rural-metro - aiding and abetting (deallawers) 3-9-16

Copyright 2016©

Rural/MetroAiding and Abetting Breach of Fiduciary Duty Claims

Aspects and Implications

DealLawyers.com Audio WebcastMarch 14, 2016

Kevin MillerAlston & Bird LLP

New York, NY

- 2 -Copyright 2016©

Background

On June 30, 2011, Rural/Metro Corporation merged with an affiliate of Warburg Pincus LLC and each share of Rural common stock was converted into the right to receive $17.25 in cash.

Plaintiffs alleged that the members of the Rural board of directors breached their fiduciary duty of care in approving the merger and by failing to disclose material information in the Company‘s definitive proxy statement

Plaintiffs further contended that defendant RBC Capital Markets, LLC, a financial advisor to Rural, aided and abetted the directors‘ breach of fiduciary duty.

Before trial, the directors settled ($6.6 million) as did Moelis & Company LLC, Rural’s other financial advisor ($5 million).

On March 7, 2014, the Court of Chancery issued a post-trial opinion in which it held that RBC was liable for aiding and abetting breaches of fiduciary duty by the Rural Board. In re Rural/Metro, CA No. 6350-VCL (Del. Ch. Mar. 7, 2014).

On October 10, 2014 the Court of Chancery issued a post-trial opinion in which it held that RBC was responsible for $75.8 million in damages accruing interest at a rate of 5.75%, 5% above the Federal Reserve Discount Rate of 0.75%, from June 30, 2011, the closing date of the merger through the date of payment. In re Rural/Metro, CA No. 6350-VCL (Del. Ch. Oct. 10, 2014).

On November 30, 2015, the Delaware Supreme Court affirmed the principal legal holdings of the Court of Chancery’s decision. RBC Capital Mkts. v. Jervis, No. 140, 2015, (Del. Nov. 30, 2015).


Aiding and Abetting a Breach of Fiduciary DutyFour Elements of a Claim Under Delaware Law

Under Delaware law, the four elements of a claim for aiding and abetting a breach of fiduciary duty include:

(i) the existence of a fiduciary relationship;

(ii) breach of fiduciary duty; [Note: see page 4 re: application of Revlon]

(iii) knowing participation in that breach by defendants [Note: see page 6 re: scienter]; and

(iv) damages proximately caused by that breach. Morgan v. Cash, No. 5053-VCS, 2010 WL 2803746, at *4 (Del. Ch. July 16, 2010).


Standard Applied for Determining Whether a Breach of Fiduciary Duty Has Occurred - Reasonableness

In assessing whether RBC was liable for aiding and abetting a breach of fiduciary duty by the Rural Metro Board, the Chancery Court applied the Revlon reasonableness standard of review to the Board’s conduct.

According to the Chancery Court, the 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 caused the Board decision to approve Warburg‘s offer to fall short under the enhanced scrutiny test.

The Supreme Court affirmed this approach.


The Board’s Revlon Breaches

According to the Chancery Court: RBC designed a process that favored its own interest in gaining financing work from the bidders

for EMS. RBC divided the possible bidders into Track 1 buyers involved in the EMS process and Track 2 buyers who were not. RBC reached out to the Track 1 buyers in December to let them know that Rural was in play and planned to contact the Track 2 buyers during the first week of January. RBC prioritized the EMS participants so they would include RBC in their financing trees. RBC also planned to push its staple financing package for Rural. [One of RBC’s lead bankers] stressed to his leveraged finance colleagues that RBC had the inside track on financing because of Rural‘s confidentiality agreements.

When it approved the merger, the Board was unaware of RBC‘s last minute efforts to solicit a buy-side financing role from Warburg, had not received any valuation information until three hours before the meeting to approve the deal, and did not know about RBC‘s manipulation of its valuation metrics. Under the circumstances, the Board‘s decision to approve Warburg‘s bid lacked a reasonable informational basis and fell outside the range of reasonableness. No one ever told the Board that its bankers had helped Warburg by giving Carney [internal Rural board ] information. No one ever told the Board that senior leveraged financing 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 for a different Warburg portfolio company.


