Rbc Capital Markets, LLC v. Jervis

Facts

Rural is a leading national provider of ambulance and private fire protection services that serves more than 400 communities across 22 states. Rural's shares traded on NASDAQ and upon closing, each publicly held share of Rural common stock was converted into the right to receive $17.25 in cash. Rural had a seven-member board of directors, six of whom were 'facially, independent, disinterested, outside directors.' D was hired by the Special Committee as Rural's primary financial advisor in connection with the Company's decision to explore strategic alternatives. D also had an 'active dialogue' with Warburg, the Company's eventual acquirer, which extended beyond Warburg's participation in the Rural sale process. DiMino was appointed Rural's President and CEO effective June 2010. He also assumed a seat on Rural's Board. DiMino was a late convert to the idea of a sale. During most of 2010, he favored keeping Rural independent. 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. It was also unreasonable because D did not disclose that proceeding in parallel with an acquisition of EMS served D's interest in gaining a role on the financing trees of bidders for EMS. The court found that D designed a process that favored its own interest in gaining financing work from bidders for The trial court also 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.  D 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. 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 'inflection point' in which the Company was transitioning from turnaround to early-stage growth story. J.P. Morgan also recommended Rural continue to execute on its 'growth plan,' as doing so would drive further stock price appreciation. D set up a bidding process but did not provide any valuations nor were they demanded. The trial court found that Ds 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 Rural aggressively, thus giving Warburg an advantage over others who were still involved in evaluating EMS. Rural's Engagement Letter gave D 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. D was also given 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.' The day before the merger was approved, D's most senior bankers made a final push to obtain Warburg's financing business. D bankers sought internal approval to underwrite 100% of a $590 million financing package for Warburg. The trial court found that, with bids in hand, the relationship between DC and Shackelton (a director in charge of setting up the sale and interfacing with D) changed. Before the bids, they shared the goal of wanting the Company sold. But Shackelton wanted more than $17.00 per share, and D 'just wanted a deal.' DiMino became D's 'principal ally' in the boardroom.  DiMino had an incentive to sell the Company and continue managing it for Warburg. On the deal front, D worked to lower the analyses in its fairness presentation so Warburg's bid looked more attractive. D made a series of changes to its fairness analysis so the deal with close with Warburg. The trial court determined that D also lowered the 'consensus' Adjusted EBITDA for 2010 from $76.5 million to $69.8 million to make the Warburg 'deal look more attractive.' The trial court found that, during the final negotiations with Warburg, the Board failed to provide active and direct oversight of D. Unbeknownst to the Rural directors, D had been communicating with Warburg in the lead up to the private equity firm's revised bid. The trial court concluded that the Proxy Statement contained materially misleading disclosures in the form of false information that DC presented to the Board in its financial presentation. The trial court also found that the Proxy Statement contained false and misleading information about D's incentives and conflicts of interest. The court found for Ps and D appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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