The Supreme Court of Delaware (SCD) has upheld a lower court ruling in a class-action lawsuit against RBC Capital Markets LLC (RBC), which had found that the firm helped cause breaches of fiduciary duty by the directors of a company that it was advising in a mergers and acquisition transaction.
The SCD denied RBC’s appeal and the plaintiff’s cross-appeal in the case from a lower court ruling that found that RBC “aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corp. in connection with the sale of the company” to an affiliate of private equity firm Warburg Pincus LLC.
In 2014, the lower court held RBC liable to a class of Rural stockholders, and issuing a US$75.8 million judgment against the firm. This represented 83% of the US$91.3 million in total shareholder damages, which was calculated as the difference between the value the company’s shareholders received in the merger and Rural’s value as a going concern.
According to the SCD’s decision, the trial court found that RBC had a conflict in that its desire for other banking business affected the advice it provided to the directors: “[The trial court] 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.” (EMS was one of Rural’s primary competitors.)
“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,” the SCD’s decision says.
The appeal decision notes that RBC raised six issues on appeal, including whether the trial court erred by holding that the board of directors breached its duty of care and violated its fiduciary duty; whether the court erred by finding that RBC aided and abetted breaches of fiduciary duty; and whether it erred by finding that the board of directors’ conduct caused damages.
The Securities Industry and Financial Markets Association (SIFMA), the U.S.’s securities industry trade association, and the National Association of Corporate Directors (NACD) both filed briefs supporting a reversal of the lower court ruling.
However, the SCD upheld the lower court decision on every ground for appeal. On the issue of whether RBC aided breaches by Rural’s directors, the SCD found that the investment bank’s conflicts led to a poor outcome for shareholders.
“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. 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 decision notes.
“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,” the decision finds.