Was a fraud perpetrated on the board and how did one board member’s independent actions effect the board and the company overall?
RBC Capital Penalized $76M for Breach of Fiduciary Duty
October 15, 2014
In a case of first impression, the Delaware Court of Chancery has ruled that the Delaware Uniform Contribution Among Tortfeasors Act does not bar RBC Capital Markets LLC from collecting a settlement credit because other defendants in the Rural/Metro Corp. shareholder litigation settled with the plaintiffs. However, the court also ruled the doctrine of unclean hands prevented RBC from receiving a full settlement credit and ordered the financial institution to pay roughly $76 million, or $4.17 per share, to Rural/Metro’s stockholders.
Vice Chancellor J. Travis Laster imposed the damages upon RBC for aiding and abetting the breach of fiduciary duties by Rural/Metro’s board when the company was sold to Warburg Pincus LLC for $438 million in 2011.
“In this case, the doctrine of unclean hands bars RBC from claiming the settlement credit to the extent RBC perpetrated what the Delaware Supreme Court has described as a ‘fraud upon the board,'” Laster said in In re Rural/Metro Stockholders Litigation.
Rural/Metro, a Scottsdale, Ariz., for-profit ambulance service provider, hired RBC in 2010, according to court documents. At the time of the hire, RBC was putting together financing packages for companies interested in bidding on Emergency Medical Services Corp., or EMS, according to court documents. EMS, of Greenwood Village, Colo., is Rural/Metro’s only national rival.
Warburg Pincus acquired Rural/Metro in March 2011. Roughly one month after the acquisition, Rural/Metro’s shareholders filed a class action lawsuit alleging that Warburg Pincus’ offer undervalued the company and resulted from a flawed process. Initially, the lawsuit included claims against Rural/Metro’s directors and its other financial adviser, Moelis & Co. LLC. Moelis agreed to settle the claims against it for $5 million in April 2013. Rural/Metro’s directors settled for $6.6 million later that month, according to court documents.
The claims against RBC moved to trial. Rural/Metro shareholders alleged RBC signed a bidding process for Rural/Metro that would enable RBC to generate $60.1 million in combined fees from the Rural/Metro and EMS deals, according to court documents.
RBC divided Rural/Metro bidders into two tracks, the plaintiffs alleged. Track 1 was composed of potential buyers who were involved in the EMS sale while Track 2 included potential buyers who were not interested in EMS. RBC notified the Track 1 participants of Rural/Metro’s potential sale in December 2010, while Track 2 buyers were notified of the possible sale during the first week of January 2011.
Rural/Metro’s directors did not receive any valuation materials beyond a one-page analysis for the transaction, and the adviser also did not disclose that it solicited buy-side financing from Warburg Pincus, according to the shareholders’ complaint.
Laster held in March that RBC’s decision to sell Rural/Metro in parallel with the EMS auction did not survive the enhanced scrutiny test. The vice chancellor said that firms interested in EMS were prioritized so they could have an inside track on Rural/Metro if they used RBC financing.
After Laster issued his liability opinion, RBC argued the DUCATA required any damages awards to be reduced by the aggregate pro rata share of the liability of the defendants who had settled. RBC claimed that because it was sued in conjunction with the defendants and Moelis, the plaintiffs recognized them as joint tortfeasors.
Laster held the DUCATA did not bar RBC from receiving a settlement credit, but ruled the bank was only entitled to 17 percent because the doctrine of unclean hands prevented it from collecting a full credit.
“Because of its unclean hands, RBC cannot claim a settlement credit for the disclosure claim or for the aspect of the sale process claim relating to the final approval of the merger,” Laster said. “RBC forfeited its right to have a court consider contribution for these matters by committing fraud against the very directors from who RBC would seek contribution. By contrast, RBC can claim a settlement credit for the aspect of the sale process claim that did not involve misrepresentations and omissions by RBC towards its fellow defendants.”
The vice chancellor determined RBC was responsible for 75 percent of the damages for its role in the disclosure claims and the breaches of fiduciary duty occurring before final approval. He concluded the remaining 25 percent of the damages responsibility occurred when the Rural/Metro sale process was initiated by one director without board approval. Of the 25 percent, Laster said 8 percent of the damages belongs to RBC.
“We are reviewing the decision and are considering our options. The process is ongoing so we cannot comment further,” said RBC spokesman Kevin Foster.
Originally posted by Jeff Mordock on the Delaware Business Court Insider website
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