RBC Capital Markets, LLC v. Jervis , 129 A.3d 816 ( 2015 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
§
§
RBC CAPITAL MARKETS, LLC, § No. 140, 2015
§
Defendant Below, §
Appellant/Cross-Appellee, § Court Below:
§
v. § Court of Chancery of the
§ State of Delaware
JOANNA JERVIS, §
§ C.A. No. 6350-VCL
Plaintiff Below, §
Appellee/Cross-Appellant. §
§
§
Submitted: September 30, 2015
Decided: November 30, 2015
Before HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices; and JOHNSTON,
Judge, constituting the Court en Banc.
Upon appeal from the Court of Chancery. AFFIRMED.
Myron T. Steele, Esquire, and T. Brad Davey, Esquire, Potter Anderson & Corroon LLP,
Wilmington, Delaware; Of Counsel: Alan J. Stone, Esquire (Argued), Daniel M. Perry,
Esquire, Benjamin E. Sedrish, Esquire, Milbank, Tweed, Hadley & McCloy LLP, New
York, New York, for Appellant/Cross-Appellee RBC Capital Markets, LLC.
Joel Friedlander, Esquire (Argued), and Jeffrey M. Gorris, Esquire, Friedlander & Gorris,
P.A., Wilmington, Delaware; Of Counsel: Randall J. Baron, Esquire, and David Knotts,
Esquire, Robbins Geller Rudman & Dowd LLP, San Diego, California, for
Appellee/Cross-Appellant Joanna Jervis.
Jack B. Jacobs, Esquire, Sidley Austin LLP, Wilmington, Delaware; Of Counsel: A.
Robert Pietrzak, Esquire, Andrew W. Stern, Esquire, Daniel A. McLaughlin, Esquire, and
Cameron Moxley, Esquire, Sidley Austin LLP, New York, New York; John K. Hughes,
Esquire, Sidley Austin LLP, Washington, D.C., Amicus Curiae for Securities Industry
and Financial Markets Association.

Sitting by designation pursuant to Del. Const. art. IV, § 12.
Raymond J. DiCamillo, Esquire, Richards, Layton & Finger, P.A., Wilmington,
Delaware; Of Counsel: Mark A. Kirsch, Esquire, Jonathan C. Dickey, Esquire, Gabrielle
Levin, Esquire, and Jonathan D. Fortney, Esquire, Gibson, Dunn & Crutcher LLP, New
York, New York; John F. Olson, Esquire, Gibson, Dunn & Crutcher LLP, Washington,
D.C., Amicus Curiae for National Association of Corporate Directors.
VALIHURA, Justice:
I. INTRODUCTION
Pending before this Court is an appeal and cross-appeal arising out of a final
judgment of the Court of Chancery finding that RBC Capital Markets, LLC (“RBC” or
“Appellant”) aided and abetted breaches of fiduciary duty by former directors of
Rural/Metro Corporation (“Rural” or the “Company”) in connection with the sale of the
Company to an affiliate of Warburg Pincus LLC (“Warburg”), a private equity firm. The
Court of Chancery issued four opinions which form the basis of this appeal.
First, on March 7, 2014, the Court of Chancery issued a post-trial decision and
held RBC liable to a class of Rural stockholders (the “Class”) for aiding and abetting
breaches of fiduciary duty by Rural’s board of directors (the “Liability Opinion” or
“Rural I”).1
Second, on October 10, 2014, the Court of Chancery issued a decision setting the
amount of RBC’s liability at $75,798,550.33, constituting 83% of the $91,323,554.61 in
total damages that the Class suffered, which represented the difference between the value
the Company’s stockholders received in the merger and Rural’s going concern value
(“Rural II”).2 The trial court awarded pre- and post-judgment interest at the legal rate
from June 30, 2011 until the date of payment.
Third, on December 17, 2013, after Rural filed a suggestion of bankruptcy, the
Court of Chancery granted Joanna Jervis’s (“Jervis” or “Lead Plaintiff”) motion to bar
1
In re Rural Metro Corp. S’holders Litig., 88 A.3d 54 (Del. Ch. 2014) [hereinafter, “Rural I, 88
A.3d at __”].
2
In re Rural/Metro Corp. S’holders Litig., 102 A.3d 205 (Del. Ch. 2014) [hereinafter, “Rural II,
102 A.3d at __”].
1
consideration of a declaration from Stephen Farber, who joined the Company as its Chief
Financial Officer on June 25, 2013, two years after the transaction, in which he presented
reasons for the entity’s subsequent financial turmoil (the “Farber Declaration”).
Finally, Lead Plaintiff filed a fee application with the Court of Chancery, seeking
to shift attorneys’ fees for RBC’s alleged misrepresentations in its pre-trial filings. The
Court of Chancery, on February 12, 2015, denied the application. On February 19, 2015,
the Court of Chancery entered its Final Order and Judgment.
RBC raises six issues on appeal, namely, (1) whether the trial court erred by
holding that the board of directors breached its duty of care under the enhanced scrutiny
standard enunciated in Revlon; (2) whether the trial court erred by holding that the board
of directors violated its fiduciary duty of disclosure by making material misstatements
and omissions in Rural’s proxy statement, dated May 26, 2011; (3) whether the trial court
erred by finding that RBC aided and abetted breaches of fiduciary duty by the board of
directors; (4) whether the trial court erred by finding that the board of directors’ conduct
proximately caused damages; (5) whether the trial court erred in applying the Delaware
Uniform Contribution Among Tortfeasors Act (“DUCATA”); and (6) whether the trial
court erred in calculating damages.3
On her cross-appeal, Jervis argues that the Court of Chancery erred in holding that
fee shifting requires a finding of “glaring egregiousness.”
3
The Securities Industry and Financial Markets Association (“SIFMA”) and National
Association of Corporate Directors (“NACD”) filed amici curiae briefs in support of reversal.
2
In this decision, we AFFIRM the principal legal holdings of the Court of
Chancery.
II. FACTS
As a preliminary observation, we note that, at oral argument before this Court,
counsel for RBC emphasized that RBC “intentionally made appellate arguments that do
not require this Court to review findings of fact.” Although RBC has chosen to avoid any
direct and specific challenge to the facts as found by the trial court, this Court,
nevertheless, has examined the appellate record in its entirety.
A. The Key Players
Rural 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’s shares traded on NASDAQ from July 1993 until the merger closed on June 30,
2011. Upon closing, each publicly held share of Rural common stock was converted into
the right to receive $17.25 in cash.
Before the merger, the board of directors had seven members: Christopher S.
Shackelton, Eugene I. Davis, Earl P. Holland, Henry G. Walker, Robert E. Wilson,
Conrad A. Conrad, and Michael P. DiMino (the “Board”). Of the Board’s seven
members, the trial court, in Rural I, determined that Wilson, Davis, Holland, Conrad,
3
Walker, and Shackelton were “facially, independent, disinterested, outside directors.”
DiMino was Rural’s President and CEO. Wilson did not vote on the merger.
Shackelton, Davis, and Walker comprised the special committee (the “Special
Committee” or “Committee”). Shackelton was its Chair. The trial court found that
Shackelton played the most significant role, and that Davis and Walker generally
deferred to Shackelton.
On April 8, 2013, all parties filed pre-trial opening briefs and all defendants were
headed for trial. On April 25, 2013, plaintiffs advised the Court of Chancery of an
agreement in principle to settle with Moelis for a payment of $5 million to the Class. On
April 29, 2013, the individual defendants advised the Court of Chancery that they had
also reached an agreement in principle to settle for a contemplated payment of $6.6
million to the Class. Thus, the case proceeded to trial solely against RBC.
B. 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 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 Organic Growth. We believe our proven track
record of high-quality patient care, meeting and exceeding contract
4
expectations and progressive public/private partnering arrangements aimed
at assisting communities to achieve their cost structure goals, creates
opportunities for us to increase revenue by winning competitive bids for
emergency ambulance services. Additionally, we will increase non-
emergency ambulance service revenue within existing and contiguous
service areas by leveraging our community name recognition and record of
service excellence to gain preferred provider status with local hospital
systems, nursing homes and other healthcare facilities.
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.
The trial court concluded that “[t]he evidence at trial demonstrated that Rural’s
growth strategy was reasonable and achievable.”4 However, at trial, DiMino also
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 payments for
the Company’s services. The Company’s public filings detailed these risks.
RBC was hired by the Special Committee as Rural’s primary financial advisor in
connection with the Company’s decision to explore strategic alternatives in late 2010.
Anthony Munoz, a Managing Director at RBC, was Rural’s lead banker. Marc Daniel,
RBC’s lead M & A banker, participated in the Rural sale process alongside Munoz.
Moelis & Company LLC (“Moelis”) was brought on as Rural’s secondary financial
advisor. Richard D. Harding, a Managing Director, was Rural’s contact at Moelis.
4
Rural I, 88 A.3d at 107.
5
Before being engaged by the Company, RBC had, according to the Board minutes,
a “significant (and satisfactory) track record with the Company in relation to debt
financing transactions and other advisory matters.” In addition to maintaining a
relationship with Rural, RBC also had an “active dialogue” with Warburg, the
Company’s eventual acquirer, which extended beyond Warburg’s participation in the
Rural sale process. Sean Carney, a partner at Warburg, was the point person for
Warburg’s Rural acquisition team.
The Special Committee was first formed in August 2010, after RBC advanced the
idea of Rural acquiring American Medical Response, Inc. (“AMR”), its primary national
competitor in the ambulance business. AMR was a subsidiary of Emergency Medical
Services Corporation (“EMS”). As a response to RBC’s approach, the Board formed the
Special Committee with the authority to oversee the process of formulating Rural’s
acquisition strategy concerning AMR.
In October of 2010, the Board re-formed the Special Committee to respond to an
approach by Irving Place Capital and Macquarie Capital (jointly, the “Consortium”),
which, together, expressed a preliminary interest in acquiring the Company. The Board
regarded the Consortium’s expressed interest in acquiring Rural for $10.50 to $11.50 per
share as being too low to justify engagement. Shackelton intimated that the price offered
by the private equity firms “was plainly insufficient in relation to the Company’s stand-
alone prospects.” Nonetheless, later that month, on October 27, 2010, the Board charged
the Special Committee with the “authority to oversee the process of reviewing the
Company’s alternatives, making recommendations to the Board, determining a course of
6
action and, if it deems appropriate, negotiations and related interactions with the
[C]onsortium . . . .”5 The two private equity firms suggested that they would be willing
to raise their interest level to $15.00 per share, but discussions with the Consortium
concluded when Irving Place Capital withdrew after Rural affirmed that it was not for
sale at the revised price point.
During the liability phase of the proceedings, the plaintiffs did not contend that
any director breached his duty of loyalty, but they did argue, and the trial court found,
that Shackelton, Davis, and DiMino each had personal circumstances that inclined them
towards a near-term sale.6 For example, Davis, in the Fall of 2010, served on a dozen
public company boards, which brought him into conflict with an Institutional Shareholder
Services Inc. (“ISS”) policy against “over-boarded” directors.7 As President and CEO of
PIRINATE Consulting Group LLC, Davis often joined boards as a hedge fund nominee
or as an outside director acceptable to stockholder activists. Beginning in 2004, Davis
served as chairman of the board for Atlas Air Worldwide Holdings (“Atlas Air”). He was
particularly concerned about avoiding a recommendation against his re-election at Atlas
Air. At his deposition, Davis testified that ISS had “uniformly recommended against
[him]” due to the fact that he routinely sat on the boards of more than six public
5
According to the minutes, “[t]he committee was instructed to update the Board regarding its
activities on a regular basis, and to return to the Board to provide its recommendations and/or to
obtain further instructions and authority when the need therefor is apparent.”
6
In Rural II, the trial court determined that Shackelton and DiMino’s unique reasons to favor a
near-term transaction presented a conflict, and that, but for the settlement, they would have
shared a common liability with RBC to the Class.
7
Davis testified that “[o]ne of ISS’s rules is they will not support a candidate for a board who
sits on the boards of more than six public companies.”
7
companies. Through counsel for Atlas Air, Davis met with ISS and agreed with them on
a process where over time he would reduce his number of board positions to six and,
pending the completion of that process, ISS would continue to give him a positive
recommendation.8 Davis and ISS set a deadline date of April 2011 for the completion of
the director’s board seat reduction process. Davis testified that “Rural/Metro had already
decided to put itself up for sale, so I put Rural/Metro on the list of companies I was going
to leave.”9
Like Davis, Shackelton had personal reasons for pushing a near-term sale.
Shackelton was a managing partner of Coliseum Capital Management, LLC
(“Coliseum”), a hedge fund he co-founded in 2006. Coliseum generates returns by taking
concentrated positions in small capitalization companies, obtaining influence, and then
facilitating an exit within approximately three to five years. Over the course of 2007,
Coliseum began acquiring shares of Rural. At trial, Shackelton suggested that, in so
doing, the fund managers believed they were investing in an undervalued company and
over the course of a longer-term horizon they would be able to recognize that value. By
October of 2010, Coliseum had amassed an equity stake in Rural of approximately 12%,
at a cost basis of “substantially less than $10 a share.” By early 2011, Coliseum’s
position in the Company’s securities equated to more than 20% of the investment firm’s
8
The Court of Chancery further found that “[a] sale of Rural would reduce [Davis’s] number of
board seats, while letting him exit on a professional high note.” Rural I, 88 A.3d at 65. The trial
court observed that a Rural business combination before his directorship deadline would enable
Davis to realize $200,000 in the Company’s equity, which would vest upon a change of control
and which he would otherwise have to leave on the table if Rural did not change hands prior to
April 2011. Id.9
B615.
8
portfolio. The Court of Chancery, therefore, concluded that Shackelton saw an M & A
event as the next logical step for Coliseum’s involvement with Rural.
DiMino was appointed Rural’s President and CEO effective June 2010. He also
assumed a seat on Rural’s Board. DiMino, upon arrival at Rural, formulated a three part
strategy to grow the Company: (i) acquire local and regional providers in the highly
fragmented ambulance transport industry, (ii) enter new markets by securing contracts
with hospitals for non-emergency, general transportation services, and (iii) secure new
government contracts through the request-for-proposal process. The trial court
determined that Shackelton’s interest in an M & A event was also a reaction to DiMino’s
business plan, and that DiMino’s growth plan conflicted with Coliseum’s investment
strategy.
Moreover, the trial court concluded that DiMino was a late convert to the idea of a
sale. During most of 2010, he favored keeping Rural independent, but changed his mind
after his six month performance review, when he received negative feedback from
Shackelton and Davis due to his response to the Company’s exploratory discussions with
private equity firms. In a November 1, 2010 email to Conrad and Walker, DiMino stated
that his desire was to “wait to sell th[e] business until after” it had realized on certain of
its growth initiatives.10 He continued by noting that he had spoken with RBC and
Shackelton, who told him that “now is the time to sell.” Shackelton also told DiMino that
“[h]e want[ed] to do this in the next 3 to 6 months and have [DiMino] prepare the
10
B21. To that end, an internal RBC memorandum posited: “Under new leadership, the
Company will also pursue tuck-in acquisitions that are both strategic and accretive to EBITDA.”
B269.
9
business for this process.” DiMino told Walker and Conrad: “Obviously this changes
my direction and perspective. Instead of running the business for the mid to long term[,]”
DiMino would have to “make decisions for the [] short term.” DiMino also stated in the
November 1, 2010 email that, in his opinion, he “would wait to sell th[e] business . . .
[until s]ometime after June of next year.” He concluded by suggesting that he had “a lot
already invested personally” at Rural. Analysts, such as J.P. Morgan, recognized that
there was “[p]otential for meaningful . . . stock price appreciation . . . as [the] growth plan
is executed on/realized.”
In notes to himself, dated December, 1, 2010, Shackelton documented feedback
from Macquarie Capital that suggested that DiMino was “an impediment to a sale.”
Shackelton wrote that he “[b]elieve[d that DiMino] was looking for buyers that would be
more favorable to him,” and that there was a “[u]niversal recognition [at Rural] that
[DiMino didn’t] want to sell the [C]ompany for personal reasons.” In fact, because he
surmised that DiMino did not stand “to gain from the transaction” with the Consortium,
Shackelton determined that DiMino “introduced enough concerns regarding the risks of
buying the business to scare off buyers[.]”
DiMino’s perspective changed following his performance review. Davis and
Shackelton’s collective input was particularly negative. The trial court found that, from
that point on, DiMino supported a sale and deferred to Shackelton.
Davis reasoned that DiMino shifted from being “unalterably opposed” to a sale to
being a willing participant, due to the fact that the pool of potential acquirers was flooded
with financial buyers. In deposition testimony, Davis stated:
10
[T]he light bulb finally went over his head that they’d probably ask him to
run it, and given the way that his relationship with the Board -- our Board
had deteriorated, I think at some point, he came to the conclusion he would
be better off with a different Board, and a new owner would bring a
different Board, on top of which he was going to prematurely cash out on
the equity that he had received less than a year earlier. And probably if he
was given the job back, would get more equity. It was a very good deal for
him. He finally figured it out.
RBC fails to mount any serious challenge to the trial court’s factual findings with
respect to the personal interests of Shackelton, Davis, and DiMino as being clearly
erroneous, and our independent review of the record confirms that such findings are
supported by the evidence.
C. The Special Committee and Engagement of RBC
In early December 2010, EMS was rumored to be in play. The trial court found
that Munoz and his RBC colleagues realized that a private equity firm that acquired EMS
might decide to buy Rural rather than sell AMR. It found that RBC recognized that if
Rural engaged in a sale process led by RBC, then RBC could use its position as sell-side
advisor to secure buy-side roles with the private equity firms bidding for EMS. Further,
the trial court concluded that RBC believed that with the Rural angle, it could get on all
of the EMS bidders’ financing trees. The record evidence supports these findings. In a
December 18, 2010 email, Moti Rubin urged his RBC colleagues to get “up to speed with
all of ems (amr and emcare) as who knows what we end up financing[.]” He wrote:
As you know we are working all angles re EMS. Rural is an important
angle and most sponsors want to use that angle in some way – either
splitting up EMS and having [Rural] buy AMR . . . or [the] sponsor buying
the [sic] ems and [Rural] and combining the 2, or other combos. Clearly
this is the most important fee event opportunity we have in healthcare and
[there is a] reasonable probability this will happen in some shape or form.
11
we are not treeing up yet but I want to make sure that we are getting ready
to move swiftly on this.
Four days later, Rubin told Munoz that RBC “should be able to get on all [EMS bidder
financing] trees given the [Rural] angle.”11
The Rural Board met on December 8, 2010. The trial court found that the Board
re-activated the Special Committee as a response to the meeting, but, in so doing, it did
not authorize the Special Committee to pursue a sale. The evidence reflects that, at the
meeting, Shackelton discussed the Company’s long-term strategic choices and outlined
three alternatives: “(1) continue to pursue the Company’s current standalone business
plan (including taking advantage of opportunities to purchase smaller competitors); (2)
pursue a sale of the Company; or (3) pursue a transaction that would seek to take
advantage of the synergies available via some form of business combination transaction
involving the Company and its principal competitor.” Shackelton, at the time, suggested
that he had not “formulated a preference among the three” strategic alternatives. When
Shackelton’s presentation concluded, the Board unanimously agreed that the Company
should promptly proceed to engage an appropriate strategic advisory team and pursue an
in-depth analysis of the alternatives discussed during the meeting.
Also at the December 8 meeting, the Board “unanimously agreed that the scope of
authority for the [S]pecial [C]ommittee created at the Board’s meeting of October 27,
2010 would be revised to include this project, and authorized and directed the
[C]ommittee to proceed to interview advisers.” Shackelton maintained his position as
11
In a December 8, 2010 email to Munoz, Shackelton wrote: “At the right price, we can be part
of the ‘angle[.]’”
12
Chair of the Special Committee. At the same meeting, Shackelton took over as Chairman
of the Board from Conrad.
The trial court found that Shackelton told RBC that he was open to reaching out to
private equity firms about partnering on an acquisition of EMS. Also, on December 13,
Shackelton advised his fellow directors that he was setting up a meeting to interview
potential financial advisors.
On December 14, EMS publicly announced that it was exploring strategic
alternatives. Its stock price spiked 19%. Rural’s stock also traded up. Shackelton, on
December 20, emailed the Board with an update: “The EMS process is moving more
quickly than we’d anticipated. Over the past 5 days, we have been contacted by nine
private equity firms that are either interested in partnering to buy EMS or turning the
tables and acquiring [Rural].” Shackelton suggested that he was “increasingly focused on
engaging an advisor.” To expedite the hiring process, Shackelton arranged for a call with
the other members of the Special Committee, reasoning: “Since the purpose of this call
will not be to evaluate and select a strategic direction, I do not believe we need the entire
board to block off four hours for the banker presentations. Our only objective will be to
select an advisor.”
