Opinion ID: 3158748
Heading Depth: 2
Heading Rank: 4

Heading: The Rural Auction Process

Text: 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. The trial court further concluded that the initiation of the sale process in December 2010 was unreasonable because RBC did not disclose that proceeding in parallel with the EMS process served RBC’s interest in gaining a role on the financing trees of bidders for EMS. It found that RBC designed a process that favored its own interest in gaining financing work from bidders for EMS. RBC’s sale process design, as the trial court observed, prioritized the EMS participants so they would include RBC in their financing trees. RBC did not disclose the disadvantages of its proposed schedule. The trial court also 12 A543. The email continues: At this stage, we have prioritized two firms that appear to have the highest level of interest in Rural and the financial capacity to execute a transaction: - Apax: As of today, we have a NDA in place and this evening we connected for our first management introduction call - KKR: We are expected to have a NDA in place by tomorrow morning. We are planning to have a management introduction call tomorrow Assuming these firms move forward, we will be sharing our projections with them over the coming week Looking forward to the week of January 3rd, we are considering the benefits of more formally reaching out to 6-12 other PE in order to gauge their level of interest in Rural (either as a partner in an AMR acquisition or an acquisition target). With this in mind, we will be working with RBC/Moelis over the next week to refine our financial model and presentation materials. 16 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.13 The evidence supports these findings and reflects that RBC viewed Rural as an “angle” to obtain EMS work. RBC scheduled first round bids for late January 2011 because that tracked with the EMS process and Rural’s ability “to act as an ‘angle.’” RBC 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. The record also indicates that there were identifiable benefits to initiating a sale process in December 2010, as the trial court noted. By January 2011, Rural’s stock price was up 143% since 2010 and trading at a 5-year high, the EBITDA multiples in the emergency medical transport sector had expanded, financial sponsors were interested in participating in the space, and the leverage finance markets were supporting equity valuations in the industry. Despite the potential advantages of running the sale process in early 2011, the trial court found that Rural encountered readily foreseeable problems associated with trying to induce financial buyers to engage in two parallel processes for targets that were direct competitors. The challenges regarding protection of Rural’s confidential information and coordinating schedules with EMS bidders were raised for the first time on February 6, 2011, at a meeting of the Special Committee. The trial court found that the Special 13 We similarly refer to claims involving the sale process as the “Sale Process Claim.” 17 Committee had not previously considered this complication. With respect to the issues concerning the terms of standard confidentiality agreements, the Court of Chancery asked Munoz at trial: Q: . . . It seems to me that this type of information sharing issue, which comes up whenever you do a process that involves potential competitors, would have been something that you all would have anticipated when you originally contemplated the spin/merge process when you were recommending the two-track structure. Was it? A: Yes.14 RBC was aware that the Rural confidentiality agreement contained a no-conflict provision that prohibited recipients of Rural’s confidential information from sharing it with individuals involved in the EMS process.15 The no-conflict provision provided: “natural persons participating in the discussions with the recipient in connection with the potential negotiated transaction have not been, are not, and will not be participating in a potential financing of an acquisition or other similar transaction involving EMS or AMR.”16 The confidentiality agreement then required the recipient to confirm in writing that the no-conflict provision was satisfied. 14 A2145. 15 At trial, Munoz testified as follows: Q. Now, moving back a couple months to January, for purposes of getting bidders to accept staple financing from RBC, you suggested to the financial -- your financial sponsor colleague, banker colleague, to remind their financial sponsors that the confidentiality agreements they signed forbid them from sharing Rural/Metro confidential information to [sic] other financing sources; right? A. That is correct, yes. A2097. 16 A2097-98. 18 RBC developed a two-track bidding process, with the first classification of buyers constituted primarily of those participating in the EMS process and the second grouping generally composed of “those that have dropped out of the EMS process and/or [those that] have/should have interest in [Rural] as a standalone deal . . . .”17 During December 2010 and January 2011, with the Special Committee’s approval, RBC and Moelis contacted 28 potentially interested parties. In late January 2011, RBC distributed a bid instruction letter to the twenty-one private equity firms that signed confidentiality agreements. The full Board had not met since December 8, 2010. The Special Committee had not met since December 23. Six parties submitted indications of interest, ranging between $14.50 and $19.00 per share. RBC and Moelis apprised the Special Committee of the reasons parties dropped out of the auction process, including two who could not justify a price above the stock’s trading value. Later, Munoz contacted Shackelton, informing him as follows: “Fyi – Thoma Bravo out. Said they can’t get to current stock price.” In late December 2010 and early January 2011, participants in the process provided negative feedback about its timing and design. As the auction developed, Moelis’s concerns regarding transaction complexity were realized; Harding, the Rural point person for Moelis, commented that a potential bidder for Rural, KKR, suggested it “would be tough” to participate in “simultanous [sic] auctions.”18 Moreover, KKR told Rural’s bankers that it “would be ideal” if the EMS deal and the Company’s deal were 17 A544. 