IN RE RURAL/METRO CORPORATION STOCKHOLDERS LITIGATION
Submitted July 28, 2014.
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Joel Friedlander, Jeffrey M. Gorris, FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Randall J. Baron, David Knotts, ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Attorneys for Plaintiffs.
Patricia R. Urban, Seton C. Mangine, PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; Alan J. Stone, MILBANK, TWEED, HADLEY & McCLOY LLP; Attorneys for Defendant RBC Capital Markets, LLC.
LASTER, Vice Chancellor.
The post-trial decision in this action held RBC Capital Markets, LLC (" RBC" ) liable to a class of stockholders of Rural/Metro Corporation (" Rural" or the " Company" ) for aiding and abetting breaches of fiduciary duty by the board of directors of Rural (the " Board" ). In re Rural Metro Corp. Stockholders Litig., 88 A.3d 54 (Del. Ch. 2014) [hereinafter " Liability Opinion" ]. This decision sets the amount of RBC's liability to the class at $75,798,550.33, representing 83% of the total damages that the class
suffered. Pre- and post-judgment interest is awarded at the legal rate from June 30, 2011, until the date of payment.
I. FACTUAL BACKGROUND
This decision relies on the facts as found in the Liability Opinion. As to new issues not reached in the Liability Opinion, the facts are drawn from the evidentiary record created at trial and finalized on December 17, 2013, when the court denied Rural's application to supplement the record. In re Rural/Metro S'holders Litig., 2013 WL 6634009 (Del. Ch. Dec. 17, 2013) [hereinafter " Trial Record Opinion" ].
A. The Merger
On March 28, 2011, Rural announced that it was being acquired by Warburg Pincus LLC (" Warburg" ) in a transaction that implied an equity value for the Company of $437.8 million (the " Merger" ). Two stockholders filed lawsuits challenging the Merger, which were consolidated into this proceeding. On June 30, 2011, the Merger closed, and each publicly held share of Rural common stock was converted into the right to receive $17.25 in cash.
The original complaint named as individual defendants Eugene Davis, Earl Holland, Conrad Conrad, Henry Walker, Christopher Shackelton, Robert Wilson, and Michael DiMino. Each served as a member of the Board before the Merger. DiMino was Rural's President and CEO; the other individual defendants were outside directors. The complaint contended that the individual defendants breached their fiduciary duties in two ways: first, by making decisions that fell outside the range of reasonableness during the process leading up to the Merger and when approving the Merger (the " Sale Process Claim" ), and second, by failing to disclose material information in the definitive proxy statement (the " Proxy Statement" ) that the Company issued in connection with the Merger (the " Disclosure Claim" ). The complaint also named as defendants Warburg and its two acquisition subsidiaries and contended that they aided and abetted the individual defendants' breaches of fiduciary duty. Oddly, the complaint named Rural itself as a defendant, even though the complaint only asserted claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty. Neither species of claim can be asserted against the corporation whom the fiduciaries serve.
On February 10, 2012, the plaintiffs filed an amended complaint that continued to assert both the Sale Process Claim and the Disclosure Claim, but modified those theories and added more supporting allegations. The amended complaint omitted the claim against Warburg and its acquisition subsidiaries and dropped Wilson from the list of individual defendants, because he had not voted on the Merger.
On August 29, 2013, the plaintiffs filed a second amended complaint that added claims against RBC and Moelis & Company LLC (" Moelis" ). RBC acted as Rural's lead financial advisor during the process that led to the Merger. Moelis served as Rural's secondary financial advisor in a role junior to RBC. The second amended complaint contended that RBC and Moelis aided and abetted the individual defendants in breaching their fiduciary duties. It remained the operative pleading through trial.
On October 24, 2012, the court entered a scheduling order setting trial for May 6-9, 2013. During the pre-trial proceedings, the court granted a contested motion for class certification. The class was defined as
all holders of common stock of Rural Corporation at any time from March 28, 2011 through and including June 30, 2011, whether beneficial or of record, including their legal representatives, heirs, successors in interest, transferees and assigns of such foregoing holders, excluding the Defendants, Warburg Pincus, LLC, and Coliseum Capital Management, LLC, and their associates, affiliates, legal representatives, heirs, successors in interest, transferees and assignees.
Dkt. 185, ¶ 1 (the " Class" ). The parties have stipulated that the Class comprises 21,900,133 shares.
B. The Agreements In Principle
On April 8, 2013, all of the parties filed pre-trial opening briefs, and the case appeared to be headed for trial against all of the defendants. On April 25, all of the parties other than Moelis filed pre-trial answering briefs. By letter, the plaintiffs explained that they had reached an agreement in principle with Moelis on a settlement that contemplated a payment of $5 million to the Class. The plaintiffs asked the court to sever the claims against Moelis and to excuse Moelis from attending trial. The letter proposed that if the settlement with Moelis was later terminated or not approved, then the plaintiffs and Moelis would have a separate trial on the claims against Moelis.
