Opinion ID: 3158748
Heading Depth: 2
Heading Rank: 2

Heading: The Company’s Business Plan

Text: In May 2010, the Board hired Michael P. DiMino as the Company’s new President and CEO and gave him a mandate to grow the Company. To carry out his mandate, DiMino developed new growth strategies. As discussed in the Company’s public filings, Rural planned to: Increase Revenue Through Strategic Growth. Flexibility in our capital structure allows us to actively pursue acquisitions of ambulance transport businesses and to consolidate business in the fragmented ambulance transport market. We will pursue acquisitions that are accretive to our profitability, leverage our strengths and complement our existing national footprint. Increase Revenue Through Organic Growth. We believe our proven track record of high-quality patient care, meeting and exceeding contract 4 expectations and progressive public/private partnering arrangements aimed at assisting communities to achieve their cost structure goals, creates opportunities for us to increase revenue by winning competitive bids for emergency ambulance services. Additionally, we will increase nonemergency ambulance service revenue within existing and contiguous service areas by leveraging our community name recognition and record of service excellence to gain preferred provider status with local hospital systems, nursing homes and other healthcare facilities. Increase Revenue Through New Market Non-Emergency Contracts. We believe we can increase revenue by entering new markets where we do not have an emergency transportation presence. We will enter new markets through preferred provider agreements with local and regional hospitals and healthcare systems for non-emergency general transportation services. We believe our name recognition and service excellence in our existing markets will allow us to gain entrance into new markets to provide non-emergency services to larger scale customers. The trial court concluded that “[t]he evidence at trial demonstrated that Rural’s growth strategy was reasonable and achievable.”4 However, at trial, DiMino also testified about the risks facing the Company in late 2010 and early 2011, which included potential difficulties integrating acquisitions and changes in the sources of payments for the Company’s services. The Company’s public filings detailed these risks. RBC was hired by the Special Committee as Rural’s primary financial advisor in connection with the Company’s decision to explore strategic alternatives in late 2010. Anthony Munoz, a Managing Director at RBC, was Rural’s lead banker. Marc Daniel, RBC’s lead M & A banker, participated in the Rural sale process alongside Munoz. Moelis & Company LLC (“Moelis”) was brought on as Rural’s secondary financial advisor. Richard D. Harding, a Managing Director, was Rural’s contact at Moelis. 4 Rural I, 88 A.3d at 107. 5 Before being engaged by the Company, RBC had, according to the Board minutes, a “significant (and satisfactory) track record with the Company in relation to debt financing transactions and other advisory matters.” In addition to maintaining a relationship with Rural, RBC also had an “active dialogue” with Warburg, the Company’s eventual acquirer, which extended beyond Warburg’s participation in the Rural sale process. Sean Carney, a partner at Warburg, was the point person for Warburg’s Rural acquisition team. The Special Committee was first formed in August 2010, after RBC advanced the idea of Rural acquiring American Medical Response, Inc. (“AMR”), its primary national competitor in the ambulance business. AMR was a subsidiary of Emergency Medical Services Corporation (“EMS”). As a response to RBC’s approach, the Board formed the Special Committee with the authority to oversee the process of formulating Rural’s acquisition strategy concerning AMR. In October of 2010, the Board re-formed the Special Committee to respond to an approach by Irving Place Capital and Macquarie Capital (jointly, the “Consortium”), which, together, expressed a preliminary interest in acquiring the Company. The Board regarded the Consortium’s expressed interest in acquiring Rural for $10.50 to $11.50 per share as being too low to justify engagement. Shackelton intimated that the price offered by the private equity firms “was plainly insufficient in relation to the Company’s standalone prospects.” Nonetheless, later that month, on October 27, 2010, the Board charged the Special Committee with the “authority to oversee the process of reviewing the Company’s alternatives, making recommendations to the Board, determining a course of 6 action and, if it deems appropriate, negotiations and related interactions with the [C]onsortium . . . .”5 The two private equity firms suggested that they would be willing to raise their interest level to $15.00 per share, but discussions with the Consortium concluded when Irving Place Capital withdrew after Rural affirmed that it was not for sale at the revised price point. During the liability phase of the proceedings, the plaintiffs did not contend that any director breached his duty of loyalty, but they did argue, and the trial court found, that Shackelton, Davis, and DiMino each had personal circumstances that inclined them towards a near-term sale.6 For example, Davis, in the Fall of 2010, served on a dozen public company boards, which brought him into conflict with an Institutional Shareholder Services Inc. (“ISS”) policy against “over-boarded” directors.7 As President and CEO of PIRINATE Consulting Group LLC, Davis often joined boards as a hedge fund nominee or as an outside director acceptable to stockholder activists. Beginning in 2004, Davis served as chairman of the board for Atlas Air Worldwide Holdings (“Atlas Air”). He was particularly concerned about avoiding a recommendation against his re-election at Atlas Air. At his deposition, Davis testified that ISS had “uniformly recommended against [him]” due to the fact that he routinely sat on the boards of more than six public 5 According to the minutes, “[t]he committee was instructed to update the Board regarding its activities on a regular basis, and to return to the Board to provide its recommendations and/or to obtain further instructions and authority when the need therefor is apparent.” 6 In Rural II, the trial court determined that Shackelton and DiMino’s unique reasons to favor a near-term transaction presented a conflict, and that, but for the settlement, they would have shared a common liability with RBC to the Class. 