Delaware Supreme Court Affirms Financial Advisor Liability for Aiding and Abetting
By Whitney Smith and Elise Gabriel
The Delaware Supreme Court affirmed RBC Capital Markets, LLC’s (“RBC”) liability for aiding and abetting a board’s fiduciary breaches based on RBC’s undisclosed conflicts of interest and its deliberately misleading the board during the company’s sales process. The Court also upheld the Chancery Court’s finding that RBC bore 83% responsibility for the shareholders’ damages, resulting in a $75 million award against RBC, plus pre- and post-judgment interest.
In RBC Capital Markets, LLC, the Delaware Supreme Court affirmed the Chancery Court’s holding that RBC was liable for aiding and abetting breaches of fiduciary duty by the board of Rural/Metro Corporation (“Rural”) in connection with the sale of Rural to private equity firm Warburg Pincus LLC (“Warburg”). The Rural board’s underlying breaches of fiduciary duties were its failure to be actively and reasonably informed when overseeing the sales process and to be adequately informed about Rural’s value, and also its breach of the duty of disclosure for including RBC’s flawed valuation analysis as well as false and misleading information about RBC’s conflicts of interest in the company’s proxy statement. RBC, in turn, knowingly induced the breaches by exploiting its own conflicted interests to the detriment of Rural and by creating an “information vacuum” for the Rural board in order to push the sale forward.
After rumors surfaced that Rural’s primary competitor, Emergency Medical Services Corporation (“EMS”), was engaged in a sales process, the Rural board reactivated a Special Committee charged with evaluating strategic alternatives for the company, which included remaining independent. Seeing an opportunity to lead Rural in a sale process and to use its position as sell-side advisor to secure buy-side roles with private equity firms bidding for EMS, RBC sought the sell-side engagement and was ultimately hired. RBC immediately began leading the Special Committee through a sale process (not yet authorized by the board) and developed a two-track bidding process to coincide with the EMS process. The Chancery Court found that this process deterred bidders involved in the EMS process from participating in the Rural process, and thereby prevented a competitive bidding process for Rural, because confidentiality obligations with respect to competitive information about Rural and EMS would require bidders to devote separate deal teams to each transaction. Warburg – not involved in the EMS process – emerged as the leading bidder, and RBC pressed its bid on the Special Committee, in spite of evidence that Rural had more value as a going concern.
Unbeknownst to Rural, RBC was simultaneously working behind the scenes throughout the sale process to provide staple financing to Warburg. Indeed, the Rural board was largely uninformed throughout – it did not meet to discuss the potential sale until March 15, 2011 (at which point it retroactively ratified the sale process) and did not receive a valuation analysis from RBC until shortly before it met to approve the sale to Warburg. Evidence later revealed that RBC hid its courting of Warburg from Rural and manipulated its fairness opinion to make Warburg’s bid appear more attractive. The proxy statement, relied upon by shareholders to approve the sale, incorporated some of this misleading information and failed to disclose RBC’s dealings with Warburg. Subsequent to the sale, Rural shareholders brought claims against RBC for aiding and abetting the Rural board’s breaches of fiduciary duty and duty to disclose (Rural also settled claims against the board and another financial advisor before trial). Based on the facts above, the Chancery Court found RBC liable for aiding and abetting and determined that the quasi-appraisal value for Rural at the time of the sale was $21.42, amounting to $91,323,554.61 in damages to shareholders. The Chancery Court attributed 83%, or $75,798,550.33, of those damages to RBC, plus pre- and post-judgment interest.
On appeal, the Delaware Supreme Court affirmed RBC’s liability and placed particular emphasis on RBC’s manipulation of the board in favor of its own conflicting interests. As an initial matter, the Court agreed that the Rural board had breached its Revlon duties to take reasonable steps to maximize shareholder value by allowing RBC to pursue the faulty dual-track bidding process, by failing to become informed about RBC’s conflicts of interest, and by failing to become well-informed as to Rural’s value. Likewise, the Court confirmed that the proxy statement failed to disclose RBC’s true incentives and contained false and misleading information related to RBC’s valuation analysis, and therefore violated the board’s duty of disclosure. The Court then affirmed that RBC had knowingly induced these breaches by, among other things, (i) failing to disclose to Rural its interests in the EMS transaction; (ii) keeping the Special Committee and Rural board uninformed about Rural’s value; (iii) disguising its behind-the-scenes attempts to provide buy-side financing to Warburg; and (iv) manipulating its financial analysis to support Warburg’s bid.
In finding RBC liable, the Delaware Supreme Court reiterated the “manifest intentionality of RBC’s conduct” which it agreed proximately caused the shareholders’ damages. Importantly, it emphasized that RBC’s liability was based on its knowing misconduct and that the Court’s opinion should not be read expansively to impose aiding and abetting liability on financial advisors who fail to prevent a board’s breach of duty. The Court also found that the Chancery Court had properly calculated damages and apportioned fault under the Delaware Uniform Contribution Among Tortfeasors Act.