The plaintiffs' letter attached a term sheet reflecting the agreement in principle, which included the following points:
2. Moelis denies all allegations of wrongdoing and liability to Plaintiff and the class, and the settlement does not constitute any admission of wrongdoing or liability.
3. All claims against Moelis to be dismissed with prejudice.
4. Moelis to be given a general release on behalf of all Class members.
5. Plaintiff and the Class agree, pursuant to 10 Del. C. § 6304(b), that the damages recoverable against all the other tortfeasors will be reduced to the extent of the pro rata share of Moelis.
6. Moelis has the right (but not the obligation) to terminate the settlement if the Court does not enter a final order as part of final approval of the settlement (a) barring any claims against Moelis by any other alleged tortfeasor for contribution (whether denominated as contribution, indemnification or otherwise); and (b) expressly preserving such rights as Moelis may have to contractual indemnification from Rural. . . .
On April 26, 2013, the court held a teleconference to discuss the Moelis settlement. The other defendants explained that they had not had time to determine whether they objected to the proposal to sever the claims against Moelis and to excuse Moelis from attending trial. The other defendants wanted to consider whether to assert cross-claims against Moelis for contribution and to evaluate how issues of relative fault might be addressed. Counsel asked to have until April 29 to respond.
On April 29, 2013, the court held a follow-up teleconference. The individual defendants informed the court that they had reached an agreement in principle of their own with the plaintiffs that contemplated a payment of $6.6 million to the Class. RBC then advised the court that it would be amending its answer to add cross-claims for contribution in accordance with a stipulated procedure. RBC also requested a continuance, which the plaintiffs opposed.
The court took the question of a continuance under advisement.
On April 30, 2013, the plaintiffs provided the court with a term sheet documenting their agreement in principle with Rural and the individual defendants, referred to collectively in the term sheet as the " Rural/Metro Defendants." The term sheet included the following provisions:
2. The Rural/Metro Defendants deny all allegations of wrongdoing and liability to Plaintiff and the Class, and the settlement does not constitute any admission of wrongdoing or liability.
3. All claims against the Rural/Metro Defendants to be dismissed with prejudice.
4. The Rural/Metro Defendants to be given a general release on behalf of all Class members.
5. Plaintiff and the Class agree, pursuant to 10 Del. C. § 6304(b), that the damages recoverable against all the other tortfeasors will be reduced to the extent of the pro rata share of the Rural/Metro Defendants.
6. The Rural/Metro Defendants have the right (but not the obligation) to terminate the settlement if the Court does not enter a final order as part of final approval of the settlement barring any claims against the Rural/Metro Defendants by any other alleged tortfeasor for contribution.
Dkt. 270. As with Moelis, the plaintiffs proposed to sever the claims against the Rural/Metro Defendants for potential disposition later if the settlement was not approved. Rather than excusing the individual defendants from attending trial, the term sheet contemplated that the Rural/Metro Defendants would make DiMino and any other individual defendant that the plaintiffs might reasonably request available as witnesses.
Later in the day on April 30, 2014, the court issued a letter ruling denying RBC's request for a continuance. On May 2, the court entered an order severing and staying the claims against the Rural/Metro Defendants. The parties submitted a stipulation and proposed order severing and staying the plaintiffs' claims against Moelis. The stipulation granted RBC leave to file its cross-claims for contribution. The recitations in the stipulation included the following:
RBC contends that there was no breach of fiduciary duty or aiding and abetting such a breach and that the claims against defendants are without merit, but seeks to amend its answer to assert a cross claim solely for the purposes of determining at trial the relative degrees of fault for purposes of 10 Del. C. § 6304 in order to secure a reduction of the damages recoverable against it to the extent of the pro rata share of Moelis and/or the Rural/Metro Defendants based on relative degrees of fault (the " Cross Claim" ).
Dkt. 296. Notably, in this recitation, RBC represented that it was not contending that the individual defendants breached their fiduciary duties or that Moelis had aided and abetted any breach. The court entered the order.
As contemplated, RBC filed an amended answer that asserted cross-claims for contribution against the Rural/Metro Defendants and Moelis. Paragraph 4 of the cross-claim stated that
RBC denies all liability to Plaintiff. However, in the event any monetary liability is assessed in favor of Plaintiff for any of the claims asserted in this Action, RBC asserts a cross claim against the Rural/Metro Defendants and Moelis solely for purposes of enabling
the Court to make an appropriate determination of the relative degrees of fault as between RBC and the other defendants for the sole purpose of reducing the damages recoverable against RBC pursuant to 10 Del. C. § 6304 to the extent of the pro rata share of the other defendants based on relative degrees of fault.
