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In re Rural Metro Corporation Shareholders Litigation

Court of Chancery of Delaware

December 17, 2013

IN RE RURAL METRO CORPORATION SHAREHOLDERS LITIGATION

Date Submitted: September 26, 2013.

Joel Friedlander, Jeffrey Gorris, Jaclyn Levy, BOUCHARD, MARGULES & FRIEDLANDER, P.A., Wilmington, Delaware; Randall J. Baron, David Knotts, ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Attorneys for Plaintiffs.

Patricia R. Uhlenbrock, Seton C. Mangine, PINCKNEY, HARRIS & WEIDINGER, LLC, Wilmington, Delaware; Alan J. Stone, Daniel M. Perry, MILBANK, TWEED, HADLEY & McCLOY LLP, New York, NY; Attorneys for Defendant RBC Capital Markets, LLC.

MEMORANDUM OPINION

LASTER, Vice Chancellor.

The plaintiffs in this class action assert that the members of the board of directors (the "Board") of Rural/Metro Corporation ("Rural/Metro" or the "Company") breached their fiduciary duties when selling the Company to a private equity firm. The plaintiffs contend that RBC Capital Markets, LLC ("RBC") and Moelis & Company LLC ("Moelis"), who served as financial advisors to the Company, aided and abetted the Board members' breaches of fiduciary duty. The directors and Moelis settled with the plaintiffs. The case proceeded to trial against RBC.

After the close of the evidence and post-trial briefing, but before post-trial argument, the Company filed a suggestion of bankruptcy. The bankruptcy filings included a declaration from Stephen Farber (the "Farber Declaration" or "FD"), who joined the Company after the trial and became its Chief Financial Officer on June 25, 2013, two years after the closing of the challenged transaction. In his declaration, Farber offers opinions about the reasons for the Company's insolvency, including his view that the Company had difficulty integrating acquisitions and could not forecast revenue accurately. By letter dated August 8, RBC asked this court to take judicial notice of the Farber Declaration and to rely on it for the truth of two propositions: first, that the financial projections used during the Rural/Metro sales process were "significantly flawed and wildly optimistic, " and second, "that the price received by the Company's shareholders was fair." Dkt. 325 at 3.

The plaintiffs have moved to bar consideration of the Farber Declaration. Their motion is granted.

I. FACTUAL BACKGROUND

Rural/Metro is a Delaware corporation headquartered in Scottsdale, Arizona. Founded in 1948, the Company is a leading national provider of ambulance and private fire protection services that serves more than 400 communities across 22 states. Its ambulance business offers emergency and non-emergency transports under contracts with government organizations, hospitals, nursing homes, and other healthcare entities. Rural/Metro listed on NASDAQ in July 1993.

A. The Company's Business Plan

In May 2010, the Board hired Michael P. DiMino as the Company's new President and CEO and gave him a mandate to grow the Company. To carry out his mandate, DiMino developed new growth strategies. As discussed in the Company's public filings, Rural/Metro planned to:

Increase Revenue Through Strategic Growth. Flexibility in our capital structure allows us to actively pursue acquisitions of ambulance transport businesses and to consolidate business in the fragmented ambulance transport market. We will pursue acquisitions that are accretive to our profitability, leverage our strengths and complement our existing national footprint.
Increase Revenue Through New Market Non-Emergency Contracts. We believe we can increase revenue by entering new markets where we do not have an emergency transportation presence. We will enter new markets through preferred provider agreements with local and regional hospitals and healthcare systems for non-emergency general transportation services. We believe our name recognition and service excellence in our existing markets will allow us to gain entrance into new markets to provide non-emergency services to larger scale customers.

JX 60 at 13.

The evidence at trial demonstrated that Rural/Metro's growth strategy was reasonable and had a significant likelihood of success. It was not a sure thing, but in an uncertain world, nothing is. During trial, DiMino testified about the risks facing the Company in late 2010 and early 2011, which included potential difficulties integrating acquisitions and changes in the sources of payment for the Company's services. Two other directors testified about these matters. The Company's public filings detailed these risks, as did the materials provided to potential bidders.

Warburg Pincus LLC ("Warburg"), the ultimate acquirer of the Company, conducted extensive due diligence on the Company. Warburg hired high-powered consultants to evaluate Rural/Metro's financial projections and business model. After combing through the contemporaneously available data, Warburg concluded that "[b]ecause Rural/Metro's revenue is predictable, long-term, and recurring, and the reimbursement environment is projected to be stable, we believe the downside to our investment is limited, with minimal risk to base capital." JX 628 at 2-3.

Warburg closed on its acquisition of the Company on June 30, 2011. So great was Warburg's confidence in Rural/Metro's prospects and business model that Warburg took two aggressive steps to enhance its post-closing returns. First, Warburg accelerated the Company's acquisition program, including by causing the Company to embark simultaneously on two large acquisitions totaling approximately $100 million. Second, Warburg increased the Company's leverage. Post-merger, Rural/Metro already was highly leveraged because of the debt financing that Warburg used to fund its acquisition of the Company. Warburg nevertheless elected to finance the $100 million in accelerated acquisitions by causing the Company to issue notes yielding 13.125% and by increasing the draw on its revolving loan facility from $5 million to $15 million.

As Rural/Metro's new owner, Warburg was entitled to take these steps, but they had the ineluctable consequence of altering the Company's risk profile. Warburg sought greater upside at the price of higher borrowing costs and a thinner equity cushion. If Warburg's bet paid off, then Warburg would reap leverage-enhanced profits. But if the Company stumbled, then Warburg would have a slimmer margin of safety, and there would be a greater risk that Rural/Metro would become insolvent.

B. Evidence About Post-Closing Performance

During fact discovery, the plaintiffs inquired into Rural/Metro's post-closing performance. The latest post-closing evidence that the defendants produced was dated September 30, 2012. During expert discovery, the defendants slipped in additional post-closing material under the guise of information that they provided to their expert. The defendants' expert received information from as late as January 2013, which was produced to the plaintiffs in March.

Trial was held on May 6-9, 2013. During trial, RBC elicited testimony from DiMino and two other directors about Rural/Metro's business plan and the risks the Company faced. RBC also questioned DiMino about Rural/Metro's post-closing performance. Both sides introduced documentary evidence on these subjects. The defendants' expert testified about these matters as well.

Post-trial briefing was completed on August 6, 2013. By letter dated August 8, RBC's counsel asked the court to take judicial notice of the Farber Declaration. This was the first time the court learned that Rural/Metro had filed for bankruptcy protection voluntarily after reaching a deal with its lenders on a pre-packaged ...


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