On December 23, 2010, the Special Committee interviewed Houlihan Lokey,
Moelis, and RBC. The trial court found that, unlike the other firms, RBC devoted the
bulk of its presentation to a sale and recommended coordinating the effort with the EMS
process. RBC stated that it “recognize[d] that selling the Company today is opportunistic
and that the optimal time to sell is when the interests of the seller and external market
13
factors are aligned to best maximize value. We believe that time is now[.]” RBC favored
an immediate sale because the M & A environment for healthcare was “strong,” Rural
possessed “compelling assets” that would sell at premiums, and such quality assets were
otherwise not readily available to interested buyers that played in the healthcare market.
The trial court found, and the evidence indicates, that RBC only identified financial
sponsors as potential bidders and suggested that an advantage of selling Rural at that
period in time was that the “[d]ebt markets remain[ed] open.”
By contrast, the trial court found that Moelis approached the engagement from a
different standpoint. Moelis’s presentation stressed its growing M & A franchise and the
bulk of its presentation examined a potential combination with AMR. Moelis placed less
emphasis on a sale, and noted that it would not seek to finance any of the bidders.
RBC hoped to offer staple financing to the potential buyers. The minutes of
December 23 meeting reflect that the Special Committee considered the “‘pros and cons’
of retaining an investment banker as a financial advisor if that advisor would also seek to
provide so-called ‘staple financing.’” The Committee’s legal counsel advised that, “if the
Committee were to select RBC, the Committee would need to be especially active and
vigilant in assuring the integrity of the progress [sic], and that it should consider
appointing a second firm which would not be in a position to provide staple financing,
but that would be very close to the process to assure both the fact and appearance of an
appropriate and robust auction process.”
The trial court found that RBC did not disclose that it planned to use its
engagement as Rural’s advisor to capture financing work from the bidders for EMS, and
14
the minutes do not reflect such a disclosure. Munoz’s trial testimony supports this
finding:
Q. . . . Now, when going through these -- these reasons about why to
initiate a sale process, did you say that RBC would use the initiation of a
Rural/Metro sale process to help RBC get a role financing EMS?
A. In our materials we included a discussion about, one, the financing
of potential [sic] sale of Rural; and, two, then we also discussed the
possibility of financing both the merger of both companies.
Q. But did you advise the special committee, in writing or orally, that
RBC would be using the initiation of a Rural/Metro sale process to help
RBC get a role financing EMS?
A. No.
Q. At any time did you say to anybody at Rural/Metro that RBC was
using its relationship with Rural/Metro as an angle to get a role financing
the EMS transaction?
A. We told both the management team and Mr. Shackelton that we
were working with select parties on the potential financing of EMS.
Q. Did you say that RBC was using its relationship with Rural/Metro as
an angle to get a role financing the EMS acquisition?
A. No.
On December 26, 2010, Shackelton sent an email update to the Board, noting that
“the Special Committee selected RBC (as primary) and Moelis (as secondary)
[advisors].” The trial court found that the Board only authorized the Special Committee
to retain an advisor to analyze the range of strategic alternatives available and to make a
recommendation to the Board. The email from Shackelton to the Board states:
“Partner/sale process: We are continuing to refine a target list of PE firms (10-15). We
have reached out informally to almost all of them over the past two weeks. Given that
15
most of the firms are currently working through the EMS sale process, it is not yet clear
where their individual preferences will end up.”12
D. The Rural Auction Process
The trial court found that the decision to initiate a sale process in December 2010
was unreasonable at the outset because the Board did not make the decision to launch a
sale process, nor did it authorize the Special Committee to start one. The trial court
further concluded that the initiation of the sale process in December 2010 was
unreasonable 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.
It found that RBC designed a process that favored its own interest in gaining financing
work from bidders for EMS. RBC’s sale process design, as the trial court observed,
prioritized the EMS participants so they would include RBC in their financing trees.
RBC did not disclose the disadvantages of its proposed schedule. The trial court also
12
A543. The email continues:
At this stage, we have prioritized two firms that appear to have the highest level
of interest in Rural and the financial capacity to execute a transaction:
- Apax: As of today, we have a NDA in place and this evening we connected for
our first management introduction call
- KKR: We are expected to have a NDA in place by tomorrow morning. We are
planning to have a management introduction call tomorrow
*Assuming these firms move forward, we will be sharing our projections with
them over the coming week
Looking forward to the week of January 3rd, we are considering the benefits of
more formally reaching out to 6-12 other PE in order to gauge their level of
interest in Rural (either as a partner in an AMR acquisition or an acquisition
target). With this in mind, we will be working with RBC/Moelis over the next
week to refine our financial model and presentation materials.
16
found that the Board failed to oversee the Special Committee, failed to become informed
about strategic alternatives and about potential conflicts of interests faced by the advisors,
and approved the merger without adequate information, including the value of not
engaging in any transaction.13
The evidence supports these findings and reflects that RBC viewed Rural as an
“angle” to obtain EMS work. RBC scheduled first round bids for late January 2011
because that tracked with the EMS process and Rural’s ability “to act as an ‘angle.’”
RBC hoped to generate up to $60.1 million in fees from the Rural and EMS deals. The
maximum financing fees of $55 million were more than ten times the advisory fee.
The record also indicates that there were identifiable benefits to initiating a sale
process in December 2010, as the trial court noted. By January 2011, Rural’s stock price
was up 143% since 2010 and trading at a 5-year high, the EBITDA multiples in the
emergency medical transport sector had expanded, financial sponsors were interested in
participating in the space, and the leverage finance markets were supporting equity
valuations in the industry.
Despite the potential advantages of running the sale process in early 2011, the trial
court found that Rural encountered readily foreseeable problems associated with trying to
induce financial buyers to engage in two parallel processes for targets that were direct
competitors. The challenges regarding protection of Rural’s confidential information and
coordinating schedules with EMS bidders were raised for the first time on February 6,
2011, at a meeting of the Special Committee. The trial court found that the Special
13
We similarly refer to claims involving the sale process as the “Sale Process Claim.”
17
Committee had not previously considered this complication. With respect to the issues
concerning the terms of standard confidentiality agreements, the Court of Chancery asked
Munoz at trial:
Q: . . . It seems to me that this type of information sharing issue, which
comes up whenever you do a process that involves potential competitors,
would have been something that you all would have anticipated when you
originally contemplated the spin/merge process when you were
recommending the two-track structure. Was it?
A: Yes.14
RBC was aware that the Rural confidentiality agreement contained a no-conflict
provision that prohibited recipients of Rural’s confidential information from sharing it
with individuals involved in the EMS process.15 The no-conflict provision provided:
“natural persons participating in the discussions with the recipient in connection with the
potential negotiated transaction have not been, are not, and will not be participating in a
potential financing of an acquisition or other similar transaction involving EMS or
AMR.”16 The confidentiality agreement then required the recipient to confirm in writing
that the no-conflict provision was satisfied.
14
A2145.
15
At trial, Munoz testified as follows:
Q. Now, moving back a couple months to January, for purposes of getting bidders to
accept staple financing from RBC, you suggested to the financial -- your financial
sponsor colleague, banker colleague, to remind their financial sponsors that the
confidentiality agreements they signed forbid them from sharing Rural/Metro
confidential information to [sic] other financing sources; right?
A. That is correct, yes.
A2097.
16
A2097-98.
18
RBC developed a two-track bidding process, with the first classification of buyers
constituted primarily of those participating in the EMS process and the second grouping
generally composed of “those that have dropped out of the EMS process and/or [those
that] have/should have interest in [Rural] as a standalone deal . . . .”17 During December
2010 and January 2011, with the Special Committee’s approval, RBC and Moelis
contacted 28 potentially interested parties. In late January 2011, RBC distributed a bid
instruction letter to the twenty-one private equity firms that signed confidentiality
agreements. The full Board had not met since December 8, 2010. The Special
Committee had not met since December 23. Six parties submitted indications of interest,
ranging between $14.50 and $19.00 per share. RBC and Moelis apprised the Special
Committee of the reasons parties dropped out of the auction process, including two who
could not justify a price above the stock’s trading value. Later, Munoz contacted
Shackelton, informing him as follows: “Fyi – Thoma Bravo out. Said they can’t get to
current stock price.”
In late December 2010 and early January 2011, participants in the process
provided negative feedback about its timing and design. As the auction developed,
Moelis’s concerns regarding transaction complexity were realized; Harding, the Rural
point person for Moelis, commented that a potential bidder for Rural, KKR, suggested it
“would be tough” to participate in “simultanous [sic] auctions.”18 Moreover, KKR told
Rural’s bankers that it “would be ideal” if the EMS deal and the Company’s deal were
17
A544.
18
B136.
19
“stagger[ed].” After speaking with Bain Capital Partners, LLC (“Bain”), Harding shared
with Shackelton and RBC that the private equity firm also thought that “lining up two
deals for public companies simultaneously is tough but staggered, even fairly closely,
could work[.]” Clayton, Dubilier & Rice (“CD & R”), a private equity firm, also urged
delaying the Rural process until the EMS sale was completed.
On January 24, 2011, DiMino met with a team from J.P. Morgan, which
recommended that Rural execute on its growth plan over the next year. J.P. Morgan saw
Rural poised at an “[i]nflection [p]oint” in which the Company was transitioning from
turnaround to early-stage growth story. J.P. Morgan’s presentation to Rural’s CEO
fundamentally challenged the central, “sell now” thesis of RBC.19 It hesitated to
recommend an immediate sale because “logical strategic buyers” at the time were
concentrating on change of control transactions of their own. J.P. Morgan also
recommended Rural continue to execute on its “growth plan,” as doing so would drive
further stock price appreciation. It advised DiMino that allowing the healthcare market to
play out, in the meantime, would enable Rural to attract greater interest from financial
sponsors and strategic buyers. In sum, it suggested that a Rural sale would likely be
better accomplished at a different point in time, in view of the fact that strategic bidders
were then “internally focused” and the Company had “significant growth to unlock.”
DiMino limited his distribution of the presentation to Shackelton and Munoz, noting: J.P.
Morgan “had some interesting comments regarding the AMR process and our potential
19
J.P. Morgan observed that, if Rural “execute[d] on [its] growth plan,” there would be
“significant interest to come,” particularly in light of the fact that strategic bidders were, at the
time, “focused internally[.]” B150.
20
attractiveness to private equity firms. I didn’t tell them we had launched our own go-
private process.”20
The Board did not schedule a meeting to review the indications of interest or
discuss next steps. The Special Committee met on February 6, 2011. RBC made a
presentation that did not include any valuation metrics. At the meeting, where Conrad,
DiMino, and Wilson were also present, RBC and Moelis reviewed the six indications of
interest received following the auction process. The minutes indicate that, after receiving
the confidential information memorandum, “14 firms declined to participate. In addition,
one private equity firm, [Bain], indicated that the level of its interest in pursuing the
transaction with [Rural] would depend on the results” of its participation in the EMS
process. A joint presentation by RBC and Moelis summarized the initial indications of
interest:
American Securities — $16.00—$17.00;
Ares Management — $14.50—$16.50;
CD & R — $15.50—$16.50;
Leonard, Green & Partners — $17.00—$19.00;
Kelso & Company — $14.75—$16.50; and
Warburg — $17.00.
RBC’s presentation to the Special Committee at the February 6 meeting was four pages
long, provided no opinion, preliminarily or otherwise, on the quality of the bids, and, as
the Court of Chancery observed, failed to include any valuation metrics.
20
B144.
21
The trial court concluded that, while the minutes reflect that Shackelton asked
Davis and Walker whether to include all six private equity firms in the next phase,
Shackelton and RBC already had agreed to make a data room available to all bidders
beginning the next day, February 7, and had scheduled meetings with all six firms to take
place between February 9 and 18. DiMino privately contacted RBC in search of
valuation metrics. According to the trial court, RBC gave DiMino a two-page analysis
showing that at prices of up to $18 per share, an LBO would generate five year internal
rates of return for a financial sponsor that exceeded 20%. On February 8, Munoz
provided DiMino with a deck regarding leveraged buyout returns, evidencing five year
internal rates of return over 20% for offers exceeding $15.50 per share.
The Special Committee met again on February 22, 2011. RBC made a limited
presentation, which included no valuation metrics and which was followed by a
discussion of CD & R’s potential participation in the Rural process. The Special
Committee identified CD & R, after it won the EMS sale, “as a competitor of the
Company, causing certain confidentiality and antitrust issues to be considerations[,]” if
the private equity firm participated in the Rural process.21 DiMino testified at trial that,
at this meeting, he was “very concerned” about confidentiality with respect to CD & R.
He continued by elaborating on that point as follows:
21
Additionally, during an executive session of the meeting, without RBC or Moelis present,
legal counsel discussed the Court of Chancery’s holding in the case of In re Del Monte Foods
Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011). At trial, DiMino testified that he was aware
of legal counsel’s advice that, in light of RBC’s interest in stapled financing, the directors “be
actively involved in the process in order to assure that there is neither an actual problem with
regard to the conflict of interest, nor the appearance of a defective process as a result of this
conflict of interest . . . .” A2212.
22
Because if [CD & R] got to the full management presentation or they got to
get all the information that we would normally give in the management
presentation and in the data room, some of those things could be
counterproductive if they didn’t buy -- if they ultimately didn’t buy us.
They would have trade secrets or some of our secret sauce, if you will, that
we had developed.22
DiMino testified further that this concern about confidentiality was present when the
Company first launched the sale process.
The trial court found that, although RBC previously had recommended a near-term
sale process to capture the interest of the winner of the EMS auction, the Special
Committee now balked at having CD & R participate. The Special Committee set a bid
deadline of March 21 and decided not to solicit interest from strategic acquirers. As the
bid date approached, CD & R suggested 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 to April, so that it could formulate its bid.
On March 15, 2011, the Board met to consider the Special Committee’s progress
for the first time since December 8, 2010.23 The minutes reflect that representatives of
RBC and Moelis made a presentation to the Board “regarding the ongoing exploration of
the potential sale of the Company” and reviewed the “next steps” in the “sale evaluation
process.” Daniel made the presentation to the Board on behalf of RBC. Akin to its
previous presentations, RBC failed to include valuation metrics and provided no opinion,
22
A2232.
23
The trial court found that the minutes prepared in connection with 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.” Rural
I, 88 A.3d at 72.
23
preliminarily or otherwise, on the quality of the bids during its March 15, 2011 sale
process update.
Further, the minutes of the March 15 meeting suggest that RBC and Moelis
“commented upon the detailed oversight provided by the Special Committee of
independent directors throughout the process, noting frequent formal and informal
communications involving the full committee or its chair (Mr. Shackelton).” RBC, at the
meeting, also remarked upon the “formal meetings of the Special Committee that were
held during the process.” Shackelton suggested that “the full Board had been updated
from time to time at key points in the process.”
The trial court found, however, that the description of the process in the minutes
was “false,” in that the record presented to it contained evidence of only two formal
meetings of the Special Committee: one on February 6, 2011 and one on February 22,
2011. According to the trial court, Davis was largely an absentee director and Walker
deferred to Shackelton, who drove the process. Again, RBC does not plainly argue that
these findings are clearly erroneous and, even if it did, we find no basis for such a
conclusion.
At the March 15 meeting of the Board, RBC and Moelis discussed the final bid
deadline of March 21, 2011. The trial court found that RBC had designed the sale
process ostensibly to give the winner of the EMS auction the opportunity to make a bid
for Rural that included synergies. It determined that neither the Board nor the Special
Committee considered the benefits that could inure to Rural’s advantage if the winner of
the EMS process then sought to acquire Rural, because Rural could seek to extract a
24
portion of the synergies from a combination of AMR and Rural in the form of a higher
price.
CD & R, the private equity firm that won the bidding process for EMS and one of
the Company’s six suitors, was a topic of discussion for the Rural directors on March 15.
CD & R had advised RBC and Moelis that it would be unable to complete its due
diligence and other review processes with respect to Rural until the completion of its
acquisition of EMS, and that any bid it might submit would be conditioned accordingly.
The minutes suggest that the Board discussed the following with respect to CD & R:
[T]he potential for a higher purchase price from CD&R relative to other
bidders due to the potential synergies that could be realized between [Rural]
and AMR under common ownership by CD&R; a possible delay in the
March 21 deadline to accommodate CD&R and the impact on the
enthusiasm of other potential bidders if the reason for the delay became
known; the risk to [Rural’s] sale process of waiting for CD&R in view of
the timing for the other potential bidders; the potential for dealing with
CD&R via a “go-shop,” “fiduciary out” linked to a reasonable break-up fee,
or other contractual provisions . . . .
On the advice of RBC, Moelis, and legal counsel, the Board “concluded it was in the best
interests of the Company to proceed with a bid deadline of March 21, and that CD&R
would be encouraged by the Company’s financial advisors to submit its best and final bid
at that time.” A March 15, 2011 RBC presentation to the Board reflects that CD & R
communicated that it would not participate further in the Rural sale “due to its
involvement in the EMS process[.]”
The trial court found that RBC’s faulty design prevented the emergence of the
type of competitive dynamic among multiple bidders that is necessary for reliable price
discovery. Because Warburg had withdrawn from the EMS process, it was able to pursue
25
Rural aggressively, thus giving Warburg an advantage over others who were still
involved in evaluating EMS. The trial court concluded that Warburg knew that its
competitors in the process lacked similar resources and that it did not need to incorporate
as much of its anticipated gains in its price to outbid the other firms. Carney referred to
the private equity firm’s challengers for the Rural acquisition as a “motley group because
the EMS process put so many of the larger firms on the sidelines.”24
In addition to the competitive design issues faced by prospective financial buyers,
the evidence indicates that strategic buyers were preoccupied. The March 15 minutes
state: “Generally speaking, it was noted that it was unlikely that any potential strategic
purchaser not affiliated with a private equity firm would have an interest in the ability
[sic] to enter into a transaction on terms acceptable to the Company.”25 J.P. Morgan’s
presentation to DiMino commented that “[t]he three other strategics are focused
internally now[.]”26 Thus, the competitive dynamic was inhibited by the fact that
potential strategic bidders for Rural were themselves tied up in change of control
transactions at the time the Company was exploring a sale. The Board decided to
proceed without reaching out to Falck A/S, a European company with an equity interest
in Rural and a potential strategic bidder. The Board also decided not to extend the bid
deadline.27
24
B251.
25
A616-17.
26
J.P. Morgan’s presentation suggested that EMS, AirMedical Group Holdings, and Air Methods
were potential strategic acquirers. B150.
27
After the meeting, RBC told the remaining bidders that the timeline would not be extended,
although Rural pushed the deadline out by 24 hours to March 22.
26
The Board then adopted a resolution which the trial court characterized as
“granting the Special Committee the authority that Shackelton and RBC had assumed for
themselves.”28 It states:
NOW THEREFORE, BE IT RESOLVED, the Board of Directors hereby
ratifies and restates its delegation to the Special Committee of the exclusive
power and authority to (i) determine whether a Potential Transaction is or
may be, at this time, in the best interests of the Company and its
stockholders, and report its recommendations to the full Board of Directors,
(ii) retain and work with outside advisors in a controlled and contained
process to seek from various financial institutions indications of interest
and possible transaction terms in respect of a Potential Transaction, (iii)
review and evaluate the terms and conditions of such indications of interest
and determine the advisability of advancing further in respect of such
proposals and/or whether other strategic alternatives in respect of the
Company should be explored, (iv) if it deems appropriate, solicit proposals
for a Potential Transaction that would be in the best interests of the
Company’s stockholders, (v) negotiate and finalize terms of any such
Potential Transaction and, and [sic] (vi) report its findings and
recommendations to the full Board of Directors[.]
E. RBC’s Efforts to Secure Staple Financing and Warburg’s Final Bid
Rural’s Engagement Letter with RBC and Moelis contains its most specific
disclosures with respect to RBC’s buy-side financing ambitions in Section 2, which is
entitled, “Certain Agreements of the Company.” Section 2.d) expressly provides that
“RBC shall have the sole and exclusive right to offer stapled financing to, and arrange
stapled financing for, any potential purchaser in a Sale Transaction, if the Board of
Directors or a special committee of the Board of Directors deems it desirable to offer
stapled financing to potential purchasers.”29 This language, however, does not capture
28
Rural I, 88 A.3d at 73.
29
A553. This provision of the Engagement Letter further provides:
27
2.d) Additionally, in connection with an AMR Acquisition Transaction or
Alternative AMR Acquisition Transaction, RBC shall have the right to participate
in the provision of any and all debt financings, on mutually acceptable terms, as
appropriate, required for the completion of such Transaction, and shall have the
opportunity to present credentials to the Board of Directors and senior
management of the Company with a view toward being appointed to have a lead
role in the underwriting, bookrunning, placing, managing or leading of various
elements of such financing, as appropriate.
Id. The Engagement Letter defines an “AMR Acquisition Transaction” as:
[A]ny merger, consolidation or other business combination or acquisition
transaction pursuant to which the Company is to acquire all or a majority of, or be
combined with, American Medical Response, Inc. (“AMR”), or all or a majority of
its business. For the avoidance of doubt, an AMR Acquisition Transaction shall
not include a Sale Transaction or an Alternative AMR Acquisition Transaction.
