In re Rural/Metro Corp. Stockholders Litig.

• Decision Date: 10 October 2014
• Docket Number: C.A. No. 6350–VCL.
• Citation: 102 A.3d 205
• Court: Court of Chancery of Delaware
• Parties: In re RURAL/METRO CORPORATION STOCKHOLDERS LITIGATION.

102 A.3d 205

In re RURAL/METRO CORPORATION STOCKHOLDERS LITIGATION.

C.A. No. 6350–VCL.

Court of Chancery of Delaware.

Submitted: July 28, 2014.

Decided: Oct. 10, 2014.

Joel Friedlander, Jeffrey M. Gorris, Friedlander & Gorris, P.A., Wilmington, Delaware; Randall J. Baron, David Knotts, Robbins Geller Rudman & Dowd LLP, San Diego, California; Attorneys for Plaintiffs.

Patricia R. Urban, Seton C. Mangine, Pinckney, Weidinger, Urban & Joyce LLC, Wilmington, Delaware; Alan J. Stone, Milbank, Tweed, Hadley & McCloy LLP; Attorneys for Defendant RBC Capital Markets, LLC.

OPINION

LASTER, Vice Chancellor.

The post-trial decision in this action held RBC Capital Markets, LLC (“RBC”) liable to a class of stockholders of Rural/Metro Corporation (“Rural” or the “Company”) for aiding and abetting breaches of fiduciary duty by the board of directors of Rural (the “Board”). In re Rural Metro Corp. S'holders Litig., 88 A.3d 54 (Del.Ch.2014) [hereinafter “Liability Opinion ”]. This decision sets the amount of RBC's liability to the class at $75,798,550.33, representing 83% of the total damages that the class suffered. Pre- and post-judgment interest is awarded at the legal rate from June 30, 2011, until the date of payment.

I. FACTUAL BACKGROUND

This decision relies on the facts as found in the Liability Opinion . As to new issues not reached in the Liability Opinion , the facts are drawn from the evidentiary record created at trial and finalized on December 17, 2013, when the court denied Rural's application to supplement the record. In re Rural Metro CorporationS'holders Litig., 2013 WL 6634009 (Del.Ch. Dec. 17, 2013) [hereinafter “Trial Record Opinion ”].

A. The Merger

On March 28, 2011, Rural announced that it was being acquired by Warburg Pincus LLC (“Warburg”) in a transaction that implied an equity value for the Company of $437.8 million (the “Merger”). Two stockholders filed lawsuits challenging the Merger, which were consolidated into this proceeding. On June 30, 2011, the Merger closed, and each publicly held share of Rural common stock was converted into the right to receive $17.25 in cash.

The original complaint named as individual defendants Eugene Davis, Earl Holland, Conrad Conrad, Henry Walker, Christopher Shackelton, Robert Wilson, and Michael DiMino. Each served as a member of the Board before the Merger. DiMino was Rural's President and CEO; the other individual defendants were outside directors. The complaint contended that the individual defendants breached their fiduciary duties in two ways: first, by making decisions that fell outside the range of reasonableness during the process leading up to the Merger and when approving the Merger (the “Sale Process Claim”), and second, by failing to disclose material information in the definitive proxy statement (the “Proxy Statement”) that the Company issued in connection with the Merger (the “Disclosure Claim”). The complaint also named as defendants Warburg and its two acquisition subsidiaries and contended that they aided and abetted the individual defendants' breaches of fiduciary duty. Oddly, the complaint named Rural itself as a defendant, even though the complaint only asserted claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty. Neither species of claim can be asserted against the corporation whom the fiduciaries serve.

On February 10, 2012, the plaintiffs filed an amended complaint that continued to assert both the Sale Process Claim and the Disclosure Claim, but modified those theories and added more supporting allegations. The amended complaint omitted the claim against Warburg and its acquisition subsidiaries and dropped Wilson from the list of individual defendants, because he had not voted on the Merger.

On August 29, 2013, the plaintiffs filed a second amended complaint that added claims against RBC and Moelis & Company LLC (“Moelis”). RBC acted as Rural's lead financial advisor during the process that led to the Merger. Moelis served as Rural's secondary financial advisor in a role junior to RBC. The second amended complaint contended that RBC and Moelis aided and abetted the individual defendants in breaching their fiduciary duties. It remained the operative pleading through trial.