Knowing Participation and the Scienter Requirement - The Supreme Court Found that the Board’s Revlon Breaches Were the Result of RBC’s Fraud on the Board and an Informational Vacuum Created By RBC

The Supreme Court held that:

“The trial court, in a lengthy analysis of aiding and abetting law and tort law, held that if a ‘[i]f the 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.’ We affirm this narrow holding.

“It is the aider and abettor that must act with scienter. The aider and abettor must act ‘knowingly, intentionally, or with reckless indifference …[;]’ that is, with an ‘illicit state of mind.’ To establish scienter, the plaintiff must demonstrate that the aider and abettor had ‘actual or constructive knowledge that their conduct was legally improper.’ Accordingly, the question of whether a defendant acted with scienter is a factual determination. The trial court found that, ‘[o]n the facts of this case, RBC acted with the necessary degree of scienter and can be held liable for aiding and abetting.’ The evidence supports this finding.…

“Here … the claim for aiding and abetting was premised on RBC’s ‘fraud on the Board,’ and that RBC aided and abetted the Board’s breach of duty where, for RBC’s own motives, it ‘intentionally duped’ the directors into breaching their duty of care.” RBC Capital Mkts. v. Jervis, No. 140, 2015, (Del. Nov. 30, 2015)


Principal Legal Holdings

Principal Legal Holdings of Supreme Court Decision “We agree with the trial court that the individual defendants breached their fiduciary duties by

engaging in conduct that fell outside the range of reasonableness, and that this was a sufficient predicate for its finding of aiding and abetting liability against RBC.”

“To establish scienter, the plaintiff must demonstrate that the aider and abettor had ‘actual or constructive knowledge that their conduct was legally improper.’ Accordingly, the question of whether a defendant acted with scienter is a factual determination.”

DUCATL contemplates giving non-settling defendants “settlement credit” in certain circumstances for the “pro rata share” of any damages attributable to the conduct of “joint tortfeasors” but the Court found that directors that qualified for exculpation under the Company’s 102(b)(7) charter provision were not “joint tortfeasors” under DUCATL and should be excluded from any settlement credit calculations. As a consequence, RBC could only get credit for the portion of the damages allocated to the Rural/Metro director defendants who failed to qualify for exculpation under 102(b)(7).


But Financial Advisors Are Not Gatekeepers

“[O]ur holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting a breach of the duty of care.191” RBC Capital Mkts. v. Jervis, No. 140, 2015 (Del. Nov. 30, 2015)__________191 In affirming the principal legal holdings of the trial court, we do not adopt the Court of Chancery’s description

of the role of a financial advisor in M & A transactions. In particular, the trial court observed that ‘[d]irectors are not expected to have the expertise to determine a corporation’s value for themselves, or to have the time or ability to design and carryout a sale process. Financial advisors provide these expert services. In doing so, they function as gatekeepers.’ Rural I, 88 A.3d at 88 (citations omitted). Although this language was dictum, it merits mention here. The trial court’s description does not adequately take into account the fact that the role of a financial advisor is primarily contractual in nature, is typically negotiated between sophisticated parties, and can vary based upon a myriad of factors. Rational and sophisticated parties dealing at arm’s-length shape their own contractual arrangements and it is for the board, in managing the business and affairs of the corporation, to determine what services, and on what terms, it will hire a financial advisor to perform in assisting the board in carrying out its oversight function. The engagement letter typically defines the parameters of the financial advisor’s relationship and responsibilities with its client. (emphasis added)


Discussion Topics

What are the implications of applying the Revlon reasonableness standard for purposes of evaluating whether the board breached its fiduciary duty? “When disinterested directors themselves face liability, the law, for policy reasons, requires that they be

deemed to have acted with gross negligence in order to sustain a monetary judgment against them. That does not mean, however, that if they were subject to Revlon duties, and their conduct was unreasonable, that there was not a breach of fiduciary duty.139 The Board violated its situational duty by failing to take reasonable steps to attain the best value reasonably available to the stockholders. We agree with the trial court that the individual defendants breached their fiduciary duties by engaging in conduct that fell outside the range of reasonableness, and that this was a sufficient predicate for its finding of aiding and abetting liability against RBC.”

