Delaware Court Upholds $76M RBC Judgment

(CN) - The Royal Bank of Canada must pay Rural/Metro shareholders $76 million for advocating the company's sale to a private firm without disclosing its own interest in the deal, the Delaware Supreme Court ruled.

Shareholders of Rural/Metro Corporation, a Scottsdale, Ariz.-based ambulance and fire-protection company, sued the board of directors and its financial advisors, RBC Capital Markets and Moelis & Company, for breach of fiduciary duty after the company was sold to private equity firm Warburg Pincus in a cash deal valued at $438 million.

The directors and Moelis & Company settled, but the case proceeded to trial against RBC Capital, a subsidiary of the bank.

After a four-day trial, Vice Chancellor Travis Laster of the Delaware Chancery Court found RBC liable for aiding and abetting breaches of fiduciary duty by Rural/Metro's board.

According to court records, RBC did not tell the Rural/Metro board that it intended to use its role as Rural's adviser to position itself to capture financing work from bidders for Emergency Medical Services Corporation, a subsidiary of American Medical Response and Rural's sole national competitor.

RBC designed a bidding process for Rural/Metro that would favor its own interest in financing a share of both the Rural and EMS deals, according to the liability judgment issued in March.

In a 96-page opinion on damages, Laster found RBC liable for 83 percent of the total damages suffered by the class, which equated to $75.8 million.

The lower court 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."

However, Laster clearly stated that RBC's actions were not a crime. "Some tortious acts rise to the level of criminal acts. RBC's did not," he wrote.

The Delaware Supreme Court affirmed Laster's ruling Monday in a 107-page opinion.

"The record evidence amply supports the trial court's conclusion that RBC [Royal Bank of Canada] purposely misled the board so as to proximately cause the board to breach its duty of care," Justice Karen Valihura wrote for the en banc state supreme court.

While RBC partially disclosed its conflict in Rural's proxy statement, it did not give stockholders the full picture of its ulterior motives, Delaware's high court found.

"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," Valihura wrote. "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."

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