A560. The Engagement Letter defines an “Alternative AMR Acquisition Transaction”
as:
[A]ny merger, consolidation or other business transaction with respect to which
the Company participates in conjunction with one or more other entities and
which involves a merger, consolidation or other business combination or
acquisition transaction pursuant to which the business and assets of Emergency
Medical Services Corporation, the parent company of AMR, undergoes a change
in control and the result of which is that the business and assets of AMR are
combined with, or operated under a common management structure which
includes, the Company. For the avoidance of doubt, an Alternative AMR
Acquisition Transaction shall not include a Sale Transaction or an AMR
Acquisition Transaction.
Id. The Engagement Letter defines a “Sale Transaction” as:
[A]ny (i) merger, consolidation, or other business combination transaction
pursuant to which the Company is to be acquired by, or combined with, another
entity, (ii) any sale or disposition by the Company of an interest in material assets
of the Company, or (iii) any recapitalization, restructuring, or other transaction or
series of transactions involving the sale or disposition of capital stock of or other
equity interest in the Company which has the effect of transferring a majority in
interest or control of the Company. For the avoidance of doubt, a Sale
Transaction shall not include an AMR Acquisition Transaction or an Alternative
AMR Acquisition Transaction.
Id. Notably, these definitions all contemplate a transaction involving the Company—not
transactions that are not inclusive of the Company.
28
RBC’s provision of financing to an acquirer of EMS in a transaction that does not involve
Rural.
Further, in Section 2.f), the Engagement Letter’s disclosures with respect to the
EMS process provide that “RBC and Moelis shall have the sole and exclusive right to
provide certain investment banking and financial advisory services with respect to an
acquisition or combination transaction with respect to [EMS] or EmCare Holdings Inc.,
other than an Alternative AMR Acquisition Transaction.” This language refers to RBC’s
possible participation in a transaction between Rural and EMS, but does not expressly
touch upon RBC’s buy-side role in any EMS transaction not inclusive of Rural.30
The Engagement Letter, in Section 9 entitled, “Other Matters Relating to
Engagement,” sets forth generic and boilerplate disclosures with respect to the provision
of financial products by both RBC and Moelis. In part, it provides that RBC “may also
provide a broad range of normal course financial products and services to [its]
customers” and “may arrange and extend acquisition financing or other financing to
purchasers that may seek to acquire the Company and/or to the same or different
purchasers that may seek to acquire companies or businesses that offer products and
30
This provision of the Engagement Letter further provides:
The terms and conditions relating to any such services will be outlined in a
separate proposal and the fees for such services will be in addition to fees payable
hereunder. Any such proposal will be negotiated separately and in good faith, set
forth in a separate written agreement, and be consistent with prevailing industry
practice. Notwithstanding the foregoing, any fees resulting from such advisory
services shall be paid in the following manner: 60% of the fee will be paid
directly to RBC and 40% of the fee will be paid directly to Moelis.
A554.
29
services that may be substantially similar to those offered by the Company.” Section 9
fails to specifically state that RBC would seek to leverage its Rural engagement to
provide financing in a separate EMS transaction, nor does it disclose that RBC would
favor its interests as a lender over those of the Company. As to Section 9, the trial court
held that, “[t]his generalized acknowledgment that RBC . . . might extend acquisition
financing to other firms did not amount to a non-reliance disclaimer that would waive or
preclude a claim against RBC for failing to inform the Board about specific conflicts of
interest.”31
Section 4 of the Engagement Letter sets forth the agreement as to the
compensation to be paid to RBC and Moelis for their services. For its fairness opinion,
RBC was entitled to $500,000, payable upon the delivery of the opinion, “without regard
to the conclusion reached in such opinion or whether such opinion [was] accepted or a
Transaction [was] consummated.”32 The fairness opinion fee was to be credited against
any transaction fee.
Under Section 4, the Engagement Letter provided for various transaction fees.
First, the Engagement Letter provided for a Sale Transaction Fee:
In the event the Company consummates at any time a Sale Transaction
pursuant to a definitive agreement or letter of intent or other evidence of
commitment entered into (i) during the Term, or (ii) during the nine (9)
31
Rural I, 88 A.3d at 101 (citation omitted).
32
A555; Engagement Letter § 4.b). The Engagement Letter, in Section 4.c), also provided for an
Announcement Fee: “In the event that . . . the Board of Directors requests a fairness opinion
from either, but not both of, RBC or Moelis, an announcement fee (“Announcement Fee”) of
$500,000 shall be payable to the Advisor . . . from which a fairness opinion has not been
requested.” Id. The Announcement Fee was to be credited against the transaction fee or the
termination fee for any transaction related to the Engagement Letter. Id.
30
months following the Term, the Company agrees to pay RBC and Moelis a
total transaction fee . . . equal to the sum of (A) 1.00% of the Aggregate
Transaction Value . . . to the extent that the price to be paid to stockholders
of the Company is at or below $16.00 per share, and, in addition, (B) 3.0%
of the Aggregate Transaction Value to the extent related to the price to be
paid to stockholders of the Company in excess of $16.00 per share.33
The Sale Transaction Fee was to be paid at closing in the following manner: “60% of the
fee will be paid directly to RBC and 40% of the fee will be paid directly to Moelis.”
Second, if Rural consummated, at any time, an AMR Acquisition Transaction
pursuant to an agreement entered into during a specified time period, the Company
agreed to pay RBC and Moelis $3,500,000. Another provision addressed a transaction
fee payable in the event Rural consummated an Alternative AMR Acquisition Transction.
Third, if the Company received a break-up fee or other termination fee in
connection with a Sale Transaction, Rural agreed to pay RBC and Moelis 20% of the
break-up or termination fee received by the Company. Like the other fees, 60% was
payable directly to RBC and 40% was payable directly to Moelis. Thus, with the
exceptions of the fairness opinion fee and termination fee, the fees that RBC and Moelis
were to receive were contingent upon the Company consummating a transaction.
On March 18, 2011, RBC sent Warburg executed commitment papers, but
Warburg did not respond. The trial court found that, on the day before the merger was
approved, RBC’s most senior bankers made a final push to obtain Warburg’s financing
business. The evidence clearly supports the trial court’s findings. For example, a
contemporaneous RBC internal memorandum documented that the bank’s “[d]eal team
33
A555; Engagement Letter § 4.d) (alternations removed).
31
[was] working with Warburg Pincus on a final round bid.” The memorandum continued:
“Other banks potentially providing papers to our sponsor include [Credit Suisse
Securities (USA) LLC], Jeffries [Finance LLC] and [Citigroup Global Markets Inc.]”
As part of its push to secure Warburg’s business, RBC bankers sought internal
approval to underwrite 100% of a $590 million financing package for Warburg. RBC’s
bankers stated the following in their memorandum regarding the Rural deal:
[Warburg], covered by David Daniels, is a top tier client of the Financial
Sponsors Group. RBC has an active dialogue with [Warburg] across all of
its industry verticals and has generated [approximately] $6mm in fees from
deals with this sponsor. We are supporting the proposed financing
commitment associated with the purchase of [Rural] as it will further
strengthen our relationship and lead to additional deal flow with [Warburg].
Before the bid deadline, Carney emailed a Warburg colleague with an update on the
Rural process: “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.”34
On the extended bidding deadline of March 22, 2011, Warburg submitted a bid at
$17.00 per share, and CD & R submitted an indication of interest at $17.00 per share,
subject to further diligence. American Securities “indicated that their current valuation
was below their initial indication of interest on February 1, 2011 of $16.00 to $17.00 per
share and that they expected remaining diligence would take approximately 2-3
weeks[.]”35
On March 23, the Special Committee met to discuss the offers received from
Warburg and CD & R. Conrad, Holland, DiMino, Wilson, RBC, and Moelis were also
34
B251.
35
A834.
32
present at the meeting by invitation. Munoz and his colleagues at RBC debated whether
to provide valuation materials to the Special Committee to enable them to evaluate the
bids. Munoz was worried that RBC would be asked about valuation.
The trial court found that, with bids in hand, the relationship between RBC and
Shackelton changed. Before the bids, they shared the goal of wanting the Company sold.
But Shackelton wanted more than $17.00 per share, and RBC “just wanted a deal.” At
this point, DiMino became RBC’s “principal ally” in the boardroom. Like RBC, DiMino
had an incentive to sell the Company and continue managing it for Warburg. As
evidence of this, in advance of the Special Committee meeting, Munoz scheduled a call
with Shackelton to “manage him.”36
The trial court determined that the Special Committee decided not to engage
further with CD & R, and that “[t]he Special Committee directed RBC and Moelis to
engage in final negotiations with Warburg over price.”37 RBC reviewed the offers with
the Special Committee on March 23, 2011. “Warburg’s offer constituted a proposal to
acquire all of the Company’s outstanding common stock for $17 per share, with no
further confirmatory due diligence. Along with its offer, Warburg had submitted fully
committed equity and debt commitment letters . . . .”38 With respect to CD & R, the
minutes reflect that RBC represented to the Special Committee that the private equity
firm’s “offer constituted a proposal to acquire all of the outstanding Company Common
Stock for $17 per share, subject to confirmatory due diligence. CD&R’s offer letter
36
B285.
37
Rural I, 88 A.3d at 76.
38
A804.
33
reiterated its previous statements to RBC and Moelis that CD&R was unable to fully
commit to a definitive transaction to acquire [Rural] until the closing of its acquisition of
[EMS] . . . .”39
The Special Committee ultimately rejected the proposals received from Warburg
and CD & R. The minutes do not reflect a discussion of valuation or the design of the
sale process. The trial court observed that the Board had no valuation materials beyond a
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.
According to the minutes, Shackelton, Davis, and Walker proceeded on that basis as
follows:
[T]he Special Committee determined that the 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 Special Committee directed RBC and Moelis to contact
Warburg to engage in further negotiations to improve its offer in terms of
the price to be paid to the stockholders of the Company . . . .40
The trial court found that RBC “encouraged DiMino to drum up director support
for Warburg’s bid” and presented a board book “designed to convince [the Board] to
accept Warburg’s bid . . . .”41 RBC’s internal communications before the March 23
meeting of the Special Committee reflect the bank’s position that closing on the Warburg
offer and obtaining the private equity firm’s buy-side financing business were its
39
Id.40
A805.
41
Rural I, 88 A.3d at 96.
34
priorities when advising the Board. Munoz emailed his RBC colleagues on March 23:
“Let’s all plan to do a call w/ Shackelton before [the] Board call. Need to send him the 1-
2 [valuation] pages we discussed to him [sic] before we get on [the] phone. Need to
manage him before he gets on w/ [the] Board.”42 On March 24, Munoz emailed Daniel:
“Told dimino to start working the board. He said he’ll start calling each of them
tomorrow.”43 Munoz also emailed DiMino: “Focus on [the] board today. Let me know
if you need more tidbits to help you. Once again, last time [Rural’s] stock was at $17
was in 1998.”44
Shackelton contacted Carney, the head of Warburg’s acquisition team, on March
25, 2011. Carney shared with a colleague, Elizabeth “Bess” Weatherman, the following:
“The Chairman (who I gather is in his early 30s) and I just spoke for 15 minutes.
Pleasant tone. He offered to drop the Go Shop, give us a voting agreement, and move a
bit on the break-up fee if we agreed to bump to $17.50. I declined.”45 Carney concluded
his sale process update to Weatherman by remarking: “I know [Rural’s] bankers are now
nervous and want to get something done.”46
On March 25, Warburg increased its bid to $17.25 per share. Warburg’s bid
materials did not include staple financing from RBC.47
42
B285.
43
B286.
44
B287.
45
B291.
46
Id.47
Warburg’s March 22 bid included three commitment letters, one from each of Credit Suisse
Securities (USA) LLC, Citigroup Global Markets Inc., and Jeffries Finance LLC. Collectively,
the commitment letters provided Warburg with 100% financing for the transaction.
35
Following Warburg’s submission of its bid, RBC did not disclose to its client that
it continued to seek a buy-side financing role with the private equity firm. As to the
Board, the trial court concluded that “[t]he Rural directors did not provide any guidance
about when staple financing discussions should start or cease, made no inquiries on that
subject, and imposed no practical check on RBC’s interest in maximizing fees.” For
example, DiMino was asked at trial:
Q. Now, between this date, December 23rd, and early February, do you
recall a single conversation you had with Mr. Munoz or anyone else at RBC
in which you specifically discussed with them what they were doing with
regard to achieving staple financing from -- from any potential buyer of
RBC [sic]?
A. No.48
In his deposition testimony, Carney confirmed that RBC continued to push for
Warburg’s financing business, even after Warburg’s bid excluded the bank’s
commitment papers:
Q. And at some subsequent date did RBC express interest -- continued
interest in offering debt financing to Warburg Pincus?
A. As I recall, yes.
Q. And what do you recall of the nature of that expression of interest by
RBC?
A. My recollection is that RBC was just -- was trying to find a way to
participate in the debt financing somehow.
...
Q. . . . And was there any subsequent discussion with RBC, perhaps
more definitive or more following up, on a subsequent date?
48
A2211-12.
36
A. . . . I do recall that we had additional conversations with RBC
because they continued to try to find a way into the financing, and we
continued to tell them that that was not going to happen.49
When directed by the Special Committee to engage in final price negotiations with
Warburg, RBC again did not disclose that it was continuing to seek a buy-side financing
role with Warburg. On Saturday, March 26, 2011, senior bankers at RBC continued to
press Warburg to include RBC in the financing package.50 Munoz testified at trial as
follows:
Q. . . . So the most senior people at RBC are trying to make a last effort
to see whether RBC can get involved in the staple on Saturday, March 26th;
correct?
A. Yes.51
Blair Fleming, RBC’s Head of U.S. Investment Banking, as an inducement, offered to
have RBC fund a $65 million revolver for a different Warburg portfolio company.52
Later, in an email to Munoz, Fleming stated: “I’m gonna call warburg myself. We just
committed 65 to their effing revolver.”53
F. RBC’s Manipulation of the Valuation Process
On Saturday, March 26, 2011, the RBC fairness opinion committee met to discuss
Warburg’s bid for Rural. In addition to Daniel and Munoz, several members of the RBC
deal team attended the meeting. Ali Akbar and Allen Morton, along with Daniel, served
49
B610.
50
A2192-93.
51
Id.52
A2192; B329.
53
B326.
37
on the “committee.” Morton “had previously been the head of M&A at RBC U.S., and . .
. Akbar, [was a] managing director in the M&A group.”54 The committee members
reviewed the fairness presentation and letter, and “recommended certain changes” to the
same.55
The record evidence supports the trial court’s factual finding that, on the deal
front, 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. First, RBC decided not to rely on the single comparable
company for valuation purposes. The record evidence reflects that RBC’s preliminary
fairness opinion deck applied peer group trading multiples to various valuation metrics.
In the final draft of the fairness presentation, however, RBC represented to the Board that
it “[d]id not rely on comparable company analysis for valuation purposes.” The
comparable company analysis nevertheless remained in the fairness materials, although it
was removed from the valuation football field.56
Second, the trial court found that RBC modified its precedent transaction analysis
by reducing the low end multiple used in both the management case and “consensus”
case, with the effect being that the alteration lowered the bottom end of the management
54
A2403. At the time of the transaction, RBC’s fairness committee formation process was ad
hoc, such that “anyone who was a managing director in the M&A group could serve on the
fairness committee. And each time there was a fairness opinion to be discussed, [RBC] needed
to have at least two independent members, independent meaning the non-sponsoring member . . .
.” Id. Daniel was the sponsor, and Morton and Akbar were the “independent members.” Id.Akbar had never served on a fairness committee.
55
A824; A2124.
56
Valuation football fields are used to summarize valuation ranges in connection with business
combinations. Typically, they provide the valuation ranges corresponding to each of the
valuation methodologies used for a given M & A transaction.
38
case precedent transaction range and “consensus” case precedent transaction range. The
morning draft of the fairness opinion presentation used a multiple range of 7.5x to 9.5x,
implying a low end per share valuation of $15.49 for the management case. The
afternoon draft that was ultimately presented to the Board used a range of 6.3x to 9.5x,
resulting in a low end per share valuation of $11.54 for the management case. The trial
court also found that, on the morning of Saturday, March 26, 2011, “the ‘consensus’
precedent transaction range was $13.31 to $19.15. On Saturday afternoon, it was $8.19
to $16.71, entirely below the deal price.” In altering its analysis, RBC decided to weigh
heavily the 2004 acquisition of AMR by Onex Partners at 6.3x EBITDA, a course of
action it had discredited earlier. The trial court observed that this change was
inconsistent with RBC’s December 2010 pitch book, where RBC assigned AMR a low-
end multiple of 8.0x and suggested that Rural pay 8.4x for AMR. This change was also
inconsistent with RBC’s view, expressed throughout the sale process, that Rural’s
operating metrics were objectively superior to AMR’s.
Finally, the trial court determined that RBC lowered the “consensus” Adjusted
EBITDA for 2010 from $76.5 million to $69.8 million to make the Warburg “deal look
more attractive.”57 In material presented to the Board before it had the March offer from
Warburg in hand, RBC added back approximately $6.3 million in certain one-time
expenses when calculating Rural’s Adjusted EBITDA for 2010. The preliminary draft of
the fairness opinion presentation contained a Consensus Adjusted EBITDA figure of
$76.5 million and, in a footnote, RBC noted that “EBITDA is adjusted for stock based
57
Rural I, 88 A.3d at 77.
39
[sic] compensation, gain on sale of assets and one time [sic] expenses.”58 The morning
draft also suggested that “[c]onsensus pro forma adjustments would be unlikely” to
account for certain of the one-time expenses.59 The final fairness presentation deck stated
that “Wall Street research analysts covering [Rural] do not make pro forma
adjustments[.]”60 The Consensus Adjusted EBITDA figure in the final draft was $69.8
million.61
Munoz, in the lead up to finalizing the fairness opinion presentation, emailed his
colleagues saying that RBC would “need to add some bullets that say Wall Street analyst
[sic] do not reflect any of these one-time expenses. Something to explain why we are not
adjusting[.]”62 Similarly, after receiving the fairness opinion deck, Daniel had several
questions with respect to the valuation analysis. In a message to Munoz and other RBC
bankers with comments to the initial draft of the fairness presentation, he noted:
10: I thought we were looking @ an ebitda multiple around 9.0. What’s
changed?
20: maybe it’s just because I’m tired but I think it’s confusing in terms of
what ebitda we’re applying. . . . This isn’t reader friendly enough.
21/22: I’d like thoughts on why there’s [sic] no qualitative comments here.
I know our internal discussions + justification. But for a new reader, the
fact that we only have 1 comp and that the most recent precedents are
58
B305.
59
B316.
60
A873.
61
Id. The evidence shows that certain Wall Street firms suggested that one-time expenses
needed to be added back and others chose to exclude those expenses when calculating the 2010
Adjusted EBITDA for the Company, although those that refrained from adding the expenses
back generally noted the one-time adjustments in the text, as RBC acknowledges. Thus, we do
not find the trial court’s factual determinations to be clearly erroneous.
62
B327.
40
higher than our deal raises issues. While I know we will explain to [the
Board and Special Committee], is there a reason why we don’t do so in the
text. [sic]63
The record reveals that Munoz coordinated between the senior RBC bankers
lobbying Warburg and the RBC deal team working on the fairness opinion, but he did not
disclose RBC’s activities to the Board. Further, the trial court found that RBC “failed to
provide Rural’s Board or the Special Committee with a preliminary valuation analysis”
for three months.64 The trial court noted that, in fact, beyond the December 2010 RBC
pitch book—which contained materially different analyses and which only the Special
Committee was privy to—the Board had not seen valuation materials before March 27,
2011.65 The evidence supports the Court of Chancery’s conclusions. The investment
bankers were well aware that they “had not provided any preliminary valuation analysis
since December 23, 2010, and had only provided [the] December 23 book to the Special
Committee,”66 as opposed to the entirety of the Board. Munoz testified at trial as
follows:
Q. And isn’t it the case, sir, that it was not until Sunday night, March
th
27 , that RBC delivered to Rural/Metro’s board or special committee a
DCF analysis of the management projections that had been sent to the
bidders back in January?
A. We did -- that was the -- we did a DCF in December and, yes, the
next time we did a DCF was, yes, at that time; right.
63
B293.
64
Rural I, 88 A.3d at 95.
65
Id. The trial court found that the December pitch book showed that Rural’s value on a stand-
alone basis exceeded what a private equity bidder willingly would pay for the Company. It
found that the evidence at trial established that the value of Rural as a going concern exceeded
what the stockholders received in the merger.
66
Id. at 100.
41
Q. Next time you did a DCF after that pitch book on December 23rd was
on March 27th, 2011; correct?