But see Corwin v. KKR Fin. Holdings LLC, 2015 WL 5772262, at *6 (Del. Oct. 2, 2015) (“Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M & A decisions in real time, before closing. They were not tools designed with post-closing money damages claims in mind, the standards they articulate do not match the gross negligence standard for director due care liability under Van Gorkom . . . .”).

What if Rural/Metro had been acquired in a stock-for-stock merger – i.e., no change in control – would a financial advisor that allegedly engaged in many of the same bad acts as RBC be liable for aiding and abetting a breach of fiduciary duty if the necessary predicate breach by directors required a finding that they were gross negligent?


Discussion Topics (cont’d)

What is the effect of the Delaware Supreme Court's definition of scienter for purposes of evaluating whether a defendant knowingly participated in a board's breach of fiduciary duty? Is egregious behavior such as “a fraud on the board” required or does “constructive

knowledge that their conduct was legally improper” suggest a much lower, potentially vague and ambiguous standard?



What are the potential implications of the Delaware Supreme Court's decision with respect to the potential liability of executive officers for breaches of fiduciary duty in connection with M&A transactions? What about other advisors, including counsel?



Under DUCATL, does stockholder adoption of a 102(b)(7) authorized exculpatory charter provision effectively “exonerate” – i.e., in addition to providing a shield against director liability, does DUCATL allow stockholders to use the 102(b)(7) as a sword to shift liability to third party aiders and abetters – i.e., under Rural/Metro the directors exculpated from liability for their breaches of their fiduciary duty of care were not deemed joint tortfeasors and any damages attributable to those breaches were excluded from any settlement credit calculations.

While plaintiffs may be able to plead in the alternative, can defendants mount an effective defense to aiding and abetting claims in the alternative? The Prisoner’s Dilemma - A united front amongst the fiduciary and advisor defendants facing

similar claims as those in Rural/Metro may not serve the interests of individual defendants who, in order to maximize the potential for contribution (or settlement credit) from joint tortfeasors, may need to seriously consider breaking ranks and presenting evidence that other defendants that participated in the transaction acted wrongfully even if their preferred primary defense would otherwise be that no underlying breach of fiduciary duty occurred.



What role should an additional/second financial advisor play – second opinion; additional source of strategic and financial advice; assistance in process oversight; assistance in conducting post-signing market check; etc? Following his opinion in Toys-R-Us, then Vice Chancellor Strine was reported to have clarified

certain of his views at the 2006 Tulane Corporate Law Institute. Among other things, VC Strine was reported by Corporate Control Alert to have expressed the view that to get [a second] opinion, a target must either pay a lot of money to a first-tier firm or get an opinion from a less-distinguished one, which, the judge said “doesn’t give me a lot of comfort. What’s going to impress us about whether you got a good deal is the quality of the market check.” The second opinion is “banker protection,” he said, and does little to benefit target shareholders.

According the Supreme Court in RBC Capital Mkts. v. Jervis, “[T]he presence of Moelis failed to cleanse the defects in the process and the defective financial advice the Board received from RBC. The Board treated its advice as secondary to that of RBC and, like RBC, Moelis’s compensation was mostly contingent upon consummation of a transaction.”



What should financial advisors be doing differently in light of the Rural/Metro decision and other developments? In “Documenting the Deal: How Quality Control and Candor Can Improve Boardroom

Decision-Making and Reduce the Litigation Target Zone,” Chief Justice Strine suggests ways to minimize litigation risks in the M&A process (available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2577356): “[T]he focus of my remarks is on what you can do as legal and financial advisors to conduct

an M & A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) more accurately records what happened so that you and your clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for your favorite plaintiffs’ lawyers.”

“But what is critical is that banks have a sensible and defensible disclosure policy that tracks and helps surface potential material conflicts .… It is also vital that there not be a partial approach to conflict disclosure, which leaves open the possibility for “oh by the way” moments that were foreseeable. Disclosure is comforting to clients and the courts, as it suggests a forthright attempt to grapple with self-interest in principled, ethical way.”

