In RBC Capital Markets, LLC v. Jervis, __ A.3d ___, 2015 WL 7721882 (Del. Nov. 30, 2015), the Delaware Supreme Court affirmed a post-trial decision by the Court of Chancery holding that a financial advisor was liable for aiding and abetting breaches of fiduciary duty by directors of a corporation during a sale of control transaction. In doing so, the Court held that the evidence supported a finding that the advisor had the necessary scienter for an aiding and abetting claim; that is, the financial advisor “knowingly participated” in the breach by “exploiting its own conflicted interests to the detriment of [the corporation] and by creating an informational vacuum.” The Court refused to require contribution from directors (who had previously settled with the stockholder-plaintiffs), because the board was exculpated from monetary liability under the Company’s Section 102(b)(7) provision. The Court confirmed, however, that Section 102(b)(7) protections do not extend to third parties.
In December 2010, the board of Rural/Metro Corporation (“Rural” or the “Company”) formed a Special Committee to explore strategic alternatives. While the Special Committee was authorized to hire a financial advisor to help explore these options, it was not expressly authorized to initiate a sale process. After interviewing two other financial advisors, the Special Committee engaged RBC Capital Markets (“RBC”) as its primary financial advisor. In its presentation to the Special Committee, RBC had recommended a sale of the Company in a coordinated effort with the sale of Rural’s competitor, Emergency Medical Services Corporation (“EMS”), because “healthcare was ‘strong’” and selling the Company at that point in time was “opportunistic.” But 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.” RBC sought to use as an “angle” its role as a sell-side advisor to secure a buy-side financing role for the EMS deal, which could entitle RBC to “$60.1 million in fees from the Rural and EMS deals.”
After contacting several private equity firms, six submitted indications of interest, and ultimately, Warburg Pincus LLC submitted the highest bid of $17.25 per share. RBC unsuccessfully solicited a “buy-side financing role from Warburg,” but did not disclose its attempt to the Special Committee. RBC and Moelis & Company (“Moelis”), the Special Committee’s secondary financial advisor, provided fairness opinions. The Court of Chancery found that “RBC worked to lower the analyses in its fairness presentation so Warburg’s bid looked more attractive. Specifically, the trial court found that RBC made a series of changes to its fairness analysis” without disclosing these changes to the Special Committee. That analysis was sent to the board just three hours before its meeting to decide on the deal. The board approved the merger with Warburg in March 2011, and in June 2011, the merger closed, after approval by the Company’s stockholders.
The class plaintiffs sought relief against Rural’s directors for breaches of fiduciary duty and against RBC and Moelis for aiding and abetting those breaches. Rural’s directors and Moelis settled, and RBC went to trial. Post-trial, the Vice Chancellor held that RBC was liable for aiding and abetting breaches of the directors’ duty of care and duty of disclosure. Specifically, the trial court held that the board breached its duty of care under Revlon’s enhanced scrutiny standard after an unreasonable sales process, and that the board failed to disclose material information in its proxy statement regarding RBC’s valuation process and conflicts. Concluding that RBC had knowingly aided and abetted these breaches, the Court of Chancery found RBC liable for $75.7 million. This represented 83% of the damages, which the Court determined was reasonable, given the Delaware Uniform Contribution Among Tortfeasors Act and RBC’s responsibility as a joint tortfeasor.
The Delaware Supreme Court affirmed. First, after concluding that Revlon applied, the Court reviewed the trial court’s holding that Rural’s board breached its duty of care under enhanced scrutiny. The Court of Chancery had found that the board’s pursuit of the transaction was outside the range of reasonableness, because “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,” and that these actions “impeded interested bidders from presenting potentially higher value alternatives.” The board, according to the Court, should have been aware of the negative implications of this dual-track structure and should have had a mechanism to identify RBC’s conflicts. “[D]irectors need to be active and reasonably informed when overseeing the sales process, including identifying and responding to actual or potential conflicts of interest,” and “the board should require disclosure of, on an ongoing basis, material information that might impact the board’s process” when there is a conflicted advisor.
The Court of Chancery also had found that Rural’s board was not “adequately informed as to Rural’s value,” including that the “Company’s value on a stand-alone basis exceeded what a private equity bidder willingly would pay.” And because the directors were not “well-informed” as to the value, their decision was “devoid of important efforts” necessary to “to protect . . . stockholders and to ensure that the transaction was favorable to them.” The “informational vacuum created by RBC” also made it impossible for stockholders to check the board and ensure that they had diligently contemplated the decision to sell the Company. This informational vacuum also contributed to the Court of Chancery’s holding that Rural’s board had violated its duty of disclosure by failing to disclose RBC’s conflicts fully and characterize RBC’s analysis accurately. The Supreme Court affirmed these rulings.
Next, the Court held that RBC had aided and abetted the board’s breaches. The Court affirmed the trial court’s “narrow holding” that “if [a] third party knows that the board is breaching its duty of care and participates in the breach by misleading the board or creating the informational vacuum, then the third party can be liable for aiding and abetting.” Even though “the requirement that the aider and abettor act with scienter makes an aiding and abetting claim among the most difficult to prove,” the Court found that the requisite scienter had been shown because RBC “intentionally duped” the board into breaching its duty of care and engaged in “fraud on the Board” by knowingly creating the informational vacuum.
Finally, the Court rejected RBC’s argument that it had a right to contribution from joint tortfeasors, noting that the settlement agreements barred such a right. Importantly, the Court also held that Rural’s Section 102(b)(7) exculpatory provision did not shield RBC from liability. “While Section 102(b)(7) insulates directors from monetary damages stemming from a breach of the duty of care, its protection does not apply to third parties such as RBC.” The intended legislative purpose of Section 102(b)(7) was not to “safeguard third parties and thereby create a perverse incentive system wherein trusted advisors to directors could, for their own selfish motives, intentionally mislead a board only to hide behind their victim’s liability shield.”