A. Yes. That’s all that the company asked and requested, yes.”67
Before the meeting at which the Board resolved to sell the Company, Munoz
shared with his RBC colleagues: “I’m worried that someone will . . . ask about our views
on [Rural] valuation.”68 In a March 23 email thread with his banking colleagues, the
RBC Managing Director reiterated that he was “afraid [the] board will ask us of our high
level views [on valuation] today.”69 After Daniel told Munoz that RBC had not planned
on providing valuation materials that day, Munoz repeated: “Ok. But we will be asked
and to convince [S]hackelton we need to show valuation. Perhaps we just put together 2-
3 pages and just send to [S]hackelton[.]”70
The trial court found that, in performing its DCF analysis, RBC used an exit
multiple range of 7.0x to 8.0x, which did not match up with the range used for RBC’s
precedent transaction analysis. On the basis of that exit multiple range, RBC’s DCF
analysis in the preliminary fairness opinion deck reflected a range of $16.49 per share to
67
A2107-08. Munoz continued:
Q. . . . And then with that caveat of sharing the EMS transaction multiple, did you
actually share a precedent transaction analysis or a comparable company analysis
between December 24th and March 26th?
A. The only thing I believe we shared during that time frame was the EMS
transaction. We did not share both a comparable and a precedent.
A2108.
68
B252.
69
B284.
70
Id.42
$21.35 per share.71 When Munoz saw the DCF analysis during the afternoon of March
26, he emailed his RBC colleagues: “I thought we were going to try to reduce dcf?”72
RBC’s final DCF analysis reflected a range of $16.28 per share to $21.07 per share.
Notably, the LBO analysis deck, dated February 9, 2011, which was provided to DiMino
by RBC, employed an exit multiple range of 7.8x to 8.3x.
On March 26, RBC’s ad hoc committee “approved the fairness opinion
presentation and letter via email and verified that the opinion could be delivered to”
Rural’s Board that day.73 RBC’s one-page document memorializing the meeting suggests
that “[a]fter making the suggested changes and receiving approval from outside legal
counsel, the deal team notified the committee of the revised fairness opinion presentation
and letter via email.”74 Morton and Akbar, however, provided limited oversight, and the
former signed off on the revised book without reading it.75 The fairness opinion was
delivered to the Board later that evening.
G. The Board’s Acceptance of the Revised Warburg Offer
The trial court found that, during the final negotiations with Warburg, the Board
failed to provide active and direct oversight of RBC. It observed that when the Board
approved the merger, the directors were unaware of RBC’s last minute efforts to solicit a
71
B321.
72
B327.
73
A824.
74
Id.75
In an email regarding the revised fairness presentation and letter, Morton stated: “The ravpn
network is not letting me in so I cannot see the revised book. If there are no material changes
from what we reviewed yesterday, other than the changes that were recommended on the call,
then I am fine with it.”
43
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. The record evidence supports the Court of
Chancery’s findings.
Unbeknownst to the Rural directors, RBC had been communicating with Warburg
in the lead up to the private equity firm’s revised bid. Carney emailed his private equity
firm colleagues the following:
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.
I think our FL [Joe Landy, Warburg’s Co-President] is probably more right
than wrong. I think we probably win if we bump at all and $0.25 may be
best in terms of helping the BOD drive to a quick consensus. In any event I
am convinced we should empty the tank, tell them best and final, and be
done. It sounds like the BOD needs to hear that and know there is a binary
decision to make on price.76
On March 25, Warburg submitted its best and final offer of $17.25 per share.
Warburg determined to proceed without utilizing RBC’s commitment papers, despite the
offer to fund the sponsor’s revolver and the bank’s other inducements. Munoz and Blair
76
B290; see also B609.
44
Fleming, RBC’s Head of U.S. Investment Banking, shared the following email exchange
concerning the bank’s inability to capture the private equity firm’s buy-side financing
business:
Munoz: I am the rbc guinea pig. Never easy[.]
Fleming: Yep. Amazing. I have to go see warburg this week. I just
pushed 65 revolver through[.]
Munoz: Lets [sic] make sure all rbc bankers know they owe us big time.
Should be first page of all pitch books.
Fleming: Our revolver in rural is gonna be very very small.77
On Sunday, March 27, 2011, the Board met to consider the potential merger.
According to the trial court, the Rural directors received written valuation analyses from
RBC and Moelis at 9:42 p.m. Eastern time. Because the Board had received no valuation
materials until three hours before the meeting to approve the merger, it found that the
Rural directors did not have a reasonably adequate understanding of the alternatives
available to Rural, including the value of not engaging in a transaction at all. At 9:27
p.m., RBC distributed its fairness opinion deck to Shackelton and DiMino. Moelis
distributed its Board materials to Shackelton and DiMino shortly before, at 9:20 p.m.
The valuation materials were the first the Board had received since December 2010. At
11 p.m. that evening, without knowledge of RBC’s downward modifications to its
analysis, back-channel communications with Warburg, and late push to get on the private
equity firm’s financing tree, the Board and Special Committee held a joint meeting.
Shackelton led the meeting before turning it over to RBC, which discussed “the implied
77
B329.
45
transaction multiples” and the premium that Warburg’s offer represented over Rural’s
current and historical trading prices. Daniel “reviewed RBC’s valuation methodologies”
with the Board. Shackelton later requested that RBC deliver its financial analysis “and
an oral fairness opinion to the Board.” RBC opined that the transaction was fair from a
financial point of view. The Board approved the merger with Warburg after midnight.
H. The Rural Proxy Statement
The definitive proxy statement was filed on May 26, 2011 (the “Proxy
Statement”). The trial court concluded that the Proxy Statement contained materially
misleading disclosures in the form of false information that RBC presented to the Board
in its financial presentation. Specifically, the trial court found that information 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.
RBC used the $69.8 million figure in conducting its precedent transaction
analysis. The Proxy Statement’s pertinent discussion of Adjusted EBITDA, however,
refers to a $76.8 million figure and provides that RBC’s precedent transaction analysis
adjusted for “stock-based compensation, certain one-time expenses, management fees
and other expenses . . . .”78 A stockholder reading the Proxy Statement would likely
incorrectly conclude that RBC’s precedent transaction range used the disclosed Adjusted
EBITDA that added back one-time expenses for 2010. Similarly, a stockholder reading
the Proxy Statement would likely incorrectly conclude that the resulting figures were
consistent with a Wall Street consensus.
78
A1100.
46
The trial court also found that the Proxy Statement contained false and misleading
information about RBC’s incentives and conflicts of interest.79 The Proxy Statement
indicated that the Special Committee was advised of “the potential conflict of interest”
regarding RBC, “which had expressed a willingness to offer buy-side financing for any
sale transaction that may be pursued . . . .”80 As to Warburg’s potential use of RBC’s
financing package, the Proxy Statement merely provides: “Although RBC had indicated
to potential buyers its willingness to offer buy-side financing and certain of the potential
buyers had considered using such financing, the Warburg Pincus bid did not include the
financing which it had been offered by RBC.”81 The Proxy Statement omits discussions
of RBC’s staple financing efforts—in both the Rural and EMS deals—and last minute
push to reserve a place on Warburg’s financing tree. The disclosure also fails to inform
Rural’s stockholders that RBC sought to use its Rural engagement to obtain EMS buy-
side financing work.
The proxy advisor, Glass, Lewis & Co., LLC (“Glass Lewis”), recommended that
Rural’s stockholders vote for the merger proposal, reasoning, in part: “[W]e consider
that the [B]oard conducted a sufficiently thorough review that would be reasonably
expected to generate the greatest possible value for Rural and its shareholders.”82
Further, Glass Lewis suggested that the transaction with the sponsor was advisable
because “[t]he [B]oard, with the assistance of independent advisers, conducted a full
79
See Rural I, 88 A.3d at 106. We similarly collectively refer to the two disclosure claims
discussed above as the “Disclosure Claim.”
80
A1090.
81
A1092.
82
B400.
47
auction process prior to executing a deal with Warburg.”83 For similar reasons, ISS
recommended that the Company’s stockholders vote for the Warburg deal. With respect
to RBC, ISS acknowledged that the bank was permitted to provide buy-side financing,
but, as the trial court observed, incorrectly concluded that RBC had no other conflicts and
that the Board sufficiently mitigated potential conflicts of interest. To that end,
elsewhere in its advisory materials, ISS determined that “there are no concerning
conflicts of interest.”84
The Proxy Statement also disclosed that the Special Committee concluded that
“RBC’s willingness to offer buy-side financing could significantly enhance a potential
sale process because such financing could be offered efficiently and could provide a
source for financing on terms that might not otherwise be available to potential buyers of
the Company . . . .”85 This, however, was not true. The Board never concluded that RBC
might provide financing on terms that otherwise might not be available. When discussing
the “major concern” associated with RBC’s potential offer of staple financing at the
December 23, 2010 meeting of the Special Committee, counsel for the Special
Committee noted that such an offer “could provide a floor for financing that would be
available to potential purchasers of the Company.”86
83
B399.
84
B407.
85
A1090.
86
A407.
48
On June 30, 2011, the transaction was announced. The Agreement and Plan of
Merger, dated as of March 28, 2011, provided the Board with a fiduciary out that enabled
it to consider higher bids. No other bidders emerged.
I. RBC’s Public Statements and Pleadings Concerning Staple Financing
Jervis raises a number of points regarding RBC’s litigation conduct. These points
later formed the basis, in part, for Jervis’s fee shifting motion. On February 12, 2015, the
Court of Chancery held a hearing and ultimately concluded that RBC “approached the
pretrial briefing and trial as if the issue wasn’t what actually happened and what was true
as to the facts within their control but, rather, whether the plaintiff had generated
discovery that could prove something different.”87 The trial court suggested that RBC’s
bad faith litigation conduct touched upon its failure to appropriately characterize its staple
financing efforts; the interactive dynamic between its financing and M & A teams; and,
perhaps most problematically, the nature of its pursuit of Warburg’s buy-side financing
business. Despite the fact that these misstatements struck at central issues before the
Court of Chancery for adjudication, the trial court concluded that fee shifting was not
warranted because RBC’s misstatements did not cross the threshold of “glaring
egregiousness.”88 In addition to noting that RBC’s trial conduct was “aggressive” and
“problematic,”89 the Court of Chancery remarked: “Here, I think there’s [sic] glimmers
of egregiousness. I think there’s some egregiousness.”90
87
Ans. Br. Ex. A. Tr. 68:5-10 (Feb. 12, 2015).
88
Id. at 72:22.
89
Id. at 72:20-21.
90
Id. at 68:1-2.
49
This ruling forms the basis of Jervis’s cross-appeal, which we also address below.
III. ANALYSIS
A. Revlon
1. Contentions of the Parties
RBC argues that the trial court erred by holding that the Board breached its duty of
care under the enhanced scrutiny articulated in Revlon, Inc. v. MacAndrews & Forbes
Holdings, Inc.91 While RBC agrees that Revlon applies, it argues that the trial court
incorrectly applied Revlon’s enhanced scrutiny to the December 2010 time-frame, when
it contends that the Company was merely exploring strategic alternatives; that the
Board’s actions do not fail Revlon scrutiny in view of the public auction, modest deal
protections, and the 90-day post-signing market check; and that the trial court erred by
finding a due care violation without finding gross negligence.
Jervis argues that RBC’s Revlon arguments are meritless. Neither party argued in
the trial court that Revlon’s enhanced scrutiny applied. In fact, Revlon was not addressed
in any pre- or post-trial briefing. In the Court of Chancery, Jervis asserted that the entire
fairness standard applied. Jervis contends that this Court can affirm on an alternative
basis and uphold the ruling that the Board breached its fiduciary duties because the
transaction was not entirely fair.
91
506 A.2d 173 (Del. 1986).
50
2. Standard of Review
Our review of a trial court’s application of enhanced scrutiny to board action
necessarily implicates a review of law and fact.92 The deferential “clearly erroneous”
standard applies to findings of historical fact.93 “That deferential standard applies not
only to historical facts that are based upon credibility determinations[,] but also to
findings of historical fact that are based on physical or documentary evidence or
inferences from other facts. Where there are two permissible views of the evidence, the
factfinder’s choice between them cannot be clearly erroneous.”94 The Court of
Chancery’s legal conclusions are reviewed de novo.95 This Court may affirm on the basis
of a different rationale than that which was articulated by the trial court, if the issue was
fairly presented to the trial court.96
3. Discussion
In Malpiede v. Townson, this Court explained that enhanced scrutiny under Revlon
does not change the nature of the fiduciary duties owed by directors:
Revlon neither creates a new type of fiduciary duty in the sale-of-control
context nor alters the nature of the fiduciary duties that generally apply.
Rather, Revlon emphasizes that the board must perform its fiduciary duties
in the service of a specific objective: maximizing the sale price of the
enterprise. Although the Revlon doctrine imposes enhanced judicial
scrutiny of certain transactions involving a sale of control, it does not
92
See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1385 (Del. 1995) (applying de novo
review to the Court of Chancery’s legal conclusions and clear error review to its factual
findings).
93
See DV Realty Advisors LLC v. Policemen’s Annuity & Ben. Fund of Chicago, Ill., 75 A.3d
101, 108-09 (Del. 2013).
94
Bank of N.Y. Mellon Trust Co., N.A. v. Liberty Media Corp., 29 A.3d 225, 236 (Del. 2011).
95
Unitrin, 651 A.2d at 1385.
96
Id. at 1390 (citing Standard Distrib. Co. v. Nally, 630 A.2d 640, 647 (Del. 1993)).
51
eliminate the requirement that plaintiffs plead sufficient facts to support the
underlying claims for a breach of fiduciary duties in conducting the sale.97
“In the sale of control context, the directors must focus on one primary objective—to
secure the transaction offering the best value reasonably available for the stockholders—
and they must exercise their fiduciary duties to further that end.”98 Revlon “requires us to
examine whether a board’s overall course of action was reasonable under the
circumstances as a good faith attempt to secure the highest value reasonably attainable.”99
As we recently reiterated in C & J Energy, “there is no single blueprint that a board must
follow to fulfill its duties, and a court applying Revlon’s enhanced scrutiny must decide
whether the directors made a reasonable decision, not a perfect decision.”100
On appeal, both parties agree that Revlon applies—only they differ as to when, in
the continuum between December 2010 and March 2011, Revlon’s enhanced scrutiny
was triggered. At oral argument, counsel for RBC contended that Revlon applied “at the
point where the auction was coming to an end and they had two bids, and they were then
in a position of deciding to sell the Company -- when the sale of the Company became
inevitable . . . . That’s when it became inevitable in this fact pattern.”
As to RBC’s argument that the business judgment rule—not Revlon—applies to
the Board’s decision to explore strategic alternatives in December 2010, the most faithful
reading of the record before us is that the Court of Chancery, as a factual matter, found
97
Malpiede v. Townson, 780 A.2d 1075, 1083-84 (Del. 2001) (citations omitted).
98
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del. 1993).
99
C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust, 107
A.3d 1049, 1066 (Del. 2014) (citing QVC, 637 A.2d at 41; Unitrin, 651 A.2d at 1385-86).
100
Id. at 1067 (citations omitted) (internal quotations omitted).
52
that there was no exploration of strategic alternatives. Instead, the trial court found that
the Special Committee, acting “without Board authorization,” “hired RBC to sell the
Company.” On this point, the trial court concluded that, “[b]ased on the totality of the
evidence, the initiation of a sale process in December 2010 fell outside the range of
reasonableness[,]” that “Shackelton and RBC got too far out in front of the Board, and
[that] RBC’s advice was overly biased by its financial interests.”101
RBC does not challenge the predicate factual findings upon which the trial court’s
Revlon holding rests.102 There is sufficient evidence in the record to support the trial
court’s conclusions. For example, on December 23, DiMino emailed the head of RBC’s
Rural team, Munoz, the following: “Well done, lets [sic] get this baby sold!”103 Earlier
that day, Munoz notified his RBC colleagues: “Just got word we got the Rural Metro
sellside [sic] mandate.”104 RBC, thus, understood that it was engaged to sell the
Company. Munoz told other lead RBC bankers that the engagement “is the deal thats
[sic] going to put our Healthcare services sellside [sic] effort on the map. Big name
sponsors are going to look at this asset.”105
Other evidence suggests that RBC understood that it had been charged to sell
Rural. For example, an internal RBC memorandum documented that Rural engaged the
101
Rural I, 88 A.3d at 93.
102
RBC contends that “[u]nder the facts as found, Revlon scrutiny could not possibly apply to
the Board’s actions during December 2010 . . . .” Op. Br. 17 (emphasis added). It urges that this
Court “need not review any factual findings to determine that the trial court erred by applying
enhanced scrutiny to the Board’s decision to explore alternatives because this Court has twice
held that being in play does not trigger Revlon.” Id. at 18.
103
B106.
104
B108.
105
B107.
53
bank “as sell-side advisors to explore the sale of the Co[mpany].”106 The memorandum
continued, suggesting that the Rural “transaction represents an important Healthcare sell-
side mandate for the bank in addition to being a large fee event.”107
While the focus of the Special Committee and RBC in December 2010 was on
commencing a sale process, there is other evidence that, at least facially, suggests the
Special Committee had not completely abandoned the other alternatives.108 But “[w]here
the support in the record is sufficient for a factual finding, even if there can be a
reasonable difference of view, our standard of review compels us to defer to the trial
court. Our function here is not to substitute our judgment for the trial court’s as though
we had before us an original application.”109 Thus, we will not disturb the Court of
Chancery’s factual determination that, in December 2010, “the directors had never
106
B139.
107
B140.
108
For example, Rural’s Engagement Letter with RBC and Moelis stated that the two financial
advisors, together, were engaged to “provide certain investment banking and financial advisory
services in connection with the exploration by the Company of various strategic alternatives
including a possible Sale Transaction . . ., AMR Acquisition Transaction . . . or Alternative AMR
Acquisition Transaction . . . .” A551 (alterations removed). Further, on December 26, 2010,
Shackelton emailed the Board with an update on the Rural process, suggesting that the Special
Committee and its advisors were “continuing to refine a target list of [private equity] firms (10-
15)” for the “[p]artner/sale” process. B118. The email continued: “[W]e are considering the
benefits of more formally reaching out to 6-12 other [private equity firms] in order to gauge their
level of interest in Rural (either as a partner in an AMR acquisition or [as] an acquisition
target).” B118. Three days later, after holding a call with Shackelton to discuss the Rural
process, Tim Balombin, a member of RBC’s M & A team, communicated to Daniel the
following: “High level takeaway is that [Shackelton] supports a two track process and selling
the [C]ompany (even to the non-EMS winner), but also wants to ensure we preserve [the] ability
to buy AMR should the situation arise.” A544.
109
N. River Ins. Co. v. Mine Safety Appliances Co., 105 A.3d 369, 381-82 (Del. 2014) (citations
omitted). See Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1341 (Del. 1987)
(citing Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972) (“We do not, however, ignore the
findings made by the trial judge. If they are sufficiently supported by the record and are the
product of an orderly and logical deductive process, in the exercise of judicial restraint we accept
them, even though independently we might have reached opposite conclusions.”)).
54
actually authorized a sale process[,]” and that “[i]t was Shackelton and RBC who
expanded their mandate into a sale.”110
As a legal matter, RBC’s counsel argued that Revlon could not apply in December
2010, since, at that point, the sale of the Company was not “inevitable.” Rather, RBC
contends that Revlon does not apply until the end of the process in late March 2011, since
Shackelton could not have sold Rural absent Board approval.
We have recognized at least three scenarios in which enhanced scrutiny under
Revlon is triggered, including:
(1) when a corporation initiates an active bidding process seeking to sell
itself or to effect a business reorganization involving a clear break-up of the
company[;] (2) where, in response to a bidder’s offer, a target abandons its
long-term strategy and seeks an alternative transaction involving the break-
up of the company[;] or (3) when approval of a transaction results in a sale
or change of control[.] In the latter situation, there is no sale or change in
control when “[c]ontrol of both [companies] remain[s] in a large, fluid,
changeable and changing market.”111
Further, in Revlon, we stated that “[t]he Revlon board’s authorization permitting
management to negotiate a merger or buyout with a third party was a recognition that the
company was for sale. The duty of the board had thus changed from the preservation of
110
Rural I, 88 A.3d at 73. The NACD argues that, “[i]f the Court of Chancery is correct that the
decision to initiate a sale process is subject to Revlon scrutiny, rather than the actions that follow
from a sale decision, that constitutes a tectonic shift in the fiduciary landscape for directors.”
NACD Br. 6. They argue further that “directors must be able to consider freely the exploration
of strategic alternatives (including a sale), without such discussions triggering Revlon’s duty to
maximize short-term value.” NACD Br. 7. We agree, and our narrow ruling premised on these
unusual facts effects no shifts in the Revlon landscape, let alone tectonic ones. The point the
NACD misses is that the trial court, as a factual matter, found that there was no exploration of
alternatives in December 2010, and that Shackelton and RBC had initiated an active sale process
without Board authorization.
111
Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (internal quotations
omitted) (internal citations omitted) [hereinafter, “Arnold I, 650 A.2d at __”].