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2577356



When and how should financial advisors disclose information regarding material relationships with potential counterparties and actual and potential conflicts of interest: Outset of engagement (e.g., single bidder process) Once limited number of likely buyers identified Prior to management presentations or second round of bids (e.g., if broad auction)

How should this information be disclosed to the board: Verbally (evidentiary concerns if recollections differ) Writing (creates contemporaneous written record)

Where to disclose: Memo to the Board of Directors or Board book (focus is on providing the board with adequate

information to the assess depth and breadth of a financial advisor’s relationships with potential counterparties)

Engagement letter - See “Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations” by E. Klinger-Wilensky and N. Emeritz at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604250 (focus is on negotiation of detailed contractual representations, covenants and remedies in engagement letter)





What else should financial advisors be doing differently in light of the Rural/Metro decision and other developments? Disclosure of “longitudinal changes” to financial analyses reviewed with the board/special

committee. Chief Justice Strine advocates blacklining v. prior Board book Many banks identify key changes (assumptions, inputs, etc.) in separate “longitudinal

change” pages included in their board/special committee discussion materials: Changes to management projections Changes to selected companies and transactions used for comparative purposes Changes to discount rate calculation, including methodology and inputs Changes to selected multiple range

Other financial advisors identify those changes orally or in footnotes.


Appendices

Appendix A: The Liability Decision – the Chancery Court’s Findings Appendix B: The Damages Decision


Appendix A: The Liability Decision – the Chancery Court’s Findings

According to the Chancery Court’s decision: The Board first formed a Special Committee comprised of three directors – Shackelton, Davis

and Walker in August 2010 to oversee an approach to American Medical Response, a competitor of Rural in the ambulance business and a subsidiary of Emergency Medical Services, following a pitch by RBC to Shackelton and DiMino, Rural’s CEO, suggesting the possibility of Rural acquiring AMR. EMS rejected Rural’s overtures regarding acquiring AMR.

The Board reformed the Special Committee in October 2010 in response to an approach by Macquarie Capital and Irving Place Capital regarding an acquisition of Rural for $10.50 to $11.50 per share. The Consortium suggested it could raise the high end of its range to $15.00 per share after its initial proposal was rejected by the Rural board. Discussions ended after Irving Place withdrew from the Consortium.

Although the Court noted in its opinion that Shackelton, Davis and DiMino each had personal circumstances that would cause them to favor a near term sale of Rural, in their post trial briefs plaintiffs did not contend that any director breached his fiduciary duty of loyalty.


The Liability Decision – the Chancery Court’s Findings (cont’d)

In December 2010, Tony Munoz, a Managing Director at RBC, apprised Shackelton and DiMino of rumors that EMS was for sale and that a number of PE firms were looking at EMS, some of which might want a partner. Internally RBC recognized that a PE firm that acquired EMS might also be interested in

acquiring Rural and that if RBC led a Rural sales process it could use its position as sellside advisor to Rural to secure buyside financing roles with the PE firms bidding on EMS – i.e., potential buyers of Rural would attempt to curry favor with Rural’s sellside financial advisor by offering Rural’s sellside financial advisor a financing role in the PE firm’s bid for EMS.

At a December 8, 2010 meeting of the Rural Board, Shackelton outlined three alternatives: (i) continue to pursue standalone business plan; (ii) pursue a sale of Rural; (iii) pursue some kind of business combination with AMR

The Board reactivated the Special Committee to generate a recommendation and authorized the Special Committee to retain advisors. According to the Chancery Court opinion, the Board did not authorize the Special Committee to pursue a sale of Rural.



After the December Board meeting, Shackelton and DiMino told RBC and Moelis that they were open to reaching out to PE firms about partnering on an acquisition of EMS and both firms made calls to their PE firm clients. DiMino also called EMS directly to offer assistance with their process.

In late December 2010, the Special Committee interviewed three potential financial advisors including RBC and Moelis. Note: Board had not authorized a sale or other transaction at this stage. In its presentation RBC indicated that it would like to offer Stapled Financing

Rural’s counsel advised the Special Committee that RBC, with its very recent experience financing Rural, and its overall familiarity with Rural and its industry, could enhance a potential sale process through staple financing because such financing could be offered quickly and could provide a floor for financing that would be available to potential purchasers of Rural. Counsel also noted that, if the Special Committee selected RBC and authorized it to provide stapled financing, the Special Committee would need to be especially active and vigilant in assuring the integrity of the sale process, and that it should consider hiring a second advisor that would not provide financing to assure a robust auction process.