7 Davis testified that “[o]ne of ISS’s rules is they will not support a candidate for a board who sits on the boards of more than six public companies.” 7 companies. Through counsel for Atlas Air, Davis met with ISS and agreed with them on a process where over time he would reduce his number of board positions to six and, pending the completion of that process, ISS would continue to give him a positive recommendation.8 Davis and ISS set a deadline date of April 2011 for the completion of the director’s board seat reduction process. Davis testified that “Rural/Metro had already decided to put itself up for sale, so I put Rural/Metro on the list of companies I was going to leave.”9 Like Davis, Shackelton had personal reasons for pushing a near-term sale. Shackelton was a managing partner of Coliseum Capital Management, LLC (“Coliseum”), a hedge fund he co-founded in 2006. Coliseum generates returns by taking concentrated positions in small capitalization companies, obtaining influence, and then facilitating an exit within approximately three to five years. Over the course of 2007, Coliseum began acquiring shares of Rural. At trial, Shackelton suggested that, in so doing, the fund managers believed they were investing in an undervalued company and over the course of a longer-term horizon they would be able to recognize that value. By October of 2010, Coliseum had amassed an equity stake in Rural of approximately 12%, at a cost basis of “substantially less than $10 a share.” By early 2011, Coliseum’s position in the Company’s securities equated to more than 20% of the investment firm’s 8 The Court of Chancery further found that “[a] sale of Rural would reduce [Davis’s] number of board seats, while letting him exit on a professional high note.” Rural I, 88 A.3d at 65. The trial court observed that a Rural business combination before his directorship deadline would enable Davis to realize $200,000 in the Company’s equity, which would vest upon a change of control and which he would otherwise have to leave on the table if Rural did not change hands prior to April 2011. Id. 9 B615. 8 portfolio. The Court of Chancery, therefore, concluded that Shackelton saw an M & A event as the next logical step for Coliseum’s involvement with Rural. DiMino was appointed Rural’s President and CEO effective June 2010. He also assumed a seat on Rural’s Board. DiMino, upon arrival at Rural, formulated a three part strategy to grow the Company: (i) acquire local and regional providers in the highly fragmented ambulance transport industry, (ii) enter new markets by securing contracts with hospitals for non-emergency, general transportation services, and (iii) secure new government contracts through the request-for-proposal process. The trial court determined that Shackelton’s interest in an M & A event was also a reaction to DiMino’s business plan, and that DiMino’s growth plan conflicted with Coliseum’s investment strategy. Moreover, the trial court concluded that DiMino was a late convert to the idea of a sale. During most of 2010, he favored keeping Rural independent, but changed his mind after his six month performance review, when he received negative feedback from Shackelton and Davis due to his response to the Company’s exploratory discussions with private equity firms. In a November 1, 2010 email to Conrad and Walker, DiMino stated that his desire was to “wait to sell th[e] business until after” it had realized on certain of its growth initiatives.10 He continued by noting that he had spoken with RBC and Shackelton, who told him that “now is the time to sell.” Shackelton also told DiMino that “[h]e want[ed] to do this in the next 3 to 6 months and have [DiMino] prepare the 10 B21. To that end, an internal RBC memorandum posited: “Under new leadership, the Company will also pursue tuck-in acquisitions that are both strategic and accretive to EBITDA.” B269. 9 business for this process.” DiMino told Walker and Conrad: “Obviously this changes my direction and perspective. Instead of running the business for the mid to long term[,]” DiMino would have to “make decisions for the [] short term.” DiMino also stated in the November 1, 2010 email that, in his opinion, he “would wait to sell th[e] business . . . [until s]ometime after June of next year.” He concluded by suggesting that he had “a lot already invested personally” at Rural. Analysts, such as J.P. Morgan, recognized that there was “[p]otential for meaningful . . . stock price appreciation . . . as [the] growth plan is executed on/realized.” In notes to himself, dated December, 1, 2010, Shackelton documented feedback from Macquarie Capital that suggested that DiMino was “an impediment to a sale.” Shackelton wrote that he “[b]elieve[d that DiMino] was looking for buyers that would be more favorable to him,” and that there was a “[u]niversal recognition [at Rural] that [DiMino didn’t] want to sell the [C]ompany for personal reasons.” In fact, because he surmised that DiMino did not stand “to gain from the transaction” with the Consortium, Shackelton determined that DiMino “introduced enough concerns regarding the risks of buying the business to scare off buyers[.]” DiMino’s perspective changed following his performance review. Davis and Shackelton’s collective input was particularly negative. The trial court found that, from that point on, DiMino supported a sale and deferred to Shackelton. Davis reasoned that DiMino shifted from being “unalterably opposed” to a sale to being a willing participant, due to the fact that the pool of potential acquirers was flooded with financial buyers. In deposition testimony, Davis stated: 10 [T]he light bulb finally went over his head that they’d probably ask him to run it, and given the way that his relationship with the Board -- our Board had deteriorated, I think at some point, he came to the conclusion he would be better off with a different Board, and a new owner would bring a different Board, on top of which he was going to prematurely cash out on the equity that he had received less than a year earlier. And probably if he was given the job back, would get more equity. It was a very good deal for him. He finally figured it out. RBC fails to mount any serious challenge to the trial court’s factual findings with respect to the personal interests of Shackelton, Davis, and DiMino as being clearly erroneous, and our independent review of the record confirms that such findings are supported by the evidence.