55
Revlon as a corporate entity to the maximization of the company’s value at a sale for the
stockholders’ benefit.”112 In Lyondell Chemical Co. v. Ryan, we held that enhanced
scrutiny did not arise “simply because [the] company [was] in play[,]”113 but rather as a
consequence of the fact that the “directors began negotiating the sale of [the
company].”114
Here, we are presented with the unusual situation where Shackelton and RBC—
and ostensibly the Special Committee—initiated a sale process in December 2010 that, at
the time, was not authorized by the Board, but which events were later purportedly
ratified by the Board on March 15, 2011. RBC argues that “the trial court repeated the
error that Lyondell reversed,” and that being “in play” is not enough: the Board must
embark on a change of control transaction, and that the focus should be at the end of the
process, because, they say, “[a]fter all, at the end of an auction, a board may decide to
refuse all offers.”115
We reaffirm our holding in Lyondell, and reject RBC’s attempt to delay the
triggering of Revlon to late March 2011 for three reasons. First, without genuinely
exploring other strategic alternatives, the Special Committee initiated an active bidding
process seeking to sell itself in December 2010, and the Board, on March 15, 2011,
purportedly “restated and ratified” the actions of the Special Committee, including the
initiation of the sale process that had transpired over the preceding months. The March
112
Revlon, 506 A.2d at 182.
113
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009) (quoting Paramount Commc’ns
v. Time Inc., 571 A.2d 1140, 1151 (Del. 1989)).
114
Id.115
Op. Br. 20 (citation omitted).
56
15, 2011 minutes state, in a section entitled “Scope of authority – Special Committee,”
that the Company’s legal counsel reviewed with the Board “the resolutions adopted by it
to date in reference to the authority and activities of the Special Committee, and further
discussed updates to such resolutions that were desirable in view of the evolution of the
sale evaluation process . . . .” The Board resolution then “ratifies and restates” the
Board’s delegation to the Special Committee of the “exclusive power and authority” to,
among other things, “solicit proposals for a Potential Transaction,” “negotiate and
finalize terms of any such Potential Transaction,” and “report its findings and
recommendations to the full Board . . . .”116 The March 15 minutes state that the Board
was briefed on the Special Committee’s activities, and a logical inference is that its
resolution reflects the Board’s recognition of, and attempt to fix, the problem posed by
the Special Committee having exceeded its authority. Thus, the March 15 “restatement
and ratification,” which deemed the actions of the Special Committee to be acts of the
Company, undermines RBC’s contention that Revlon should not apply because action by
the full Board was required.117
116
A620. Notably, the prior grants of authority as reflected in the October 27 and December 8
minutes do not mention any grant of “exclusive” authority to the Special Committee. The
October 27, 2010 minutes refer to the “authority” of the Special Committee, not its “exclusive
authority.” A274. The December 8, 2010 minutes revised the scope of authority of the Special
Committee, but omit any reference to the Committee’s “exclusive power and authority.” See
A394.
117
A number of factors influence the amount and type of interaction between the board and a
special committee to which the board has delegated certain authority during the course of a sale
process. We adhere to our observations in C & J Energy that “perfection” is not the standard.
And while there is no blueprint for the degree and type of interaction required, the Board’s
passivity and lack of effective oversight of the sale process was unreasonable. Compare C & J
Energy Servs., 107 A.3d at 1060, 1066 (noting that while the C & J board process “sometimes
fell short of ideal,” the CEO/Chairman “continually shared the details of the valuation changes
57
Second, while RBC relies on Lyondell for the proposition that merely being “in
play” does not trigger Revlon, that case involved a third party putting the target company
in play. The third party’s Schedule 13D signaled to the market that Lyondell was “in
play,” but the directors decided that they would neither put the company up for sale nor
institute defensive measures to fend off a possible hostile offer. Instead, the directors
decided to take a “wait and see” approach. We held that, “[t]he time for action under
Revlon did not begin until . . . the directors began negotiating the sale of Lyondell.”118
Further, we stated that “[t]he duty to seek the best available price applies only when a
company embarks on a transaction—on its own initiative or in response to an unsolicited
offer—that will result in a change of control.”119 Here, with assistance from RBC,
Shackelton, who was then Chairman of both the Special Committee and the Board,
initiated the sale process in December 2010. Given that the Board deemed “any and all
actions heretofore taken by . . . the Special Committee . . . acts and deeds of the
and negotiations with the C & J board, which was majority-independent, and which had the final
say in approving the deal before it went to a stockholder vote[,]” and that, “[a]lthough the board
authorized [the CEO/Chairman] to lead the negotiations” on its behalf, “C & J’s board remained
engaged in the process”) (citations omitted) with Mills Acquisition Co. v. Macmillan, Inc., 559
A.2d 1261, 1281 (Del. 1989) (“Although the Macmillan board was fully aware of its ultimate
responsibility for ensuring the integrity of the auction, the directors wholly delegated the creation
and administration of the auction to an array of [the chairman and CEO’s] hand-picked
investment advisors.”). In Mills, we stated that while a board is entitled to rely upon experts,
officers, and employees selected with reasonable care under 8 Del. C. 141(e), “it may not avoid
its active and direct duty of oversight in a matter as significant as the sale of corporate control.”
Id.118
Lyondell, 970 A.2d at 242.
119
Id. (citing In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71 (Del. 1995)).
58
Company[,]”120 we confine our holding to these unusual facts and do not view our
affirmance of the trial court’s holding as a departure from our prior case law.121
Third, to sanction RBC’s contention would allow the Board to benefit from a more
deferential standard of review during the time when, due to its lack of oversight, the
Special Committee and RBC engaged in a flawed and conflict-ridden sale process. Given
the parties’ agreement on appeal that Revlon applies, the acceptance by both parties of the
predicate “facts as found,” RBC’s acknowledgement that, as we stated in C & J Energy,
“Revlon requires us to examine whether a board’s overall course of action was
reasonable,”122 we decline to upset the trial court’s legal determination as to when Revlon
was triggered.
We agree with the Court of Chancery’s principal conclusion that the Board’s
overall course of conduct fails Revlon scrutiny. Revlon permits a board to pursue the
transaction it reasonably views as most valuable to the stockholders, provided “the
120
A621.
121
To sanction an argument that Revlon applies only at the very endpoint of the sale process—
and not during the course of the overall sale process—would afford the Board the benefit of a
more lenient standard of review where the sale process went awry, partially due to the Board’s
lack of oversight. Such a result would potentially incentivize a board to avoid active engagement
until the very end of a sale process by delegating the process to a subset of directors, officers,
and/or advisors.
122
C & J Energy Servs., 107 A.3d at 1066. Counsel for RBC argued that Revlon applies when
the “Board gets to the point where it now has all the information it needs for a sale and is
comparing that to remaining independent or some other alternative that it might have. That’s the
point at which the Revlon duties attach. And it is certainly at that point -- it’s not as if the court
ignores what’s gone before that -- because you certainly -- there’s sort of a sliding scale and you
look at what kind of activity there was, in terms of price discovery, before that point and after
that point. And that’s the part that we think the trial court, here, missed. It’s the afterward part
that they need to look at, as well.” Videotape: Oral Argument Before the Delaware Supreme
Court, at 4:50 (RBC Capital Markets, LLC v. Joanna Jervis, No. 140, 2015, September 30,
2015), archived at
http://livestream.com/DelawareSupremeCourt/events/4384267/videos/100717775.
59
transaction is subject to an effective market check under circumstances in which any
bidder interested in paying more has a reasonable opportunity to do so.”123 We stated in
C & J Energy that “[s]uch a market check does not have to involve an active solicitation,
so long as interested bidders have a fair opportunity to present a higher-value alternative,
and the board has the flexibility to eschew the original transaction and accept the higher-
value deal.”124
Here, the evidence fully supports the trial court’s findings that the solicitation
process was structured and timed in a manner that impeded interested bidders from
presenting potentially higher value alternatives. This aspect of the trial court’s ruling
relied, in part, upon findings that RBC designed the sale process to run in parallel with a
process being conducted by EMS, 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.”125 We agree with the trial court’s suggestion that the
reasonableness of initiating a sale process to run in tandem with the EMS auction, absent
conflicts of interest, “would be one of the many debatable choices that fiduciaries and
123
C & J Energy Servs., 107 A.3d at 1067 (citing Equity-Linked Investors, L.P. v. Adams, 705
A.2d 1040 (Del. Ch. 1997); Freedman v. Rest. Assocs. Indus. Inc., 1990 WL 135923 (Del. Ch.
Sept. 19, 1990); Roberts v. Gen. Instrument Corp., 1990 WL 118356 (Del. Ch. Aug. 13, 1990);
In re RJR Nabisco, Inc. S’holders Litig., 14 Del. J. Corp. L. 1132 (Del. Ch. 1989); In Re Fort
Howard Corp. S’holders Litig., 1988 WL 83147 (Del. Ch. Aug. 8, 1988)).
124
Id. at 1067-68 (citing Lyondell, 970 A.2d at 243; In re Dollar Thrifty S’holders Litig., 14 A.3d
573, 612-13, 615 (Del. Ch. 2010); In re MONY Grp. Inc. S’holders Litig., 852 A.2d 9 (Del. Ch.
2004); Equity-Linked Investors, 705 A.2d at 1056-58; Herd v. Major Realty Corp., 1990 WL
212307, at *9 (Del. Ch. Dec. 21, 1990); Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d
278, 289 (Del. Ch. 1989)).
125
Rural I, 88 A.3d at 91.
60
their advisors must make . . . and it would fall within the range of reasonableness.”126
But where undisclosed conflicts of interest exist, such decisions must be viewed more
skeptically.
The record indicates that Rural’s Board was unaware of the implications of the
dual-track structure of the bidding process and that the design was driven by RBC’s
motivation to obtain financing fees in another transaction with Rural’s competitor. There
is ample evidence that there were material barriers, including confidentiality restrictions,
that would have impeded or prevented a bidder from making an offer. For example, the
record supports the trial court’s findings that a bidder for EMS would need a separate
team of advisors to participate in the Rural process, and that these individuals could not
share confidential information with advisors working on a potential EMS acquisition.
RBC also did not explain that a successful bidder for EMS would own a Rural
competitor, making it difficult for the Company to provide due diligence freely to such
bidder. The trial court found that “[t]here is no contemporaneous evidence that [these
problems] were identified and considered.”127 These findings are sufficiently supported
by the record evidence.
The Board, as a result, took no steps to address or mitigate RBC’s conflicts.
Directors frequently rely on expert opinions concerning the fairness of proposed
transactions, and the Delaware General Corporation Law recognizes that directors may
126
Id.127
Id. at 92.
61
rely upon such expert opinions. In Citron v. Fairchild Camera & Instrument Corp., this
Court observed:
[W]e are, of course, ever mindful of the realities of corporate directorship.
We recognize that management is often the catalyst in the decision-making
process. We further recognize that a board will receive substantial
information from third-party sources. As we have noted on various
occasions, however, in change of control situations, sole reliance on hired
experts and management can “taint[] the design and execution of the
transaction.” Thus, we look particularly for evidence of a board’s active
and direct role in the sale process.128
While a board may be free to consent to certain conflicts, and has the protections
of 8 Del. C. § 141(e), directors need to be active and reasonably informed when
overseeing the sale process, including identifying and responding to actual or potential
conflicts of interest.129 But, at the same time, a board is not required to perform searching
and ongoing due diligence on its retained advisors in order to ensure that the advisors are
not acting in contravention of the company’s interests, thereby undermining the very
process for which they have been retained. A board’s consent to a conflict does not give
the advisor a “free pass” to act in its own self-interest and to the detriment of its client.
Because the conflicted advisor may, alone, possess information relating to a conflict, the
128
Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 66 (Del. 1989) (quoting Mills,
559 A.2d at 1281) (internal citation omitted).
129
“Under 8 Del. C. § 141(e), when corporate directors rely in good faith upon opinions or
reports of officers and other experts ‘selected with reasonable care,’ they necessarily do so on the
presumption that the information provided is both accurate and complete. Normally, decisions
of a board based upon such data will not be disturbed when made in the proper exercise of
business judgment.” Mills, 559 A.2d at 1283-84. A board’s reasonable reliance on an advisor
presupposes that it has undertaken to manage conflicts as part of its oversight of the process. A
board’s consent to the conflicts of its financial advisor necessitates that the directors be
especially diligent in overseeing the conflicted advisor’s role in the sale process.
62
board should require disclosure of, on an ongoing basis, material information that might
impact the board’s process.130
In addition to the problems with the design of the sale process, the trial court
found that Rural’s directors were not adequately informed as to Rural’s value. Further,
the trial court concluded that, when the Special Committee and RBC were selling Rural,
“the Company’s value on a stand-alone basis exceeded what a private equity bidder
willingly would pay.”131 RBC contends that the trial court ignores our recent holding in
C & J Energy, advocating that the post-signing market check cures any shortcomings of
the Rural sale process. The NACD argues that, “this Court has recognized that the
absence of topping bids from the market evidences that a board had adequate information
to evaluate a sale.”132
But RBC ignores other significant aspects of our holding in C & J Energy,
including our recognition that “[t]he ability of the stockholders themselves to freely
accept or reject the board’s preferred course of action is also of great importance in this
context.”133 Here, the stockholders—and the Board—were unaware of RBC’s conflicts
and how they potentially impacted the Warburg offer. Unlike the C & J Energy directors,
the Board failed to appropriately satisfy itself that the Warburg transaction was the best
130
For instance, the board could, when faced with a conflicted advisor, as a contractual matter,
treat the conflicted advisor at arm’s-length, and insist on protections to ensure that conflicts that
might impact the board’s process are disclosed at the outset and throughout the sale process.
131
Rural I, 88 A.3d at 103.
132
NACD Br. 15 (citing Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1287 (Del. 1989)).
133
C & J Energy Servs., 107 A.3d at 1068 (citing In re El Paso Corp. S’holder Litig., 41 A.3d
432, 449 (Del. Ch. 2012); In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 515 (Del. Ch. 2010); In
re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 208 (Del. Ch. 2007); In re Toys “R” Us,
Inc. S’holder Litig., 877 A.2d 975, 1023 (Del. Ch. 2005)).
63
course of action for its stockholders. Moreover, Rural’s directors were not in a position
to rely on the ability of the Company’s stockholders to have a fair chance to evaluate its
decision, in light of the fact that both the Board and the stockholders were operating on
the basis of an informational vacuum created by RBC.134 Rural’s directors were not
“well-informed” as to Rural’s value, such that the decision to accept Warburg’s offer was
devoid of “important efforts” by the Company’s directors “to protect their stockholders
and to ensure that the transaction was favorable to them.”135
The Court of Chancery determined that, “[a]s a result of th[e] faulty process, the
merger did not generate for stockholders the best value reasonably attainable. . . . RBC’s
faulty design prevented the emergence of the type of competitive dynamic among
multiple bidders that is necessary for reliable price discovery.”136 We agree.
“When a board exercises its judgment in good faith, tests the transaction through a
viable passive market check, and gives its stockholders a fully informed, uncoerced
opportunity to vote to accept the deal,” a court will have difficulty determining that such
board violated its Revlon duties.137 But here, the Company’s stockholders were not fully
informed when they voted to accept the deal. A confluence of factors undercut the
134
See, e.g., id. at 1070 (“Although the C & J board had to satisfy itself that the transaction was
the best course of action for stockholders, the board could also take into account that its
stockholders would have a fair chance to evaluate the board’s decision for themselves.”).
135
Id. at 1069.
136
Rural I, 88 A.3d at 102-03; see also Netsmart, 924 A.2d at 184 (discussing an unreasonably-
conducted, target-initiated active bidding process involving an “informal and haphazard market
canvass” that excluded potential strategic buyers).
137
C & J Energy Servs., 107 A.3d at 1053.
64
reliability and competitiveness of the Rural sale process.138 Moreover, the 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.
Finally, we reject RBC’s contention that the trial court erred by finding a due care
violation without finding gross negligence. RBC argues that intermediate scrutiny under
Revlon exists to determine whether plaintiff stockholders should receive pre-closing
injunctive relief, but it cannot be used to establish a breach of fiduciary duty that warrants
post-closing damages.
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
138
Those factors included: (i) “the Company was just beginning to implement new growth
strategies under a new CEO[;]” (ii) for various reasons, “the market did not understand Rural’s
prospects[;]” (iii) large private equity buyers were tied up in the EMS process; and (iv) logical
strategic bidders were focused on their own change of control transactions. Rural I, 88 A.3d at
101-03.
139
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 . . . .”). At trial, Jervis was not seeking to impose liability on the defendant directors,
since Jervis had settled the litigation as to them.
65
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.
B. The Board Violated its Disclosure Obligations
1. Contentions of the Parties
The Court of Chancery concluded that RBC aided and abetted the Board’s breach
of the fiduciary duty of disclosure, due to the fact that the “Proxy Statement contained
false and misleading information about RBC’s incentives,” in addition to “false
information that RBC presented to the Board in its financial presentation.” RBC argues
that the trial court erred in finding that the Proxy Statement was misleading, and in its
finding that the purported misstatements and omissions were material.
2. Standard of Review
Whether disclosures are adequate “is a mixed [question] of law and fact, requiring
an assessment of the inferences a reasonable shareholder would draw and the significance
of those inferences to the individual shareholder.”140 Thus, “this Court has the authority
to review the entire record and to make its own findings of fact in a proper case.”141 But
“if the findings of the trial judge ‘are sufficiently supported by the record and are the
product of an orderly and logical deductive process, . . . we accept them, even though
independently we might have reached opposite conclusions.’”142
140
Shell Petroleum, Inc. v. Smith, 606 A.2d 112, 114 (Del. 1992) (citing Rosenblatt v. Getty Oil
Co., 493 A.2d 929, 944-45 (Del. 1985)) (citations omitted).
141
Id. (quoting Levitt, 287 A.2d at 673) (internal quotation omitted).
142
Id.66
3. Discussion
RBC lodges three challenges to the trial court’s analysis with respect to the
Disclosure Claim. First, as to the valuation analysis, RBC argues that the Board did not
falsely summarize RBC’s fairness analysis in the Proxy Statement. Further, RBC claims
that the trial court incorrectly scrutinized whether the analysis performed was proper, as
opposed to whether such analysis was accurately described in the Proxy Statement.
Second, RBC contends that the Board and the Company’s stockholders were aware of
RBC’s role in the EMS financing as a result of a February 14, 2011 CD & R press release
identifying RBC among the banks providing the private equity firm with financing in the
EMS transaction.143 RBC also asserts that it negotiated a term in the Engagement Letter
that permitted it to participate in financing the purchase of Rural’s competitors. On this
point, RBC argues that the Proxy Statement described its relationship with Warburg and
disclosed that it was given permission “to indicate that it would be willing to offer buy-
side financing.”144 Such disclosure, according to RBC, was sufficient to inform
stockholders that RBC operated with a potential conflict throughout the sale process.
Finally, RBC contends that the trial court’s finding that the Proxy Statement contained
materially misleading disclosures about the Board’s conclusion as to RBC’s ability to
provide financing to potential purchasers was incorrect.
143
The CD & R press release, dated February 14, 2011, noted that “CD&R has obtained
committed financing from Barclays Capital, Deutsche Bank Securities Inc., BofA Merrill Lynch,
affiliates of Morgan Stanley, RBC Capital Markets and UBS Investment Bank.” A589. The
press release also stated that “Barclays Capital, Deutsche Bank Securities Inc., Morgan Stanley
& Co., RBC Capital Markets and UBS Investment Bank acted as financial advisors” to CD & R
in the EMS transaction. A590.
144
A1091.
67
The Board’s “fiduciary duty of disclosure, like the board’s duties under Revlon
and its progeny, is not an independent dut[y] but the application in a specific context of
the board’s fiduciary duties of care, good faith, and loyalty.”145 In Pfeffer v. Redstone,
we stated that “[c]orporate fiduciaries can breach their duty of disclosure under Delaware
law . . . by making a materially false statement, by omitting a material fact, or by making
a partial disclosure that is materially misleading.”146 We also observed that, “[t]o state a
claim for breach by omission of any duty to disclose, a plaintiff must plead facts
identifying (1) material, (2) reasonably available (3) information that (4) was omitted
from the proxy materials.”147
For an omission to be material, “there must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as
having significantly altered the ‘total mix’ of information made available.”148 Stated
another way, “[o]mitted facts are material ‘if there is a substantial likelihood that a
reasonable stockholder would consider [them] important in deciding how to vote.’”149
Materiality “does not require proof of a substantial likelihood that disclosure of the
omitted fact would have caused the reasonable investor to change his vote[,]”150 only that
145
Malpiede, 780 A.2d at 1086 (citations omitted).
146
Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (citations omitted) (internal quotation
omitted).
147
Id. at 686 (citations omitted) (internal quotation omitted).
148
Arnold I, 650 A.2d at 1277 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976)) (emphasis removed) (citations omitted). See Rosenblatt, 493 A.2d at 944; Zirn v. VLI
Corp., 621 A.2d 773, 778-79 (Del. 1993).