The Special Committee decided to hire RBC and DiMino, Rural’s CEO, emailed Munoz: ―Well done, let‘s get this baby sold!



Contemporaneous documents indicated that Munoz told his colleagues at RBC that RBC had been engaged as Rural’s sellside advisor (“the deal that‘s going to put our Healthcare services sellside effort on the map”) and that RBC was free to help on the overall financing of Rural+EMS - likely be a $2bn financing.

After hiring RBC to sell Rural, Shackelton told DiMino that he was interested in having a secondary M&A advisor that isn’t providing staple financing to at the very least provide a fairness opinion.

On December 26, 2010, Shackelton sent an update to the Board reporting that the Special Committee had hired RBC as its primary advisor and Moelis as its secondary advisor.

According to the Court, RBC designed a process that favored its own interest in gaining financing work from the bidders for EMS. RBC divided the possible bidders into Track 1 buyers involved in the EMS process and Track 2 buyers who were not. RBC reached out to the Track 1 buyers in December to let them know that Rural was in play and planned to contact the Track 2 buyers during the first week of January. RBC prioritized the EMS participants so they would include RBC in their financing trees. RBC also planned to push its staple financing package for Rural. Munoz stressed to his leveraged finance colleagues that RBC had the inside track on financing because of Rural‘s confidentiality agreements.



According to the Chancery Court, RBC hoped to generate up to $60.1 million in fees from the Rural and EMS deals: RBC anticipated earning an M&A advisory fee of $5.1 million and staple financing fees of $14-20

million from the Rural deal. RBC also hoped to capture $14-35 million by financing a share of an EMS deal. The maximum financing fees of $55 million were more than ten times the advisory fee, giving RBC

a powerful reason to take steps to promote itself as a financing source at the expense of its advisory role.

According to the Chancery Court, the Rural sales process encountered readily foreseeable problems: Financial sponsors who participated in the EMS process would be limited in their ability to consider

Rural simultaneously because they would be constrained by confidentiality agreements they signed as part of the EMS process and because EMS would fear that any participants in both processes would share EMS‘s confidential information with its closest competitor.

KKR informed Rural that it was not interested in Rural unless it acquired EMS and that a simultaneous deal would be tough.



Shackelton, RBC, and Moelis contacted twenty-eight private equity firms during late December and January. Of those, twenty-one executed confidentiality agreements and received the confidential information memorandum.

Shackelton emailed his fellow directors that Rural ultimately received six indications of interest and scheduled management meetings with all six firms: American Securities - $16.00 - $17.00 Ares - $14.50 - $16.50 CD&R - $15.50 - $16.50 Leonard Green - $17.00 - $19.00 Warburg Pincus - $17.00 Kelso - $14.75 - $16.50



Subsequently RBC advised the Special Committee that Kelso had dropped out and that CD&R had won the bidding for EMS. It was noted that, due to its pending purchase of EMS, CD&R may not be able to conform to

certain aspects of the schedule outlined by the Company‘s advisors regarding a potential sale of the Company.

It was further noted that CD&R should be seen as a competitor for the Company, causing certain confidentiality and anti-trust issues to be considerations.

The Special Committee discussed whether the timeline for bids should be extended to accommodate CD&R. The Special Committee resolved to set a bid deadline of March 21.

The Special Committee also decided not to solicit interest from strategic acquirers.



After the Special Committee meeting, RBC communicated the bid deadline to the remaining firms.

Sean Carney, the leader of the Warburg team, emailed one of his partners and assessed Warburg‘s chances as follows:

“I think we are in a good position. [DiMino] likes us a lot, the bankers are pulling for us, and we are the premier firm involved in the process. My sense [is] the other participants include a bit of a motley group because the EMS process put so many of the larger firms on the sidelines. I think ~5 firms had management meetings, and [DiMino] did not like 2-3 and is basically constructively terminating their involvement by essentially being unwilling to meet with them. That leaves only 2-3, including ourselves, that are legitimate contenders.”

