Corporate directors and their outside advisers would seem to have fulfilled their fiduciary duties to shareholders handsomely by agreeing to sell a company for a 37% premium. That did not turn out to be true for the directors of Rural/Metro Corp. or their investment bankers at Moelis & Co. LLC and RBC Capital Markets LLC after the ambulance service business' $438 million sale to Warburg Pincus LLC two years ago.
Instead, a shareholder suit against RBC went to trial before Vice Chancellor J. Travis Laster of the Delaware Court of Chancery from May 6 to May 9 after Moelis agreed to settle the claims against them for $5 million on April 25 and the directors settled for $6.6 million on April 30, though they will likely be indemnified by insurance and Moelis should be indemnified by Rural/Metro.
Even though the directors settled, three of them testified before Laster: Christopher Shackleton, who owned 12% of the company when it was sold; CEO Michael DiMino, who was hired less than a year before the sale and stayed on under Warburg Pincus; and Henry Walker, who had served on the board since 1997. RBC relationship banker Anthony Munoz also testified, as did Marc Daniel, at the time of the deal RBC's head of healthcare M&A. (He has since moved to SunTrust Robinson Humphrey.) The trial thus offered a detailed picture of the sales process and suggested the Rural/Metro board cut a very good deal for the shareholders.
The case against RBC bears a strong resemblance to the 2011 shareholder suit against Del Monte Corp., another instance in which the investment bank was told by Laster that it hadn't done right by the shareholders even though the company it was shopping sold at a high premium. There, Laster wrote an opinion blasting Del Monte banker Barclays plc for offering stapled financing as it was running an auction for the food production and distribution company. Even though Del Monte sold to Kohlberg Kravis Roberts & Co. LP, Vestar Capital Partners and Centerview Partners for $5.3 billion, a 23% premium to the target's price before news of its potential sale broke, Laster found that Barclays "secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees."
The opinion, seen by many lawyers as a stern warning against using the staple in many circumstances, came down as the Rural/Metro auction was reaching its conclusion. The company's directors and its bankers were aware of the decision, but RBC persisted in trying to offer stapled financing, an effort that ended up failing.
Laster aggressively managed the plaintiffs' lawyers in both cases by opting for plaintiffs' counsel who would litigate vigorously rather than settle.
The judge awarded lead counsel status in the Del Monte case to Wilmington's Grant & Eisenhofer PA and Robbins Geller Rudman & Dowd LLP even though their client owned just 25,000 shares while a shareholder with 1.9 million shares had hired other firms. Laster attributed his move to Grant & Eisenhofer's "track record" and Robbins Geller's "significant success in Delaware."
"Reputational capital," as the judge has called it elsewhere, also came into play in Rural/Metro. After the company announced its sale, the inevitable shareholder litigation followed, and Juan Monteverde of Faruqi & Faruqi LLP garnered lead counsel status and negotiated a proposed settlement that would have required the company only to make additional disclosures to shareholders about the deal. Joel Friedlander of Wilmington's Bouchard Margules & Friedlander PA and Randall Baron of Robbins Geller challenged that settlement, and Laster rejected it in a Jan. 12, 2012, hearing where he appointed Friedlander and Baron as lead counsel.
Friedlander began his presentation by pointing to cases in which he and Baron had successfully opposed other disclosure-only settlements. He went on to criticize the fairness opinions that RBC and Moelis produced, claiming that the banks dramatically reworked their analysis just before the March 27 meeting at which the Rural/Metro board approved the sale to Warburg Pincus.
Friedlander and Baron also went after the Rural/Metro directors. They asserted in their briefs that Shackleton desperately wanted to sell the company because his investment vehicle, Coliseum Capital Management LLC, was overly concentrated in the stock at a time when it was trying to raise money for another fund. They also argued that DiMino, who initially opposed the sale of the company because he wanted time to expand the business, came to favor it once he realized that he would likely continue to run the company after a sale, and that Eugene Davis had to leave the board by the end of March 2011 and therefore also wanted a quick sale.
Investment banks Moelis and RBC aided and abetted these violations of fiduciary duty, the plaintiffs claimed, by producing fairness opinions supported by financial analysis that was dramatically overhauled in the days before the Rural/Metro directors voted to approve the transaction. Both banks stood to receive a hefty fee for their M&A work, and RBC had the chance to earn millions more by providing financing to the buyer.
Much of the plaintiffs' case should have seemed dubious given the premium on the deal, and the Rural/Metro directors came off well at trial. The plaintiffs cast aspersions on the company's decision to run an auction while larger rival Emergency Medical Services Corp. was also up for sale. But Rural/Metro itself had previously tried to buy EMS's American Medical Response Inc. division, a deal Shackleton said he would have supported enthusiastically, so combining the companies made some sense. At the very least the timing of the auction would have been within the board's business judgment.
So too would have been the board's decision to sell even though it had just adopted a growth strategy in the fall of 2010. As Munoz said at trial, "The company had no track record of making acquisitions." DiMino pointed out that Rural/Metro has completed only two $50 million acquisitions since being sold to Warburg Pincus and that one of those has turned out badly. Many of the bidders for the business were skeptical about Rural/Metro's growth prospects, and they turned out to be correct, since the company has struggled since being sold.
RBC's Munoz did not come off as well. The Del Monte decision notwithstanding, he and RBC's head of U.S. investment banking Blair Fleming schemed to provide stapled financing to Warburg Pincus even after the PE shop declined the offer. Both bankers were focused on RBC's relationship with Warburg Pincus and on signing up a deal that would have been RBC's largest deal ever for a healthcare company. And RBC stood to receive an M&A advisory fee only if Rural/Metro agreed to a sale, though that's true in the vast majority of sell-side assignments.
But RBC and Moelis also ran an auction in which they contacted 28 potential buyers, entered into 21 confidentiality agreements, secured 6 indications of interest, conducted 5 management presentations and ended up with a strong bid from Warburg Pincus. RBC didn't force a deal on a reluctant or supine or ignorant Rural/Metro board.
The board might not have known everything Munoz and his colleagues at RBC were up to, but they were under no illusions about their bank's incentives. Baron asked DiMino at trial if he knew that RBC was pitching Warburg Pincus on a revolving loan rather than stapled financing on the Rural/Metro deal. "I just knew Tony had several products," DiMino answered in words that provoked laughter in the courtroom. "He's always trying to sell something. So it would make sense -- you know, he was trying to pitch something to somebody."
That's what bankers do.