149
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000) (quoting Louden v. Archer-
Daniels-Midland Co., 700 A.2d 135, 142 (Del. 1997)).
150
Rosenblatt, 493 A.2d at 944 (quoting TSC Indus., 426 U.S. at 449).
68
such reasonably available information would have impacted upon a stockholder’s voting
decision. But “[o]mitted facts are not material simply because they might be helpful.”151
i. The Valuation Analysis
The Court of Chancery’s finding that the Proxy Statement incorporated a false
valuation analysis centered on the fact that “RBC told the [Board] that it used ‘Wall
Street research analyst consensus projections’ to derive Rural’s EBITDA for 2010.”152
According to the trial court, “[t]he ‘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.”153
RBC rests its argument on three points. It contends that the trial court (1) erred in
analyzing whether RBC’s fairness analysis was flawed rather than whether the Proxy
Statement fairly and accurately described that analysis; (2) erred in concluding that the
underlying fairness analysis was false; and (3) erred in determining that the Adjusted
EBITDA figure used in conducting the precedent transaction analysis was material. We
disagree with these contentions.
The trial court concluded that the Proxy Statement did not accurately represent
RBC’s analysis. It found that RBC employed an Adjusted EBITDA figure of $69.8
million when conducting its precedent transaction analysis, while the Proxy Statement’s
disclosures with respect to Rural’s 2010 Adjusted EBITDA referenced the $76.8 million
151
Skeen, 750 A.2d at 1174.
152
Rural I, 88 A.3d at 104.
153
Id.69
figure. Moreover, the Proxy Statement stated that RBC adjusted the guideline target
companies’ EBITDA in its precedent transaction analysis “to account for . . . certain one-
time expenses . . . .”154 The trial court also found that the Proxy Statement falsely
suggested that RBC performed its analysis in accordance with Wall Street analyst
“consensus.” Accordingly, the trial court determined that a stockholder reviewing the
Proxy Statement would incorrectly conclude that RBC used the disclosed Adjusted
EBITDA that added back one-time expenses.
Here, the trial court’s decision was both supported by the record and well-
reasoned. There is a substantial likelihood that a reasonable stockholder would consider
the Adjusted EBITDA figure used in conducting the precedent transaction analysis to be
material when considering how to vote. Both ISS and Glass Lewis interpreted $8.19 per
share—the low end of the “consensus” range at 6.3x—as the true low end of RBC’s
precedent transaction analysis. We agree with the trial court’s conclusion that the
“consensus” range was artificial and misleading, and that the information that RBC
provided for the Proxy Statement about its precedent transaction analysis was material
and false.
ii. RBC’s Failure to Fully Disclose its Conflicts
RBC contends that its last minute efforts seeking to provide staple financing to
Warburg were “not material.” RBC further urges that stockholders reading the Proxy
Statement knew that RBC operated with a potential conflict and that disclosure of that
154
A1100.
70
potential conflict was sufficient.155 The Court of Chancery concluded that the “Proxy
Statement contained false and misleading information about RBC’s incentives.”156 In so
doing, it reiterated that “it is imperative for the stockholders to be able to understand what
factors might influence the financial advisor’s analytical efforts. . . .”157 We agree.
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 . . . .”158 The trial court determined that this
statement was “false,” given that 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.”159 This finding is supported by the record.
The Proxy Statement’s discussion of RBC’s right to offer staple financing was a
partial disclosure. When parties to a transaction and their advisors “travel[] down the
road of partial disclosure . . . they . . . [have] an obligation to provide the stockholders
155
Similarly, the NACD contends that, “[i]t should be enough to disclose RBC had permission to
seek to offer buy-side financing, as Rural did here.” NACD Br. 17 (emphasis added). We
disagree.
156
Rural I, 88 A.3d at 105.
157
Id. (quoting David P. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *8 (Del. Ch.
June 27, 2008)). See also In re Lear Corp. S’holder Litig., 926 A.2d 94, 114 (Del. Ch. 2007)
(requiring disclosure of a CEO conflict of interest, where the CEO acted as negotiator and
observing that, “a reasonable stockholder would want to know an important economic
motivation of the negotiator singularly employed by a board to obtain the best price for the
stockholders, when that motivation could rationally lead that negotiator to favor a deal at a less
than optimal price, because the procession of a deal was more important to him, given his overall
economic interest, than only doing a deal at the right price”).
158
A1090.
159
Rural I, 88 A.3d at 106.
71
with an accurate, full, and fair characterization of those historic events.”160 The Proxy
Statement failed to disclose how RBC used the Rural sale process to seek a financing role
in the EMS transaction. Nor did it disclose RBC’s courtship of Warburg. When viewed
in conjunction with the potential fees RBC was to receive for its financing services, the
investment bank’s pursuit of Warburg’s financing business was demonstrative of a
conflict that was unquestionably material, and necessitated full and fair disclosure for the
benefit of the stockholders.
C. RBC Aided and Abetted the Board’s Breaches
1. Contentions of the Parties
RBC advances three arguments to support its claim that the Court of Chancery
erred in determining that the investment bank aided and abetted the Board’s breach of the
duty of care. First, RBC argues that a third party cannot “knowingly participate” in an
exculpated breach of the duty of care, and it contends that a third party cannot knowingly
participate in a breach of the duty of care that is not “inherently wrongful.” Second, RBC
suggests that the Court of Chancery erred by concluding that “a third party” can be
deemed to have knowingly participated in a breach of the duty of care when it “misleads
directors into breaching their” fiduciary obligation. Finally, RBC asserts that aiding and
abetting is a “subset of conspiracy” and therefore rests on proof that the aider and abettor
agreed to a joint course of conduct with the primary actor.
2. Standard of Review
160
Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996) (quoting Arnold I, 650 A.2d at 1280)
(citation omitted) [hereinafter, “Zirn II, 681 A.2d at __”].
72
This Court reviews the Court of Chancery’s conclusions of law de novo.161
However, we afford a trial court’s factual findings a “high level” of deference,162 and we
will not disturb such conclusions unless they are the by-product of clear error.163
3. Discussion
In Malpiede v. Townson, this Court described the elements of aiding and abetting
breaches of fiduciary duty as: (i) the existence of a fiduciary relationship, (ii) a breach of
the fiduciary’s duty, (iii) knowing participation in that breach by the defendants, and (iv)
damages proximately caused by the breach.164 The first two elements are established as
set forth above.
As to the third element, this Court, in Malpiede, observed that “[a] third party may
be liable for aiding and abetting a breach of a corporate fiduciary’s duty to the
stockholders if the third party ‘knowingly participates’ in the breach.”165 We stated
further that “[k]nowing participation in a board’s fiduciary breach requires that the third
party act with the knowledge that the conduct advocated or assisted constitutes such a
161
Unitrin, 651 A.2d at 1385.
162
United Techs., 109 A.3d at 557 (quoting DV Realty Advisors, 75 A.3d at 108).
163
DV Realty Advisors, 75 A.3d at 109.
164
Malpiede, 780 A.2d at 1096 (quoting Penn Mart Realty Co. v. Becker, 298 A.2d 349, 351
(Del. Ch. 1972)). See also Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116, 131 (Del. Ch.
1986); Gilbert v. El Paso Co., 490 A.2d 1050, 1057 (Del. Ch. 1984). In Malpiede, we
“express[ed] no view on the question whether a third party may ‘knowingly participate’ in or
give substantial assistance to a board’s grossly negligent conduct or whether a third party may be
liable for aiding and abetting only if the board’s breach is intentional.” Malpiede, 780 A.2d at1097 n.78 (citations omitted).
165
Malpiede, 780 A.2d at 1096 (quoting Gilbert, 490 A.2d at 1057) (citations omitted). See also
Mills, 559 A.2d at 1284 n.33 (noting that “it is bedrock law that the conduct of one who
knowingly joins with a fiduciary, including corporate officials, in a breach of a fiduciary
obligation, is equally culpable”).
73
breach.”166 As an example, this Court has said that “a bidder may be liable to the target’s
stockholders if the bidder attempts to create or exploit conflicts of interest in the
board.”167 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.”168 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 . . .[;]”169 that is, with an
“illicit state of mind.”170 To establish scienter, the plaintiff must demonstrate that the
aider and abettor had “actual or constructive knowledge that their conduct was legally
166
Malpiede, 780 A.2d at 1097 (citations omitted).
167
Id. (citing Gilbert, 490 A.2d at 1058 (“[A]lthough an offeror may attempt to obtain the lowest
possible price for stock through arm’s-length negotiations with the target’s board, it may not
knowingly participate in the target board’s breach of fiduciary duty by extracting terms which
require the opposite party to prefer its interests at the expense of its shareholders.”)) (citations
omitted).
168
Rural I, 88 A.3d at 97.
169
Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 143 (Del.
Ch. 2004) (quoting DRR, L.L.C. v. Sears, Roebuck & Co., 949 F. Supp. 1132, 1137 (D. Del.
1996)). See Lord v. Souder, 748 A.2d 393, 402 (Del. 2000) (“It is well-settled under both
Delaware law and the law of most other jurisdictions that the scienter . . . requirement can be
satisfied by a showing of recklessness. . . . ‘There is of course no difficulty in finding the
required intent to mislead where it appears that the speaker believes his statement to be false.
Likewise there is general agreement that it is present when the representation is made without
belief as to its truth, or with reckless disregard whether it be true or false.’”) (internal citation
omitted).
170
In re Oracle Corp., 867 A.2d 904, 931 (Del. Ch. 2004).
74
improper.”171 Accordingly, the question of whether a defendant acted with scienter is a
factual determination.172 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.”173 The evidence supports this finding.
RBC knowingly induced the breach by exploiting its own conflicted interests to
the detriment of Rural and by creating an informational vacuum.174 RBC’s knowing
participation included its failure to disclose its interest in obtaining a financing role in the
EMS transaction and how it planned to use its engagement as Rural’s advisor to capture
buy-side financing work from bidders for EMS; its knowledge that the Board and Special
Committee were uninformed about Rural’s value; and its failure to disclose to the Board
its interest in providing the winning bidder in the Rural process with buy-side financing
and its eleventh-hour attempts to secure that role while simultaneously leading the
negotiations on price. RBC’s desire for Warburg’s business also manifested itself in its
financial analysis, provided by RBC the day the Board approved the merger. RBC’s
illicit manipulation of the Board’s deliberative processes for self-interested purposes was
enabled, in part, by the Board’s own lack of oversight, affording RBC “the opportunity to
171
Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (citing Malpiede, 780 A.2d 1075); Emerald
Partners v. Berlin, 787 A.2d 85 (Del. 2001) [hereinafter, “Emerald Partners III, 787 A.2d at
__”]) (citation omitted).
172
Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 648 (2010) (stating that “[s]cienter is assuredly
a ‘fact’” (emphasis added)).
173
Rural I, 88 A.3d at 97.
174
Cf. Encite LLC v. Soni, 2011 WL 5920896, at *26 (Del. Ch. Nov. 28, 2011) (recognizing that
a “plaintiff can prove knowing participation by showing that a [third party] ‘attempt[ed] to create
or exploit conflicts of interest in the board’ or ‘conspire[d] in or agree[d] to the fiduciary
breach’”) (citation omitted).
75
indulge in the misconduct which occurred.”175 The Board was unaware of RBC’s
modifications to the valuation analysis, back-channel communications with Warburg, and
eleventh-hour attempt to capture at least a portion of the acquirer’s buy-side financing
business. RBC made no effort to advise the Rural directors about these contextually
shaping points. The result was a poorly-timed sale at a price that was not the product of
appropriate efforts to obtain the best value reasonably available and, as the trial court
found, a failure to recognize that Rural’s stand-alone value exceeded the sale price.
RBC’s failure to fully disclose its conflicts and ulterior motives to the Board, in
turn, led to a lack of disclosure in the Proxy Statement.176 The Proxy Statement included
materially misleading information that RBC presented to the Board in its financial
presentation and omitted information about RBC’s conflicts.
The manifest intentionality of RBC’s conduct—as evidenced by the bankers’ own
internal communications—is demonstrative of the advisor’s knowledge of the reality that
the Board was proceeding on the basis of fragmentary and misleading information.
Propelled by its own improper motives, RBC misled the Rural directors into breaching
their duty of care, thereby aiding and abetting the Board’s breach of its fiduciary
obligations.177
175
Mills, 559 A.2d at 1279.
176
See, e.g., Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *28 n.22 (Del. Ch. Jan. 25, 1999)
(discussing disclosure of improper motives).
177
SIFMA claims that it is internally inconsistent that a “victimized” board engaged in
wrongdoing. But the trial court held that the Board independently breached its duty of care in
ways not caused by RBC. One such example was the Board’s failure to exercise appropriate
oversight as to the unauthorized initiation of the sale process. Certain other breaches were more
directly the result of RBC’s conduct. See, e.g., Rural II, 102 A.3d at 239 (“The directors
76
D. Proximate Cause
1. Contentions of the Parties
RBC contends that the court below improperly concluded that but for the financial
advisor’s actions the Board would not have breached its duty of care “and damaged
Rural’s stockholders by causing the Company to be sold at a price below its fair
value.”178 RBC suggests that “Moelis’s presence in [the Warburg] negotiations logically
cuts the causal link relied upon by the trial court.”179 RBC similarly rests on the
availability of Moelis’s financial analysis to support its argument that the Court of
Chancery erred in determining that RBC proximately caused the harm suffered by the
Company’s stockholders when voting in favor of the Warburg offer on the basis of the
misleading and false Proxy Statement.180
2. Standard of Review
On appeal, this Court reviews the issue of proximate cause for clear error, as the
question “is ordinarily a question of fact to be determined by the trier of fact.”181
3. Discussion
Under Delaware law, a proximate cause is one “which in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury and without
breached their duties when approving the disclosures in the Proxy Statement and when
approving the Merger, but they did so because RBC misled them, affirmatively in the case of the
Disclosure Claim and both affirmatively and by omission during the final approval of the
Merger.”).
178
Rural I, 88 A.3d at 101.
179
Op. Br. 52.
180
Id. at 54.
181
Duphily v. Del. Elec. Co-op., Inc., 662 A.2d 821, 830 (Del. 1995) (citations omitted).
77
which the result would not have occurred.”182 Our law “has long recognized that there
may be more than one proximate cause of an injury.”183 To establish proximate cause, “a
plaintiff must show that the result would not have occurred ‘but for’ the defendant’s
action.”184 Further, “[i]n order to break the causal chain, the intervening cause must also
be a superseding cause, that is, the intervening act or event itself must have been neither
anticipated nor reasonably foreseeable by the original tortfeasor.”185 “[A] superseding
cause is a new and independent act, itself a proximate cause of an injury, which breaks
the causal connection between the original tortious conduct and the injury.”186 However,
“[t]he mere occurrence of an intervening cause . . . does not automatically break the chain
of causation stemming from the original tortious conduct.”187
The Board’s receipt of Moelis’s financial analysis—which the Special Committee
treated as “secondary” to that of RBC—does not remedy RBC’s improper conduct, nor
does it destroy the causal link between RBC’s actions, the Board’s failure to satisfy itself
of its fiduciary obligations, and the harm suffered by the Company’s stockholders.188
182
Russell v. K-Mart Corp., 761 A.2d 1, 5 (Del. 2000) (quoting Duphily, 662 A.2d at 829)
(internal quotations omitted).
183
Jones v. Crawford, 1 A.3d 299, 302 (Del. 2010) (quoting Culver v. Bennett, 588 A.2d 1094,
1097 (Del. 1991)) (internal quotation omitted).
184
Mazda Motor Corp. v. Lindahl, 706 A.2d 526, 532 (Del. 1998) (citing Money v. Manville
Corp. Asbestos Disease Comp. Trust Fund, 596 A.2d 1372, 1375-77 (Del. 1991); Culver, 588
A.2d at 1097).
185
Duphily, 662 A.2d at 829 (citing Stucker v. Am. Stores Corp., 171 A. 230, 233 (Del. 1934)).
186
Id.187
Id.188
We acknowledge that obtaining the advice of a second bank is a common practice and that
such practice can have a salutary effect on a sale process. But see In re BankAtlantic Bancorp,
Inc. Litig., 39 A.3d 824, 840 (Del. Ch. 2012) (enjoining a sale transaction, despite the presence
of two financial fairness opinions from two separate banks); El Paso, 41 A.3d at 434 (discussing
the problematic entwinement of primary and secondary bank incentives); In re Del Monte Foods
78
Moelis was a secondary actor in the valuation process, and—like RBC—was
compensated for its advisory role on contingent basis. RBC’s argument that Moelis’s
presence cleansed the process falls short, in part, because the supposedly conflict-
cleansing bank was paid on the same contingent basis as the primary bank. A contingent
compensation arrangement that pays an advisor a percentage of the deal value can have
the salutary effect of aligning the interests of the advisor with those of its client in
attempting to obtain the best value. But there could be misalignment over whether to
take a deal in the first instance, and divergence could arise over how to proceed during
final negotiations.189 Moelis’s fairness opinion does not cure RBC’s aiding and abetting
of the Board’s breach of the duty of disclosure. Here, the stockholders went to the ballot
box on the basis of a deficient Proxy Statement, the insufficiency and misleading nature
of which was due to RBC’s failure to be forthcoming.
SIFMA submits that a claim for aiding and abetting a breach of the duty of care, if
recognized by this Court, would create an anomalous imbalance of responsibilities where
a non-fiduciary may be held liable for an unintentional violation of a fiduciary duty by a
fiduciary. Here, these concerns are overstated since the claim for aiding and abetting was
premised on RBC’s “fraud on the Board,” and that RBC aided and abetted the Board’s
Co. S’holders Litig., 25 A.3d 813, 826 (Del. Ch. 2011) (enjoining a transaction, despite a
primary bank’s provision of buy-side financing and correlative insistence that their client “obtain
a second fairness opinion”).
189
The trial court found that certain changes made by Moelis to its valuation analysis were
“debatable” and “had the effect of lowering the range of fairness and making the merger price
look more attractive.” Rural I, 88 A.3d at 77 n.1. But because Moelis settled, the trial court did
not “delve into the minutiae of Moelis’s work,” and it did not make any findings as to why
Moelis made these changes. Id.79
breach of duty where, for RBC’s own motives, it “intentionally duped” the directors into
breaching their duty of care.190 The record evidence amply supports the trial court’s
conclusion that RBC purposely misled the Board so as to proximately cause the Board to
breach its duty of care. Accordingly, our 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 Moreover, the requirement that the aider and abettor act
190
Goodwin, 1999 WL 64265, at *28 (suggesting the availability of an aiding abetting claim
where a “third-part[y], for improper motives of [its] own, intentionally dupe[s] . . . directors into
breaching their duty of care”).
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. Here, the Engagement Letter
expressly permitted RBC to explore staple financing. But, this permissive language was general
in nature and disclosed none of the conflicts that ultimately emerged. As became evident in the
instant matter, the conflicted banker has an informational advantage when it comes to knowledge
of its real or potential conflicts. See William W. Bratton & Michael L. Wachter, Bankers and
Chancellors, 93 TEX. L. REV. 1, 36 (2014) (“The basic requirements of disclosure and consent
make eminent sense in the banker-client context. The conflicted banker has an informational
advantage. Contracting between the bank and the client respecting the bank’s conflict cannot be
expected to succeed until the informational asymmetry has been ameliorated. Disclosure evens
the field: the client board has choices in the matter . . . and needs to make a considered decision
regarding the seriousness of the conflict.”). The banker is under an obligation not to act in a
manner that is contrary to the interests of the board of directors, thereby undermining the very
advice that it knows the directors will be relying upon in their decision making processes.
Adhering to the trial court’s amorphous “gatekeeper” language would inappropriately expand
80
with scienter makes an aiding and abetting claim among the most difficult to prove.192
Here, that standard was satisfied by the unusual facts proven at trial and which have not
been seriously challenged on appeal.
E. The Trial Court Did Not Err in Calculating Damages
1. Contentions of the Parties
On appeal, RBC suggests that the Court of Chancery abused its discretion in
calculating damages by ignoring the results of a full auction and post-signing market
check and accepting an unreasonably inflated discounted cash flow as the sole evidence
of value. For her part, Jervis suggests that the Court of Chancery properly determined the
amount of damages suffered by the Class.
our narrow holding here by suggesting that any failure by a financial advisor to prevent directors
from breaching their duty of care gives rise to an aiding and abetting claim against the advisor.