As the bid date approached, CD&R indicated to RBC that it could outbid other sponsors for Rural because of synergies with AMR. CD&R asked for the bid deadline to be pushed back until April so it could formulate its bid. Carney told RBC that Warburg did not want the bid deadline delayed.



On March 15, 2011, the Board met to consider the Special Committee‘s progress since its last meeting on December 8, 2010, when the Board authorized the Special Committee to hire an advisor and develop a recommendation on strategic alternatives. The Chancery Court’s opinion in Del Monte case had come out approximately one month

before, and emails during the intervening period suggest that counsel was worried about whether Rural‘s process was defensible.

The Chancery Court said that the minutes of the March 15 meeting have the feel of a document drafted in anticipation of litigation, and the rose-colored description of the sale process that appears in the minutes does not match up with what actually took place. Draft minutes for the Board meetings on October 1, 2010, and December 8, 2010, also were prepared at that time.



On March 22, 2011, Warburg offered to acquire Rural for $17.00 per share. It was the only firm to submit a final bid. Warburg understood that it had an advantage because of the timing of Rural‘s process. In an

internal presentation, the Warburg team wrote, most large LBO firms conflicted out of evaluating [Rural] due to EMS process. The presentation further noted that Warburg was management‘s preferred partner.

Warburg‘s bid did not use RBC‘s financing. Rather than accepting defeat, RBC re-doubled its efforts to win the business. Carney testified that after Warburg submitted its bid, RBC continued to try to find a way into the financing.

CD&R submitted an indication of interest at $17.00 per share, but said it was unable to fully commit to a definitive transaction to acquire [Rural] until the closing of its acquisition of EMS, which was expected to be in late April.



The Special Committee and its advisors scheduled a meeting for March 23, 2011, to discuss the two proposals. The directors who were not members of the Special Committee attended the March 23

meeting by invitation. The lead RBC M&A banker, orally reviewed the two bids. The Special Committee decided not to engage further with CD&R. According to the minutes,

“[T]he purported offer from CD&R did not provide the Company any certainty of a successful transaction, and did not otherwise present a compelling case for pursuing a transaction with CD&R at this time, given that it did not have committed financing and that it did not provide any indication of the merger agreement terms it would require.”

The directors did not have any valuation materials when they made this decision beyond the advisors‘ one-page transaction summary that compared the metrics implied by a $17.00 per share offer to the metrics implied by Rural‘s closing market price of $12.38 on the prior day.



After the Special Committee meeting, Rural‘s bankers called Carney. Over the next twenty-four hours, Carney had numerous conversations with various bankers for Rural and Warburg. On the evening of March 24, Carney summarized the situation in an email:

“I have spoken to a number of bankers on our side (for advice) and theirs (for back-channel feedback). There are definitely two other offers as we suspected, both say they need another week of work but the company‘s bankers think it is more like 2-3 weeks. Sounds like both are higher but again not a knock-out, I haven‘t been able to get more specific info than that.

The BOD is split. Some are ready to vote yes for us now. Others want to try to get a little more from us, and some a lot more, with silly numbers like $18 being thrown around in the BOD room. The company‘s bankers think this may just be posturing in front of the bankers, and the bankers have told the BOD that a number like that is not likely to happen ever and certainly not from us.”

On Friday, March 25, 2011, Warburg submitted a revised final bid of $17.25 per share that expired at 9:00 a.m. Eastern time on Monday, March 28. The bid letter stated that it was Warburg‘s best and final offer.



The next day was Saturday, March 26, 2011, the day before the Board approved the merger. RBC spent that day working hard to get something done.

On the buy-side financing front, RBC‘s most senior bankers made a final push. Blair Fleming, RBC‘s Head of US Investment Banking, David Daniels, RBC‘s Co-Head of US Financial Sponsors, and James Wolfe, RBC‘s Head of US Leveraged Finance, engaged in a full-court press to convince Warburg to include RBC.

On the deal front, RBC worked to lower the analyses in its fairness presentation so Warburg‘s bid looked more attractive. the initial ranges provided to RBC’s fairness committee suggested that the deal price fell at

the midpoint of fairness. By the end of the day, the metrics would make the deal look more attractive.



On March 27, 2011, the directors convened a joint meeting of the Board and the Special Committee.

