBC’s actions, a fully-informed Board would have had numerous opportunities to achieve a superior result.”
Judge Laster’s 91-page ruling continued to blister RBC, citing “the magnitude of the conflict between RBC’s claims and the evidence” that may justify fee-shifting in this action. Laster “placed the least weight on the testimony of the two RBC managing directors who appeared at trial. Their accounts at times strained credulity, and the plaintiffs successfully impeached their testimony on multiple occasions.”
Judge Laster ordered the parties to submit expert reports to determine a range of fair value for Rural/Metro at the time of the merger with Warburg, to brief whether RBC’s liability can be reduced by any amount due to other defendants’ share of liability, and that plaintiffs could make a formal motion for a bad faith fee award at a later stage in the case.
Praise for lead counsels’ success in this action has poured in from many sources. Reuters columnist Alison Frankel wrote that the trial and ruling “should scare M&A advisors.” In a Wall Street Journal interview, retired Delaware Supreme Court Chief Justice Myron T. Steele said of lead counsel, “They are not what [many judges] would characterize as frequent fliers. They take cases to win them, and they push hard.” In devoting nearly a week of blog postings to the case and decision, J. Robert Brown, Jr., University of Denver Sturm College of Law Professor and corporate governance and shareholder litigation blogger at TheRacetotheBottom.org wrote, “Is it the best case for shareholders in Delaware of the New Millennium? It may well be.”
“Boards are supposed to be looking out for shareholders,” said Randall J. Baron of Robbins Geller, one of the lead plaintiff’s attorneys on the case. “When that doesn’t happen, that’s where litigation comes in.”
In re Rural Metro Corp. Stockholders Litigation, No. 6350-VCL, 2014 Del. Ch. LEXIS 36 (Del. Ch. Mar. 7, 2014).