192
See, e.g., Malpiede, 780 A.2d at 1097-98 (finding “that the plaintiffs’ aiding and abetting
claim fails as a matter of law because the allegations in the complaint do not support an inference
that [the alleged aider and abettor] knowingly participated in a fiduciary breach”); Santa Fe, 669
A.2d at 72 (affirming the dismissal of an aiding and abetting claim); Lee v. Pincus, 2014 WL
6066108, at *13 (Del. Ch. Nov. 14, 2014) (quoting Allied Capital Corp. v. GC-Sun Holdings,
L.P., 910 A.2d 1020, 1039 (Del. Ch. 2006)) (noting that “[k]nowing participation has been
described as a ‘stringent’ standard that ‘turn[s] on proof of scienter’”) (emphasis added); Morgan
v. Cash, 2010 WL 2803746, at *4-5 (Del. Ch. July 16, 2010) (granting a motion to dismiss
predominantly on the basis that knowing participation was not established); Katell v. Morgan
Stanley Grp., Inc., 1993 WL 106067, at *1 (Del. Ch. Mar. 29, 1993) (denying plaintiffs’ requests
for reargument and modification following a finding that “plaintiffs failed to allege specifically
the third element, namely facts from which it can be reasonably be inferred that [the alleged
aiders and abettors] knowingly participated” in the breach). See also El Paso, 41 A.3d at 448(stating that “it is difficult to prove an aiding and abetting claim”) (citations omitted); Binks v.
DSL.net, Inc., 2010 WL 1713629, at *10 (Del. Ch. Aug. 18, 2009) (“The standard for an aiding
and abetting claim is a stringent one, one that turns on proof of scienter of the alleged abettor.”)
(emphasis added); Allied Capital, 910 A.2d at 1039 (“[T]he test for stating an aiding and abetting
claim is a stringent one . . . .”); Bratton & Wachter, Bankers and Chancellors, 93 TEX. L. REV. at
62-63 n.356 (suggesting that, for an aiding and abetting claim, “[t]he plaintiff must meet a
scienter requirement, proving not only the existence and breach of a fiduciary relationship but
the defendant’s knowing participation in the breach[,]” and that “[t]hese claims accordingly are
thought to be hard to prove”) (emphasis added) (citations omitted).
81
2. Standard of Review
We review findings as to damages by the Court of Chancery for an abuse of
discretion.193 “The Court of Chancery has the . . . power ‘to grant such . . . relief as the
facts of a particular case may dictate.’”194
3. Discussion
The Court of Chancery determined that the Class was entitled to compensatory
damages in the amount of $4.17 per share.195 Relying, in part, on this Court’s holding in
Weinberger v. UOP, Inc., the Court of Chancery undertook to discover the “fair value” or
“intrinsic value” of the shares held by the Class “using the same methodologies employed
in an appraisal [proceeding]. . . .”196
As part of Rural I, the trial court adopted the discounted cash flow model
presented by Jervis’s expert as the general framework for the valuation analysis. Further,
the trial court ordered revised expert analyses “extending” Rural’s management
projections and employing the projections that Jervis’s expert advanced, reasoning that
“DiMino and his team prepared reliable projections based on the business plan that he
developed and the Board adopted.”197 Accounting for DiMino’s aggressive acquisition
program was problematic, however. The Court of Chancery concluded that
193
Gotham Partners, L.P. v. Hallwood Realty Partners, 817 A.2d 160, 175 (Del. 2002) (citing
Weinberger v. UOP, Inc. 457 A.2d 701, 715 (Del. 1983) (noting “the broad discretion of the
Chancellor to fashion such relief as the facts of a given case may dictate”); Int’l Telecharge, Inc.
v. Bomarko, Inc. 766 A.2d 437, 439 (Del. 2000) (noting that this Court “defer[s] substantially to
the discretion of the trial court in determining the proper remedy”)).
194
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1251 (Del. 2012) (quoting Weinberger, 457
A.2d at 714).
195
Rural II, 102 A.3d at 224.
196
Id. 224-25 (citations omitted).
197
Rural I, 88 A.3d at 107.
82
“[n]ormalizing the EBITDA figure or adjusting the terminal value multiple requires
assumptions about the future states of the world, but those assumptions are hidden in
altered numbers.”198 For that reason, the trial court ordered the revised analyses to extend
the projections and employ those that were set out by Jervis’s expert, noting that “the
technique of extending the projections deals with the valuation difficulties more
forthrightly by making its assumptions explicitly and enabling them to be evaluated and
tested.”199
The Court of Chancery, in Rural I, also resolved a series of disputes stemming
from the methodologies employed by the parties’ experts at trial. It concluded that the
standard capital asset pricing model “that adds a size premium to reflect the superior
historical performance of smaller companies” should be used to determine the discount
rate.200 The trial court also ordered that the revised expert submissions incorporate two
calculations, “one using the historical equity risk premium and another using the supply
side equity risk premium.”201 Finally, in Rural I, the Court of Chancery ordered that the
experts recalculate beta using Jervis’s expert’s method, which derived beta from “weekly
data measured against the S & P 500 for two years,” as opposed to the method set forth
by RBC’s expert that “used monthly measurements and a five year look-back period.”202
In so ordering, the Court of Chancery reasoned that “both are acceptable methods. In this
specific case, both measures are problematic because the reliability of an observed beta
198
Id. at 108.
199
Id.200
Id.201
Id.202
Id.83
depends on an efficient trading market.”203 According to the trial court, Rural’s stock did
not achieve market efficiency “on a reasonably consistent basis until the second week of
September 2009.”204 Thus, it ordered a measuring period from September 11, 2009 to
March 25, 2011.
In Rural II, upon receipt of the revised expert opinions and based on the evidence
presented at trial, the Court of Chancery determined to use a beta of 1.199, because “[t]he
beta calculated as instructed in [Rural I was] 1.147, which [was] lower than the figure
advocated by [Jervis’s expert]. To avoid awarding value beyond what [Jervis] sought,
[Rural II] use[d]” the beta advanced by Jervis’s expert.205 In Rural II, the trial court
adopted “the compromise position of giving equal weight to the supply side and historical
equity risk premiums” and employed 3.7% as the perpetuity growth rate, which was the
low end of the range advanced by RBC’s expert.206
The Court of Chancery concluded that the “quasi-appraisal value for Rural as of
the Merger date [was] $21.42 per share. The members of the Class received $17.25 in
the Merger and therefore suffered damages of $4.17 per share.”207 It also determined, in
Rural I, that “exclusive reliance on the negotiated deal price [was] inappropriate” in its
203
Id. at 108-09 (internal citation omitted).
204
Id. at 109. In reaching its conclusion with respect to market efficiency, the trial court
suggested: “For a company like Rural that is traded on a major exchange, ‘[t]urnover measured
by average weekly trading of . . . 1% would justify a substantial presumption’ of market
efficiency.” Id. (quoting 5 Bromberg et al., Bromberg & Lowenfels on Securities Fraud § 7:484
(2d ed. 2003)).
205
Rural II, 102 A.3d at 225-26.
206
Id. at 226.
207
Id.
84
attempt to determine damages,208 in part, because, “[w]hen the sale process started, the
market did not understand Rural’s prospects.”209 Further, the trial court determined that
“RBC’s faulty [sale process] design prevented the emergence of the type of competitive
dynamic among multiple bidders that is necessary for reliable price discovery. . . . If
RBC had not run the Rural process in parallel with the EMS process, other private equity
players with . . . large funds [equal to that of Warburg] could have participated, forcing
up the price.”210 Similarly, the competitive dynamic was inhibited by the fact that
potential strategic bidders for Rural were themselves tied up in change of change of
control transactions at the time the Company was exploring a sale.
In Americas Mining Corp. v. Theriault, we explained that, “[i]n making a decision
on damages, or any other matter, the trial court must set forth its reasons. This provides
the parties with a record basis to challenge the decision. It also enables a reviewing court
to properly discharge its appellate function.”211 Here, the Court of Chancery explained
the reasons for its calculation of damages in great detail. The trial court applied the
quasi-appraisal remedy to conclude that Rural’s stockholders were denied $4.17 per share
in the Warburg deal. In addition to an actual award of monetary relief, the Court of
Chancery had the authority to grant pre- and post-judgment interest, and to determine the
208
Rural I, 88 A.3d at 102.
209
Id.210
Id. at 103.
211
Theriault, 51 A.3d at 1251.
85
form of that interest.212 Here, the court below awarded pre- and post-judgment interest at
the legal rate, running from June 30, 2011 until the date of payment.213
The record reflects that the Court of Chancery properly exercised its broad
discretionary powers in fashioning a remedy and making its award of damages. The trial
court’s judgment awarding damages is, accordingly, affirmed.214
F. DUCATA
1. Contentions of the Parties
RBC does not question the applicability of the Delaware Uniform Contribution
Among Tortfeasors Act (“DUCATA”), but rather the manner in which the Court of
Chancery applied it. RBC’s arguments can be summarized as follows: (1) the Court of
Chancery erred by failing to allocate fault on a pro rata basis as required by Section 6304
of DUCATA; (2) the trial court erred by denying RBC a fair chance to prove that other
parties to the transaction were joint tortfeasors; (3) the trial court erred in holding that the
burden rested with Jervis to demonstrate that the other defendants were joint tortfeasors;
(4) the trial court should not have invoked the doctrine of unclean hands; and (5) quasi-
estoppel should apply. For her part, Jervis unconditionally defends the trial court’s
application of DUCATA.
After applying DUCATA to the breach of the duty of care by the Rural directors,
the Court of Chancery concluded that (1) the total damages suffered by the Class
212
Id. at 1252 (citing Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 409 (Del.
1988)).
213
Rural II, 102 A.3d at 214.
214
We affirm the trial court’s December 17, 2013 Memorandum Opinion excluding the Farber
Declaration from the record for purposes of post-trial decision.
86
amounted to $91,323,554.61; (2) two of the settling defendants, Shackelton and DiMino,
were joint tortfeasors who breached their duty of loyalty and bore a 17% share of the
responsibility for the damages suffered by the Class; and (3) RBC was responsible for
83% of the damages, or $75,798,550.33, plus pre- and post-judgment interest at the legal
rate from June 30, 2011 until the date of payment.
2. Standard of Review
This Court reviews the Court of Chancery’s conclusions of law de novo.215
However, we afford a trial court’s factual findings a “high level” of deference,216 and will
leave such conclusions undisturbed unless they are the by-product of clear error.217
3. Discussion
i. The Court of Chancery Properly Allocated Fault on a Pro Rata Basis
Pursuant to DUCATA, this State recognizes the right of contribution among joint
tortfeasors.218 The trial court determined that RBC, Shackelton, and DiMino qualified as
joint tortfeasors. By DUCATA’s terms, “[a] joint tortfeasor is not entitled to a money
judgment for contribution until he or she has by payment discharged the common liability
or has paid more than his or her pro rata share thereof.”219 Stated otherwise, a joint
tortfeasor cannot obtain contribution from another tortfeasor until the tortfeasor seeking
215
Unitrin, 651 A.2d at 1385.
216
United Techs., 109 A.3d at 557 (quoting DV Realty Advisors, 75 A.3d at 108) (internal
quotation omitted).
217
DV Realty Advisors, 75 A.3d at 108 (citing Montgomery Cellular Holding Co., Inc. v. Dobler,
880 A.2d 206, 219 (Del. 2005)) (holding that this Court “will not set aside a trial court’s factual
findings ‘unless they are clearly wrong and the doing of justice requires their overturn’”).
218
10 Del. C. § 6302(a). On appeal, the parties have assumed that DUCATA applies to breaches
of fiduciary duty—an issue of first impression in this Court. We find no error in the trial court’s
conclusion that DUCATA is applicable.
219
Id. at § 6302(b) (emphasis added).
87
contribution has satisfied its common liability as to the plaintiff or made payment in
excess of its relative fault.
Further, Section 6302(d) of DUCATA provides that “[w]hen there is such a
disproportion of fault among joint tortfeasors as to render inequitable an equal
distribution among them of the common liability by contribution, the relative degrees of
fault of the joint tortfeasors shall be considered in determining their pro rata shares.”220
That is to say, when one joint tortfeasor’s culpability meaningfully exceeds another’s, the
more culpable of the two may properly be required to account to the plaintiff for its
higher degree of fault. Section 6306(d) modifies this concept by providing: “[a]s among
joint tortfeasors against whom a judgment has been entered in a single action, § 6302(d)
of this title applies only if the issue of proportionate fault is litigated between them by
cross-complaint in that action.”221
Here, the Settlement Agreement—to which RBC did not object—bars any claims
against the settling defendants for contribution. Further, it expressly provides that,
pursuant to 10 Del. C. § 6304(b), the damages recoverable against the non-settling
defendant RBC “will be reduced to the extent of the pro rata shares, if any, of Moelis and
the Rural/Metro Defendants.”222 Accordingly, while its claims for contribution were
barred, RBC retained the opportunity to claim a judgment reduction under 10 Del. C. §
6304(b). In this regard, it contends that its damages should have been reduced by the
appropriate pro rata share of the seven settling defendants. It further maintains that of
220
Id. at § 6302(d) (emphasis added).
221
Id. at § 6306(d).
222
A3071.
88
the eight total defendants, each should have been allocated an equal 12.5% share. Thus,
RBC claims it should have received a settlement credit under 10 Del. C. § 6304(b) equal
to 87.5% of the damages, with RBC remaining liable only for the 12.5% of the total
damages.
The Court of Chancery properly determined that “DUCATA uses the term ‘pro
rata’ to mean ‘proportionate,’ which is the plain meaning of the term.”223 The United
States Supreme Court has also recognized the term “pro rata” to mean “proportionate:”
“Some courts have adopted the concept of a pro-rata recovery . . . . Under this
procedure, damages are distributed . . . on a proportional basis . . . .”224 This Court has
also interpreted pro rata to mean “proportionate.”225
The trial court assigned 83% of the responsibility for the damages to the Class to
RBC. In so doing, it reasoned that the Sale Process Claim and the Disclosure Claim “can
be weighted equally on the premise that each led to the same injury.”226 Because RBC
223
Rural II, 102 A.3d at 261 (citing AMERICAN COLLEGE DICTIONARY 1098 (3d ed. 1993)
(defining “pro rata” as “[i]n proportion; according to a factor that can be calculated exactly”);
BLACK’S LAW DICTIONARY 1340 (9th ed. 2009) (“proportionately”)).
224
Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703, 718 n.15 (1974)
(emphasis added). See also Seatrain Shipbuilding Co. v. Shell Oil Co., 444 U.S. 572, 590-91
(1980) (using “proportionate” and “pro rata” interchangeably).
225
See, e.g., Stonewall Ins. Co. v. E.I. du Pont de Nemours & Co., 996 A.2d 1254, 1260 n.22
(Del. 2010) (noting that “a pro rata approach spreads the loss and assigns liability on a
proportionate basis”) (emphasis added); Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008)
(examining proportionate pro rata recovery); Universal Underwriters Ins. Co. v. Travelers Ins.
Co., 669 A.2d 45, 49 (Del. 1995) (discussing the “equitable underpinnings” of “a proportionate
or pro rata allocation”); Ikeda v. Molock, 603 A.2d 785, 786-87 (Del. 1991) (using “pro rata” to
mean “proportionate” and discussing the proration of liability “based upon proportionate fault”)
(emphasis added).
226
Rural II, 102 A.3d at 262. The Court of Chancery also suggested that “RBC was solely
responsible for the Disclosure Claim, which could be viewed as an independent cause of the
damages suffered by the Class and justify imposing 100% of the damages on RBC.” Id.
89
was “the party solely responsible for the Disclosure Claim,” the Court of Chancery
allocated 50% of the responsibility for the total damages suffered by the Class to RBC.227
As to the Sale Process Claim, which accounted for the remaining portion of the damages
suffered, the trial court suggested that the “breaches of duty that occurred when
Shackelton and RBC initiated the sale process . . . and the breaches of duty that occurred
during the final approval” of Warburg’s offer “can be weighted equally.”228 Applying the
unclean hands doctrine, the trial court determined that “RBC cannot seek contribution
and is not entitled to any settlement credit for the breaches of duty that occurred during
the final approval of the Merger. RBC is therefore allocated an additional 25% of the
responsibility for the damages suffered by the Class to account for the breaches that took
place during the final approval.”229 We agree with the trial court’s pro rata allocation of
fault.
ii. RBC Had a Fair Chance to Prove that Other Parties to the Transaction were Joint
Tortfeasors
RBC contends that “Section 6306(d) requires actual litigation between the joint
tortfeasors before proceeding on anything other than a pro rata basis.”230 This Court has
stated that “when one or more pretrial settlements have occurred, joint tort[]feasor status
227
Id.
228
Id.
229
Id. The trial court allocated the remaining 25% of the Sale Process Claim as follows: 10% to
Shackelton, 8% to RBC, and 7% to DiMino.
230
Op. Br. 63 (emphasis added).
90
is . . . resolved judicially by submitting the liability of a settling defendant to the trier of
fact for a determination.”231
In Ikeda v. Molock, we held, in the context of Section 6306(d), that “the filing of a
cross-claim is a prerequisite to the apportionment of liability between joint tort[]feasors
based upon relative degrees of fault.”232 Here, RBC filed a cross-claim against the
settling defendants, who “remained parties to the action for purposes of trial after the
agreements in principle were reached.”233 Ikeda stands for the proposition that “[a] jury
may not properly fulfill its role as trier of fact unless the questions to be decided by the
jury are litigated at trial.”234 Given that this case involved a bench trial, however, RBC
acknowledges that the Court of Chancery correctly determined that RBC did not waive
its right to argue during post-trial proceedings that the settling defendants were joint
tortfeasors. But it urges that the trial court erred by requiring RBC to litigate its
contribution claims upon “the record created at trial and in light of the factual findings”
in the trial court’s opinion adjudging liability.235 It contends that such limitation was
particularly unfair where the defendants had asserted a common interest privilege during
the litigation.
To the extent that RBC claims prejudice due to the timing of the eve-of-trial
settlements between the plaintiffs and all other defendants, that is simply a function of
RBC being the last non-settling defendant. This situation does not relieve RBC of its
231
Med. Ctr. of Del., Inc. v. Mullins, 637 A.2d 6, 10 (Del. 1994) (internal citation omitted).
232
Ikeda, 603 A.2d at 787.
233
Rural II, 102 A.3d at 248.
234
Ikeda, 603 A.2d at 787.
235
Rural II, 102 A.3d at 245.
91
burden to prove the joint tortfeasor status of the other defendants. After the agreements
in principle were reached, the settling defendants remained parties to the action for
purposes of trial. RBC had the opportunity to develop a record in support of its
contribution claims at trial. Three of the individual defendants testified at trial. RBC
could have issued trial subpoenas as to the others. RBC was permitted to file a post-trial
brief in support of its contribution defenses.236 Further, the settling defendants were not
released from the case until six months after trial and RBC did not object to the
settlement or to the entry of the Partial Final Judgment.237
RBC also contends that it “seeks only Section 6304(b) judgment reduction[,]” and
that Section 6302(d)’s allowance for disproportionate fault applies only with respect to
claims for contribution. Thus, it claims that disproportionate fault may not be considered
under Section 6304(b). Yet, RBC’s contention is based upon its view—which we
reject—that pro rata must mean “equal.” We also reject RBC’s contention that the trial
court erred in finding that the settling directors were not joint tortfeasors. Section 6301
defines “joint tortfeasors” as “2 or more persons jointly or severally liable in tort for the
same injury to person or property, whether or not judgment has been recovered against all
or some of them.” Because of the operation of Rural’s Section 102(b)(7) exculpatory
provision, the director defendants would not be liable for money damages.
236
A2903-2956.
237
In RBC’s amended answer, dated May 2, 2013, RBC asserted cross-claims against Moelis
and the individual defendants. RBC’s cross-claim did not actually allege any wrongdoing by the
individual defendants or Moelis that could give rise to liability to the Class. B1058.
92
Nor would the settling defendants be “tortfeasors” as a result of the settlement. In
Medical Center of Delaware, Inc. v. Mullins,238 we concluded that a release providing for
a reduction in a plaintiff’s recovery in accordance with Section 6304 does not establish a
settling defendant as a joint tortfeasor by its nature.239 In other words, a release, absent
an admission, is insufficient to establish a settling defendant as a joint tortfeasor. As the
Court of Chancery observed, DUCATA applies only to joint tortfeasors. Moelis and the
settling members of the Rural Board were not adjudicated joint tortfeasors, nor did the
Settlement Stipulation240 or Partial Final Judgment contain an admission of liability
establishing them as such. Accordingly, here, as in Mullins, the applicable release
predicated any settlement reduction upon an adjudication of the settling defendants’
liability as joint tortfeasors. Thus, the trial court correctly concluded that the settlement
did not establish the joint tortfeasor status of the settling defendants.
As to RBC’s suggestion that the doctrine of quasi-estoppel bars Jervis from
asserting that neither the Board nor Moelis were joint tortfeasors, it is mistaken. Under
Delaware law, the doctrine of quasi-estoppel applies “when it would be unconscionable
to allow a person to maintain a position inconsistent with one to which he acquiesced, or
from which he accepted a benefit. To constitute this sort of estoppel the act of the party
against whom the estoppel is sought must have gained some advantage for himself or
238
637 A.2d 6 (Del. 1994).
239
Id. at 8-9.
240
The Settlement Stipulation provided: “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.” A3071
(emphasis added). The settling defendants expressly denied “any and all allegations of
wrongdoing, fault, liability or damages.”