On October 24, 2012, the court entered a scheduling order setting trial for May 6–9, 2013. During the pre-trial proceedings, the court granted a contested motion for class certification. The class was defined as

all holders of common stock of Rural Corporation at any time from March 28, 2011 through and including June 30, 2011, whether beneficial or of record, including their legal representatives, heirs, successors in interest, transferees and assigns of such foregoing holders, excluding the Defendants, Warburg Pincus, LLC, and Coliseum Capital Management, LLC, and their associates, affiliates, legal representatives, heirs, successors in interest, transferees and assignees.

Dkt. 185, ¶ 1 (the “Class”). The parties have stipulated that the Class comprises 21,900,133 shares.

B. The Agreements In Principle

On April 8, 2013, all of the parties filed pre-trial opening briefs, and the case appeared to be headed for trial against all of the defendants. On April 25, all of the parties other than Moelis filed pre-trial answering briefs. By letter, the plaintiffs explained that they had reached an agreement in principle with Moelis on a settlement that contemplated a payment of $5 million to the Class. The plaintiffs asked the court to sever the claims against Moelis and to excuse Moelis from attending trial. The letter proposed that if the settlement with Moelis was later terminated or not approved, then the plaintiffs and Moelis would have a separate trial on the claims against Moelis.

The plaintiffs' letter attached a term sheet reflecting the agreement in principle, which included the following points:

2. Moelis denies all allegations of wrongdoing and liability to Plaintiff and the class, and the settlement does not constitute any admission of wrongdoing or liability.

3. All claims against Moelis to be dismissed with prejudice.

4. Moelis to be given a general release on behalf of all Class members.

5. Plaintiff and the Class agree, pursuant to 10 Del. C. § 6304(b), that the damages recoverable against all the other tortfeasors will be reduced to the extent of the pro rata share of Moelis.

6. Moelis has the right (but not the obligation) to terminate the settlement if the Court does not enter a final order as part of final approval of the settlement (a) barring any claims against Moelis by any other alleged tortfeasor for contribution (whether denominated as contribution, indemnification or otherwise); and (b) expressly preserving such rights as Moelis may have to contractual indemnification from Rural....

Dkt. 251.

On April 26, 2013, the court held a teleconference to discuss the Moelis settlement. The other defendants explained that they had not had time to determine whether they objected to the proposal to sever the claims against Moelis and to excuse Moelis from attending trial. The other defendants wanted to consider whether to assert cross-claims against Moelis for contribution and to evaluate how issues of relative fault might be addressed. Counsel asked to have until April 29 to respond.

On April 29, 2013, the court held a follow-up teleconference. The individual defendants informed the court that they had reached an agreement in principle of their own with the plaintiffs that contemplated a payment of $6.6 million to the Class. RBC then advised the court that it would be amending its answer to add cross-claims for contribution in accordance with a stipulated procedure. RBC also requested a continuance, which the plaintiffs opposed.

The court took the question of a continuance under advisement.

On April 30, 2013, the plaintiffs provided the court with a term sheet documenting their agreement in principle with Rural and the individual defendants, referred to collectively in the term sheet as the “Rural/Metro Defendants.” The term sheet included the following provisions:

2. The Rural/Metro Defendants deny all allegations of wrongdoing and liability to Plaintiff and the Class, and the settlement does not constitute any admission of wrongdoing or liability.

3. All claims against the Rural/Metro Defendants to be dismissed with prejudice.

4. The Rural/Metro Defendants to be given a general release on behalf of all Class members.

5. Plaintiff and the Class agree, pursuant to 10 Del. C. § 6304(b), that the damages recoverable against all the other tortfeasors will be reduced to the extent of the pro rata share of the Rural/Metro Defendants.

6. The Rural/Metro Defendants have the right (but not the obligation) to terminate the settlement if the Court does not enter a final order as part of final approval of the settlement barring any claims against the Rural/Metro Defendants by any other alleged tortfeasor for contribution.

Dkt. 270. As with Moelis, the plaintiffs proposed to sever the claims against the Rural/Metro Defendants for potential disposition later if the settlement was not approved. Rather than excusing the individual defendants from attending trial, the term sheet contemplated that the Rural/Metro Defendants would make DiMino and any other individual defendant that the plaintiffs might reasonably request available as witnesses.

Later in the day on April 30, 2014, the court issued a letter ruling denying RBC's request for a continuance. On May 2, the court entered an order severing and staying the claims against the Rural/Metro Defendants. The parties submitted a stipulation and proposed order severing and staying the plaintiffs' claims against Moelis. The stipulation granted RBC leave to file its cross-claims for contribution. The recitations in the stipulation included the following:

RBC contends that there was no breach of fiduciary duty or aiding and abetting such a breach and that the claims against defendants are without merit, but seeks to amend its answer to

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