The Board meeting started at 11:00 p.m. Eastern time on Sunday, March 27. The directors received written valuation analyses from RBC and Moelis at 9:42 p.m. Eastern

time. This was the first valuation information that the Board ever received as part of the sale process.

The merger agreement was approved after midnight.


Appendix B: The Damages Decision

Background At trial, RBC contended that there was no underlying breach of fiduciary duty and that, absent a

predicate breach of fiduciary duty, RBC could not be held liable for aiding and abetting breaches of fiduciary duty.

At trial RBC did not seek to prove that the settling defendants were joint tortfeasors, but merely sought to preserve RBC’s right to seek a reduction in the damages otherwise recoverable from RBC under Delaware’s Uniform Contribution Among Tortfeasors Law (“DUCATL”).

On March 7, 2014, the Chancery Court issued its liability decision in Rural/Metro. The Liability Opinion did not address damages or the allocation of fault between the settling and non-settling defendants.

On October 10, 2014, the Chancery Court issued its damages decision in Rural/Metro.


The Damages Decision (cont’d)

Key features of the Damages Decision included: The Chancery Court found that Rural/Metro’s stockholders suffered $91.3 million in damages. 83% of the damages ($75.8 million) were allocated to RBC, after holding that the 91.3 million

judgment should be reduced by the amount of the damages attributable to two directors who settled prior to trial but who would not have qualified for exculpation under Rural/Metro’s 102(b)(7) exculpatory charter provision.

The net $75.8 million in damages payable by RBC accrued interest at a rate of 5.75%, 5% above the Federal Reserve Discount Rate of 0.75%, from June 30, 2011, the closing date of the merger to the date of payment.



Other features of the Damages Decision included: The Chancery Court determined that the plaintiffs were entitled to a “quasi appraisal” remedy

that would compensate them for the difference between the “intrinsic value” of their stock at the time of the merger and the transaction price.

Relying on a discounted cash flow analysis, the Chancery Court determined that Rural/Metro shares were worth $21.42 at the closing of the merger and that the plaintiff stockholders were entitled to damages of $4.17 per share or aggregate damages of $91.3 million.

The Chancery Court conducted a detailed analysis under DUCATL to determine the extent to which the judgment against RBC should be reduced in respect of the alleged joint tortfeasor directors and co-advisor.



As noted by the Chancery Court, DUCATL contemplates giving non-settling defendants “settlement credit” in certain circumstances for the “pro rata share” of any damages attributable to the conduct of “joint tortfeasors”

RBC argued that, because the plaintiffs had settled with seven other “tortfeasors,” RBC was only responsible for 1/8th of the $91.3 million

The plaintiffs contended that RBC was not entitled to any reduction because its conduct amounted to an intentional tort.

Plaintiffs also disputed whether the settling defendants could be considered “joint tortfeasors” for purposes of DUCATL’s settlement credit provisions given RBC’s “united front” defense and its failure to introduce evidence of any wrongdoing by the settling defendants at trial.



Controversially, the Chancery Court found that directors that qualified for exculpation under the Company’s 102(b)(7) charter provision were not “joint tortfeasors” under DUCATL and should be excluded from any settlement credit calculations.

As a consequence, RBC could only get credit for the portion of the damages allocated to the Rural/Metro director defendants who failed to qualify for exculpation under 102(b)(7).

The Chancery Court found that Moelis was not a joint tortfeasor because RBC didn’t prove that Moelis aided and abetted the breaches of fiduciary duties by Rural/Metro’s directors.

Allocating fault among RBC and the nonexculpated directors, the Chancery Court found that: 50% of the damages were attributable to disclosure violations and 50% of the damages were

attributable to sale process breaches of fiduciary duty of which 25% were attributable to the initiation of the sales process without board authorization and 25% were attributable to the decision to approve the merger; and

RBC was solely responsible for damages attributable to the disclosure violations and the decision to approve the merger and roughly 1/3 responsible for the damages attributable to the premature initiation of the sales process – resulting in an aggregate contribution credit of 17% or $15.5million for the damages attributable to the nonexculpated directors.

rural-metro - aiding and abetting (deallawers) 3-9-16

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