93
produced some disadvantage to another.”241 In Mullins, the plaintiff was permitted to
assert liability against all defendants, settle with a subset of the defendants, and maintain,
for the purposes of the contribution claims, that the non-settling defendant was not
negligent. We decline to hold that Jervis is estopped from disputing the joint tortfeasor
status of the settling defendants in the similar circumstances presented here. We do not
find Jervis’s shift in litigation position to be unconscionable. Rather, it is a predictable
consequence of settling the case as to all other defendants.242
iii. Rural’s Section 102(b)(7) Exculpatory Provision Does Not Shield RBC
RBC challenges, on both legal and policy grounds, the trial court’s conclusion that
Rural’s Section 102(b)(7) exculpatory provision precluded contribution from the
defendant directors: (1) from a legal perspective, RBC claims that the trial court
improperly asserted the Board’s 102(b)(7) defense on their behalf; and (2) from a policy
perspective, duty of care exculpatory provisions, according to RBC, are intended to
eliminate liability, not shift it. We address both arguments, in turn. In so doing, we
affirm the trial court’s holding, but not necessarily its reliance on Delaware decisions
construing the Delaware Guest Statute and Delaware’s Tort Claims Act.243
241
Bank of N.Y. Mellon v. Commerzbank Capital Funding Trust II, 2011 WL 3360024, at *8
n.71 (Del. Ch. Aug. 4, 2011) (quoting Pers. Decisions, Inc. v. Bus. Planning Sys., Inc., 2008 WL
1932404, at *6 (Del. Ch. May 5, 2008)) (internal quotations omitted). See also Barton v. Club
Ventures Invs. LLC, 2013 WL 6072249, at *6 (Del. Ch. Nov. 19, 2013) (“Under the doctrine of
quasi-estoppel, the Court may ‘preclude[] a party from asserting, to another’s disadvantage, a
right inconsistent with a position it has previously taken.’ A party does not need to show
reliance for quasi-estoppel to apply.”) (citations omitted).
242
Cf. Fins v. Pearlman, 424 A.2d 305, 309 (Del. 1980) (“Settlements are encouraged because
they voluntarily resolve disputed matters.”).
243
See Rural II, 102 A.3d at 249-52. In performing its 8 Del. C. § 102(b)(7) analysis, the trial
court analogized exculpation under Section 102(b)(7) to the Delaware Guest State, as discussed
94
“The statutory enactment of Section 102(b)(7) was a logical corollary to the
common law principles of the business judgment rule. Since its enactment, Delaware
courts have consistently held that the adoption of a charter provision, in accordance with
Section 102(b)(7), bars the recovery of monetary damages from directors for a successful
shareholder claim that is based exclusively upon establishing a violation of the duty of
in Lutz v. Boltz, 100 A.2d 647 (Del. Super. 1953), and Delaware’s Tort Claims Act, as discussed
in N.Z. Kiwifruit Mktg. Bd. v. City of Wilmington, 825 F. Supp. 1180 (D. Del. 1993). In
Kiwifruit, the District Court distinguished cases where the operation of law prevents one of the
co-defendants from being held liable to the plaintiff:
[W]here one party is immune from suit by operation of law, as is true in guest
statute, spousal immunity, or workers compensation cases, courts have found that
the party who is, by law, immune from suit cannot have shared a “common
liability. . . .” [H]owever, where suit against one party is merely barred by the
statute of limitations, courts have found that the “common obligation which is
essential to the right of one to contribution is the showing that the fellow
tort[]feasor at some time was liable with him for damage. . . . [There is] no
reason why the law should let action or inaction of the injured party defeat a claim
for contribution.”
825 F. Supp. at 1186-87 (internal citation omitted) (emphasis removed). Here, the policies that
underlie Section 102(b)(7) are different from those that underlie the Guest Statute or Tort Claims
Act. Section 102(b)(7) operates differently from the Guest Statute or Tort Claims Act, in that it
does not bar all relief, even for breaches of the duty of care. See In re Cornerstone Therapeutics
Inc., S’holder Litig., 115 A.3d 1173, 1181 n.32 (Del. 2015) (noting that Section 102(b)(7) may
not have a case-dispositive effect in cases where equitable relief, such as rescission, is sought);
Arnold v. Soc’y for Sav. Bancorp, Inc., 678 A.2d 533, 535 n.2, 542 (Del. 1996) (stating that
“[u]nder 8 Del. C. § 102(b)(7), directors are not exempt from equitable relief . . .” and that
directors are not exempt from equitable relief under Section 102(b)(7) in the context of a post-
merger lawsuit where stockholders alleged direct claims against the corporation). The present
situation is unlike the case where suit against one party is barred due to some conduct by the
plaintiff, e.g., a statute of limitations. Rather, the operation of a statutory provision, Section
102(b)(7), bars recovery of money damages. Because there could be no liability at least as to
that form of relief—which is the only relief sought here—we agree with the trial court’s decision
to deny RBC contribution from the defendant directors.
95
care.”244 This Court, in In re Cornerstone Therapeutics Inc. Stockholder Litigation,
recently repeated our recognition that “[t]he purpose of Section 102(b)(7) [is] to ‘free[]
up directors to take business risks without worrying about negligence lawsuits.’”245
One of the primary policy motivations impelling Section 102(b)(7)’s adoption
was—and continues to be today—the elimination of liability “for potentially value-
maximizing business decisions . . . .”246 However, in the case now before us, Rural’s
exculpatory charter provision is operating as intended: to exculpate the directors from
monetary damage liability for a breach of the duty of care. Accordingly, the Company’s
Section 102(b)(7) provision did not vitiate the Board’s obligation to adhere to its
fiduciary obligation to proceed with due care, it simply proscribed monetary liability in
the event that they failed to do so. RBC’s knowing and intentional inducement of the
fiduciary breach justifies the award of damages in this matter, and such award is neither
inequitable nor contrary to the policies underlying Section 102(b)(7).
Importantly, 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. As the Court of Chancery observed, “[t]he literal language of Section
102(b)(7) only covers directors; it does not extend to aiders and abettors.”247 Our
Legislature did not intend for Section 102(b)(7) to safeguard third parties and thereby
244
Emerald Partners III, 787 A.2d at 91 (citing Malpiede, 780 A.2d at 1095; Emerald Partners
v. Berlin, 726 A.2d 1215, 1224 (Del. 1999); Zirn II, 681 A.2d at 1061-62; Arnold I, 650 A.2d at
1288).
245
Cornerstone, 115 A.3d at 1185 (quoting Malpiede, 780 A.2d at 1095).
246
Id.247
Rural I, 88 A.3d at 86 (citations omitted).
96
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 when stockholders or the corporation seeks retribution for the wrongdoing.
RBC cannot essentially commit a fraud upon the very directors who hired and relied upon
it, and subsequently seek to exploit the Board’s exculpatory provision.
RBC urges that the trial court’s application of the interplay of DUCATA and
Section 102(b)(7) results in an erroneous and inequitable shifting of liability, and further
underscores why this Court should not recognize a cause of action for aiding and abetting
a board’s breach of its duty of care. The argument is that, unless reversed,
stockholders—who voted to place such exclusions from liability in their corporate
charters—would be able to shift damages from the fiduciaries (directors), who are
primarily liable but who are statutorily immunized from a damages claim, to a non-
fiduciary (and non-immunized) third party (financial advisor). They suggest that this
interpretation of DUCATA causes the financial advisor to bear a disproportionate and
inequitable share of the liability and essentially makes financial advisors sureties for
grossly negligent directors who may approve M & A transactions with no risk of liability
to the directors themselves. Stated another way, had they not settled, the directors would
have enjoyed protection from damages under Section 102(b)(7); the trial court declined to
extend this protection to RBC, and so RBC was liable for damages for aiding and
abetting the directors’ breach of due care where the directors themselves would not have
been liable for damages.
97
We reject RBC’s contention that the trial court erred by considering the impact of
Section 102(b)(7).248 We find no error in the trial court’s determination that RBC had the
burden to show that the directors would not have been exculpated and that, but for the
settlement, they would have shared a common liability to the Class. As for the directors
who were not entitled to exculpation, as in the case of DiMino and Shackelton, RBC was
properly given a credit under DUCATA.
Nor is the result here inequitable. The trial court properly determined that RBC’s
conduct accounted for a disproportionate amount of the fault. Further, the law provides
third-party advisors, like RBC, a benefit not available to directors. That is, if an advisor
acts with gross negligence, that will not be sufficient for a finding of aiding and abetting
liability. Rather, plaintiffs must prove that the advisor acted with scienter. If an advisor
knowingly induces directors to breach their duty to act reasonably under Revlon, the
advisor is liable but only under a more stringent standard for imposing liability than a
director faces when the director is not protected by a Section 102(b)(7) provision. In
essence, the aider and abettor standard affords the advisor a form of protection by
insulating it from liability unless it acts with scienter.
iv. The Court of Chancery Did Not Err in Applying the Doctrine of Unclean Hands
RBC asserts that the Court of Chancery erroneously relied upon the doctrine of
unclean hands to preclude the bank from seeking contribution “for the Disclosure Claim
or for the aspect of the Sale Process Claim relating to the final approval of the
248
The director defendants raised 8 Del. C. § 102(b)(7) in their Opening Pre-Trial Brief and
Answering Pre-Trial Brief. See B795; B811-12; B902-04. The plaintiff also raised 8 Del. C. §
102(b)(7) in her Answering Post-Trial Contribution Brief. See A2963; A2984; A2988-91.
98
Merger.”249 In Rural II, the Court of Chancery held that “the doctrine of unclean hands
bars RBC from claiming the settlement credit to the extent RBC perpetrated” a fraud on
the board.250
The doctrine of unclean hands is “[e]quity’s maxim that a suitor who engaged in
his own reprehensible conduct in the course of [a] transaction at issue must be denied
equitable relief . . ., a rule which in conventional formulation operated in limine to bar the
suitor from invoking the aid of the equity court . . . .”251 This Court has said before that
“[t]he Court of Chancery has broad discretion in determining whether to apply the
doctrine of unclean hands.”252 Further, “[t]he question of unclean hands is factual, and
our review will be limited to an inquiry as to whether the findings below support the
conclusion that” RBC had unclean hands.253
Based upon our review of the record before us, the trial court correctly concluded
that “RBC forfeited its right to have a court consider contribution” for the Disclosure and
Sale Process Claims “by committing fraud against the very directors from whom RBC
would seek contribution.”254 We agree with the trial court’s reasoning that if RBC were
permitted to seek contribution for these claims from the directors, then RBC would be
taking advantage of the targets of its own misconduct. By contrast, RBC was
249
Op. Br. 66-67 (quoting Rural II, 102 A.3d at 239) (internal quotation omitted).
250
Rural II, 102 A.3d at 238 (citing Mills, 559 A.2d at 1283).
251
McKennon v. Nashville Banner Publ’g. Co., 513 U.S. 352, 360 (1995) (internal citation
omitted).
252
SmithKline Beecham Pharms. Co. v. Merck & Co., Inc., 766 A.2d 442, 448 (Del. 2000)
(citing Nakahara v. NS 1991 Am. Trust, 718 A.2d 518, 522 (Del. Ch. 1998) (“[T]he decisional
authority is almost universal in its acceptance that courts of equity have extraordinarily broad
discretion in application of the doctrine [of unclean hands].”)) (citations omitted).
253
Collins v. Burke, 418 A.2d 999, 1004 (Del. 1980).
254
Rural II, 102 A.3d at 239.
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appropriately allowed to claim a credit for the aspect of the Sale Process Claim that did
not involve misrepresentations and omissions by RBC towards its co-defendants.
G. Fee Shifting
1. Contentions of the Parties
On February 12, 2015, the Court of Chancery denied Jervis’s application for fee
shifting. She now contends that the trial court improperly concluded that the bad faith
exception to the American Rule mandated a finding of “glaring egregiousness” in order
to shift attorneys’ fees.255 Jervis, instead, suggests that the standard for fee shifting under
this exception “is met in light of the Court of Chancery’s factual findings respecting
RBC’s knowingly false factual representations in its pre-trial papers . . . .”256 On the
other hand, RBC asserts that the Court of Chancery correctly applied the “glaring
egregiousness” standard to the exception, and that Jervis failed to set forth clear evidence
that RBC engaged in bad faith litigation conduct.
2. Standard of Review
When reviewing an award or denial of attorneys’ fees under exceptions to the
American Rule, this Court determines whether the trial court abused its discretion.257
“We do not substitute our own notions of what is right for those of the trial judge if that
255
Ans. Br. 75.
256
Id.
257
See Dobler, 880 A.2d at 227 (citing Johnston v. Arbitrium (Cayman Is.) Handels AG, 720
A.2d 542, 546 (Del. 1998)).
100
judgment was based upon conscience and reason, as opposed to capriciousness or
arbitrariness.”258
3. Discussion
“Under the American Rule, absent express statutory language to the contrary, each
party is normally obligated to pay only his or her own attorneys’ fees, whatever the
outcome of the litigation.”259 We have previously recognized, however, the bad faith
exception to the rule.260 Recently, we observed that this exception is premised on the
theory that “when a litigant imposes unjustifiable costs on its adversary by bringing
baseless claims or by improperly increasing the costs of litigation through other bad faith
conduct, shifting fees helps to deter future misconduct and compensates the victim of that
misconduct.”261
“[A]n award of fees for bad faith conduct must derive from either the
commencement of an action in bad faith or bad faith conduct taken during litigation, and
not from conduct that gave rise to the underlying cause of action.”262 Further, “[t]he bad
faith exception applies only in extraordinary cases, and the party seeking to invoke that
258
William Penn P’ship v. Saliba, 13 A.3d 749, 758 (Del. 2011) (citing Dover Historical Soc’y,
Inc. v. City of Dover Planning Comm’n, 902 A.2d 1084, 1089 (Del. 2006)).
259
Johnston, 720 A.2d at 545 (citation omitted).
260
See, e.g., Blue Hen Mech., Inc. v. Christian Bros. Risk Pooling Trust, 117 A.3d 549, 558-560
(Del. 2015); Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206, 1222 (Del. 2012); Versata
Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 607-08 (Del. 2010); Johnston, 720 A.2d at 546;
Kaung v. Cole Nat’l Corp., 884 A.2d 500, 506 (Del. 2005).
261
Blue Hen, 117 A.3d at 559-560 (citing Brice v. State, Dep’t of Correction, 704 A.2d 1176,
1179 (Del. 1998) (“The purpose of this exception is not to award attorney[s’] fees to the
prevailing party as a matter of right, but rather to ‘deter abusive litigation in the future, thereby
avoiding harassment and protecting the integrity of the judicial process.’”) (internal citation
omitted)) (citation omitted).
262
Versata, 5 A.3d at 607 (quoting Johnston, 720 A.2d at 546) (internal quotation omitted).
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exception must demonstrate by clear evidence that the party from whom fees are sought .
. . acted in subjective bad faith.”263 Our courts have not settled on a singular definition of
bad faith litigation conduct, but “‘have found bad faith where parties have unnecessarily
prolonged or delayed litigation, falsified records[,] or knowingly asserted frivolous
claims.’”264 Further, we have recognized the bad faith exception where a party is found
to have “mis[led] the court, alter[ed] testimony, or chang[ed] position on an issue.”265
During its ruling from the bench, the trial court cited to several instances of what it
believed to be potentially demonstrative of RBC’s bad faith litigation conduct arising
throughout the proceeding below. In sum, the Court of Chancery determined that RBC
made intentional and misleading misstatements of fact in its briefs and at trial. The trial
court suggested that RBC’s bad faith litigation conduct touched upon its failure to
appropriately characterize its staple financing efforts;266 the interactive dynamic between
its financing and M & A teams;267 and, perhaps most problematically, the nature of its
pursuit of Warburg’s buy-side financing business.268 Despite the fact that these
misrepresentations struck at central issues before the Court of Chancery for adjudication,
the trial court concluded that fee shifting was not warranted because RBC’s
263
Lawson v. State, 91 A.3d 544, 552 (Del. 2014) (internal quotations omitted) (citation
omitted). See also Dover Historical Soc’y, Inc, 902 A.2d at 1093 (“Delaware courts have the
power to shift attorneys’ fees where a losing party has acted in bad faith, vexatiously, wantonly,
or for oppressive reasons.”) (internal quotation omitted) (citation omitted).
264
Gatz Props., 59 A.3d at 1222 (quoting Johnston, 720 A.2d 542 at 546).
265
Dover Historical Soc’y, 902 A.2d at 1093 (quoting Beck v. Atl. Coast PLC, 868 A.2d 840,
850-51 (Del. Ch. 2005)) (internal quotation omitted).
266
Ans. Br. Ex. A. Tr. 69:5-22 (Feb. 12, 2015).
267
Id. at 69:23-70:6.
268
Id. at 70:7-72:5.
102
misstatements did not cross the threshold of “glaring egregiousness.”269 Indeed, the trial
court remarked that RBC’s actions were “aggressive” and “problematic.”270
For example, RBC’s Munoz did not admit until redirect questioning on the second
day of trial that RBC had been lobbying Warburg on Saturday, March 26, 2011, seeking a
role in the buy-side financing. That admission stood in sharp contrast to various
statements in RBC’s pre-trial briefing, including the following:
 “RBC was not asked to provide a fairness opinion until after it was clear
that there would be no staple financing.”271
 “Warburg made clear that it would not use RBC’s financing, hence RBC
had no incentive to favor Warburg, and there is no record of RBC favoring
any bidder.”272
 “By March 23, 2011, RBC and the Special Committee were aware that
RBC would not be providing staple financing for the Transaction.”273
 “Furthermore, RBC could not have been motivated to find the Transaction
fair, as it knew it would not be providing staple financing to Warburg
before Rural/Metro requested a fairness opinion.”274
 “[T]he record makes clear that RBC did not start on its fairness analysis
until it was clear that RBC would not be financing the Warburg deal and it
was thus likely that Rural/Metro would be requesting a fairness opinion.”275
 “RBC knew that Warburg had 100% financing in place for the Transaction,
and that it would not make sense for RBC to pursue Warburg regarding
staple financing.”276
269
Id. at 72:22.
270
Id. at 72:20-21.
271
B737.
272
A1932.
273
A1944.
274
A1960 (emphasis in original).
275
A2033.
276
A2034.
103
 “The RBC team offering the staple financing was distinct and separate from
the RBC team advising Rural/Metro on the sale of the Company.”277
 “Unlike Del Monte, RBC was not secretly meeting with Warburg without
Rural/Metro’s consent.”278
As to the last example, the Court of Chancery noted:
And then there’s a footnote 133 on page 32 of the brief: ‘Unlike Del
Monte, RBC was not secretly meeting with Warburg without Rural/Metro’s
consent.’ That one I find troubling. That’s also on the borderline of where
you get aggressive advocacy. So one could argue that technically that
statement was true, because RBC allegedly obtained this blanket consent in
its engagement letter. But I think the record at trial established that the
Board wasn’t aware and was never told about the final full-court press.
It’s those statements that essentially deny the existence of the final push for
financing that I think could potentially warrant some type of fee shifting
award. And I think that because it does address a fundamental issue in the
case. It relates to matters that were within RBC’s knowledge. RBC knew
that there, in fact, was a final push. And it’s the type of thing where it’s not
unfair to expect a party to accurately present facts within its control.279
At the conclusion of oral argument on the issue, the trial court suggested that
“[t]he cases speak of bad faith being reserved for rare situations involving cases of
‘glaring egregiousness.’”280 It further suggested that this standard of conduct “implies
that we’re comfortable with some egregiousness, we’re even comfortable with relatively
considerable egregiousness. We’re just not comfortable with ‘glaring egregiousness.’”281
This is a matter that is within the discretion of the trial judge and, while this is a close
277
A1941.
278
A1963.
279
Ans. Br. Ex. A. Tr. 71:10-72:5 (Feb. 12, 2015).
280
Id. at 67:17-19.
281
Id. at 67:21-24.
104
issue, we decline to find an abuse of discretion, even though we might have come to a
different conclusion if we were reviewing this as an original application. 282
IV. CONCLUSION
For the foregoing reasons, the Final Order and Judgment of the Court of Chancery
is hereby AFFIRMED.
282
In Dobler, we reversed a finding by the Court of Chancery that a defendant’s conduct was not
“sufficiently egregious to justify fee-shifting.” 880 A.2d at 227. In so doing, we observed that
the defendants “repeatedly acted in bad faith” during the litigation process, thereby justifying an
award of reasonable attorneys’ fees. Id. at 229. Despite our serious concern about the
statements described above, we will defer to the trial court in this instance. Cf. Kane v. Burnett,
2003 WL 231619 (Del. Jan. 30, 2003) (holding that “this Court must apply the deferential abuse
of discretion standard of review and, in the absence of an abuse of discretion, must affirm the
[trial court’s] award [of attorneys’ fees], even though we might have reached a different
conclusion”) (citation omitted).
105