Dkt. 296. Consistent with the stipulation, RBC's cross-claim did not actually allege any wrongdoing by the Rural/Metro Defendants or Moelis that could give rise to liability to the Class.
As a result of the agreements in principle, the case went to trial solely against RBC. During trial, RBC did not contend that the individual defendants breached their fiduciary duties or that Moelis aided and abetted a breach of duty. Rather, RBC proceeded at trial consistent with the position it staked out in the Pre-Trial Stipulation and Order: " RBC disputes Plaintiff's claims and contends that . . . the Rural/Metro directors did not breach their fiduciary duties in connection with the Merger." Dkt. 292 at 2. RBC did not seek to prove that any of the individual defendants or Moelis were joint tortfeasors and liable to the plaintiffs for money damages. Nor did RBC seek to establish that, under principles of relative fault, RBC's share of any potential liability should be reduced and some or all of the other defendants' shares of liability increased. In its post-trial brief, RBC argued only that if it were found liable, then it should be entitled to contribution.
C. The Settlement
On August 5, 2013, the plaintiffs, the individual defendants, and Moelis submitted a 38-page Stipulation and Agreement of Compromise and Settlement with a proposed form of order. Dkt. 323 (the " Settlement Stipulation" ). The terms of the Settlement Stipulation were conditioned on court approval.
The Settlement Stipulation memorialized the terms of the agreements in principle by granting expansive releases to Rural, the individual defendants, Moelis, and their affiliates--but excluding RBC--and foreclosing RBC's ability to seek contribution. Paragraphs 12 and 13 stated:
12. . . . It is the intention of the Settling Parties that the Settlement eliminate all further risk and liability relating to the Released Plaintiffs' Claims and the Released Settling Defendants' Claims and that the Settlement shall be a final and complete resolution of all disputes asserted or which could be or could have been asserted with respect to the Released Plaintiffs' Claims and the Released Settling Defendants' Claims, including without limitation any third party claims for contribution in accordance with 10 Del. C. § 6304 and any similar laws or statutes; provided, however, that nothing herein shall release or otherwise affect any claims for contribution or indemnity between or among Defendants and/or their insurance carriers.
13. Lead Plaintiff and the Class agree pursuant to 10 Del. C. § 6304(b) that the damages recoverable against non-settling defendant RBC and any other alleged tortfeasor will be reduced to the extent of the pro rata shares, if any, of Moelis and the Rural/Metro Defendants.
Id. at 22-23.
On November 19, 2013, the court conducted a hearing on the settlement. RBC did not object to the terms of the settlement either before or during the hearing. The court approved the settlement and
entered the proposed form of order, which contained the following provisions:
16. Any claims against Moelis (and its employees, representatives and affiliates) by any other alleged tortfeasor for contribution (whether denominated as contribution, indemnification or otherwise, but not including contractually based claims by Rural/Metro arising under the January 10, 2011 Engagement Letter, as to which the parties thereto reserve any and all rights or defenses) are hereby barred.
* * *
18. Any claims against the Rural/Metro Defendants (and Rural/Metro Corporation's employees, representatives and affiliates) by any other alleged tortfeasor for contribution (whether denominated as contribution, indemnification or otherwise, but not including contractually based claims arising under the January 10, 2011 Engagement Letter, if any, against the Rural/Metro Defendants, as to which the parties thereto reserve any and all rights or defenses) are hereby barred.
* * *
20. Pursuant to 10 Del. C. § 6304(b) the damages recoverable against non-settling defendant RBC and any other alleged tortfeasor will be reduced to the extent of the pro rata shares, if any, of Moelis and the Rural/Metro Defendants.
Dkt. 351 (the " Partial Final Judgment" ). This decision refers to the settlement among the plaintiffs, the Rural/Metro Defendants, and Moelis that was memorialized in the Settlement Stipulation and implemented through the Partial Final Judgment as the " Settlement."
D. The Liability Opinion
On December 17, 2013, the court issued the Trial Record Opinion, which rejected RBC's attempt to supplement the trial record by having the court consider a declaration from Rural's then-CFO that was filed two years after the Merger closed. On March 7, 2014, the court issued the Liability Opinion.
As to the Sale Process Claim, the Liability Opinion held that the individual defendants breached their fiduciary duties by making decisions, taking actions, and allowing steps to be taken that fell outside the range of reasonableness, which the Liability Opinion held was the applicable standard of review. The first occasion when their conduct fell outside the range of reasonableness was when the Board allowed Shackelton and RBC to initiate a sale process in December 2010, without Board authorization and contrary to the Board's instruction that the Special Committee should simply pursue " an in-depth analysis of the alternatives discussed during the [December 8, 2010] meeting." Liability Op., 88 A.3d at 91. This ruling relied in part on findings that RBC designed the sale process to run in parallel with a process being conducted by Emergency Medical Services Corporation (" EMS" )--the parent company of American Medical Response (" AMR" ) and Rural's lone national competitor in the ambulance business--and that " 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." Id .
The second occasion was when the Board approved the Merger. Id. at 94. During the final negotiations between Rural and Warburg, the Board failed to provide active and direct oversight of RBC. As a result, 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.
As to the Disclosure Claim, the Liability Opinion held that the individual defendants breached their fiduciary duties by providing materially misleading information in the Proxy Statement. The plaintiffs proved at trial that " [i]nformation that RBC provided to the Board in connection with its precedent transaction analyses was false, and that false information was repeated in the Proxy Statement." Id. at 104.
RBC told the directors that it used " Wall Street research analyst consensus projections" to derive Rural's EBITDA for 2010. The " consensus projections" were neither analyst projections, nor did they represent a Wall Street consensus. The figures were actually Rural's reported results, not projections, and RBC used the reported figures without adjusting for one-time expenses, which was contrary to the Wall Street consensus. The resulting figure that RBC used in the precedent transaction analysis was $69.8 million. The Proxy Statement elsewhere identified Rural's Adjusted EBITDA for 2010 as $76.8 million, which adjusted for one-time expenses, and identified Rural's Pro Forma Adjusted EBITDA as $83.7 million. The Proxy Statement also noted RBC adjusted the guideline target companies' EBITDA in its precedent transaction analysis " to account for ... certain one-time expenses."
Id. at 104-05 (internal citations omitted).
The plaintiffs also proved at trial that information RBC provided about its conflicts of interest was false:
The Proxy Statement stated that RBC received the right to offer staple financing because it " could provide a source for financing on terms that might not otherwise be available to potential buyers of the Company...." This statement was false. The Board never concluded that RBC could provide financing that might otherwise not be available, and no evidence to that effect was introduced at trial. In December 2010, RBC told the Special Committee that the credit markets were open and receptive to acquisition financing, and they remained so for the duration of the sale process.
Id. at 106 (internal citations omitted). This statement also constituted a partial disclosure which " imposed on the Rural directors a duty to speak completely on the subject of RBC's financing efforts." Id. The Proxy Statement did not describe how RBC used the initiation of the Rural sale process to seek a role in the EMS acquisition financing, did not disclose RBC's receipt of more than $10 million for its part in financing the acquisition of EMS, and said nothing about RBC's lobbying of Warburg after the delivery of Warburg's fully financed bid while RBC was developing its fairness opinion. Id.
For purposes of the plaintiffs' claim against RBC for aiding and abetting a breach of duty, the Liability Opinion only needed to determine that the directors' conduct fell outside the range of reasonableness. The plaintiffs did not ask the court to go further and categorize the defendant directors' breaches as either breaches of the duty of loyalty or the duty of care. Nor did the plaintiffs address or
attempt to overcome the defendant directors' potential entitlement to exculpation under Section 102(b)(7) of the Delaware General Corporation Law (the " DGCL" ). 8 Del. C. § 102(b)(7). Because the plaintiffs were not seeking to impose liability on the defendant directors, they did not ask the court to rule on the availability of exculpation. RBC did not either. The Liability Opinion observed that " [t]he plaintiffs did not press a loyalty claim in their post-trial briefing, and when advancing its contribution claim, RBC did not argue for director-by-director determinations of culpability." 88 A.3d at 89. The Liability Opinion did not determine, for purposes of either the Sale Process Claim or the Disclosure Claim, that any of the directors breached the duty of loyalty or failed to act in good faith. The Liability Opinion commented that Shackelton, Davis, and DiMino each faced personal circumstances that inclined them towards a near-term sale of Rural, but the Liability Opinion only described those interests without making any findings. Id. at 64-65.
The Liability Opinion did not make any findings regarding whether Moelis knowingly participated in a breach of fiduciary duty. RBC did not argue that Moelis aided and abetted a breach of duty and that, but for the Settlement, Moelis would have been a joint tortfeasor and liable to the plaintiffs for money damages. Moelis was not identically situated to RBC. Moelis acted in a secondary role; RBC had the primary role. Like RBC, Moelis had a contingent fee arrangement in which it would only be paid if Rural was sold, but, unlike RBC, Moelis never sought buy-side financing work, nor did it seek to use its position as an advisor to Rural to obtain a role in financing the sale of another company. Like RBC, Moelis did modify its valuation materials in debatable ways that had the effect of lowering the range of fairness and making the Merger price look ...