18 B136. 19 “stagger[ed].” After speaking with Bain Capital Partners, LLC (“Bain”), Harding shared with Shackelton and RBC that the private equity firm also thought that “lining up two deals for public companies simultaneously is tough but staggered, even fairly closely, could work[.]” Clayton, Dubilier & Rice (“CD & R”), a private equity firm, also urged delaying the Rural process until the EMS sale was completed. 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 “[i]nflection [p]oint” in which the Company was transitioning from turnaround to early-stage growth story. J.P. Morgan’s presentation to Rural’s CEO fundamentally challenged the central, “sell now” thesis of RBC.19 It hesitated to recommend an immediate sale because “logical strategic buyers” at the time were concentrating on change of control transactions of their own. J.P. Morgan also recommended Rural continue to execute on its “growth plan,” as doing so would drive further stock price appreciation. It advised DiMino that allowing the healthcare market to play out, in the meantime, would enable Rural to attract greater interest from financial sponsors and strategic buyers. In sum, it suggested that a Rural sale would likely be better accomplished at a different point in time, in view of the fact that strategic bidders were then “internally focused” and the Company had “significant growth to unlock.” DiMino limited his distribution of the presentation to Shackelton and Munoz, noting: J.P. Morgan “had some interesting comments regarding the AMR process and our potential 19 J.P. Morgan observed that, if Rural “execute[d] on [its] growth plan,” there would be “significant interest to come,” particularly in light of the fact that strategic bidders were, at the time, “focused internally[.]” B150. 20 attractiveness to private equity firms. I didn’t tell them we had launched our own goprivate process.”20 The Board did not schedule a meeting to review the indications of interest or discuss next steps. The Special Committee met on February 6, 2011. RBC made a presentation that did not include any valuation metrics. At the meeting, where Conrad, DiMino, and Wilson were also present, RBC and Moelis reviewed the six indications of interest received following the auction process. The minutes indicate that, after receiving the confidential information memorandum, “14 firms declined to participate. In addition, one private equity firm, [Bain], indicated that the level of its interest in pursuing the transaction with [Rural] would depend on the results” of its participation in the EMS process. A joint presentation by RBC and Moelis summarized the initial indications of interest: American Securities — $16.00—$17.00; Ares Management — $14.50—$16.50; CD & R — $15.50—$16.50; Leonard, Green & Partners — $17.00—$19.00; Kelso & Company — $14.75—$16.50; and Warburg — $17.00. RBC’s presentation to the Special Committee at the February 6 meeting was four pages long, provided no opinion, preliminarily or otherwise, on the quality of the bids, and, as the Court of Chancery observed, failed to include any valuation metrics. 20 B144. 21 The trial court concluded that, while the minutes reflect that Shackelton asked Davis and Walker whether to include all six private equity firms in the next phase, Shackelton and RBC already had agreed to make a data room available to all bidders beginning the next day, February 7, and had scheduled meetings with all six firms to take place between February 9 and 18. DiMino privately contacted RBC in search of valuation metrics. According to the trial court, RBC gave DiMino a two-page analysis showing that at prices of up to $18 per share, an LBO would generate five year internal rates of return for a financial sponsor that exceeded 20%. On February 8, Munoz provided DiMino with a deck regarding leveraged buyout returns, evidencing five year internal rates of return over 20% for offers exceeding $15.50 per share. The Special Committee met again on February 22, 2011. RBC made a limited presentation, which included no valuation metrics and which was followed by a discussion of CD & R’s potential participation in the Rural process. The Special Committee identified CD & R, after it won the EMS sale, “as a competitor of the Company, causing certain confidentiality and antitrust issues to be considerations[,]” if the private equity firm participated in the Rural process.21 DiMino testified at trial that, at this meeting, he was “very concerned” about confidentiality with respect to CD & R. He continued by elaborating on that point as follows: 21 Additionally, during an executive session of the meeting, without RBC or Moelis present, legal counsel discussed the Court of Chancery’s holding in the case of In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011). At trial, DiMino testified that he was aware of legal counsel’s advice that, in light of RBC’s interest in stapled financing, the directors “be actively involved in the process in order to assure that there is neither an actual problem with regard to the conflict of interest, nor the appearance of a defective process as a result of this conflict of interest . . . .” A2212. 22 Because if [CD & R] got to the full management presentation or they got to get all the information that we would normally give in the management presentation and in the data room, some of those things could be counterproductive if they didn’t buy -- if they ultimately didn’t buy us. They would have trade secrets or some of our secret sauce, if you will, that we had developed.22 DiMino testified further that this concern about confidentiality was present when the Company first launched the sale process. The trial court found that, although RBC previously had recommended a near-term sale process to capture the interest of the winner of the EMS auction, the Special Committee now balked at having CD & R participate. The Special Committee set a bid deadline of March 21 and decided not to solicit interest from strategic acquirers. As the bid date approached, CD & R suggested to RBC that it could outbid other sponsors for Rural because of synergies with AMR. CD & R asked for the bid deadline to be pushed back to April, so that it could formulate its bid. On March 15, 2011, the Board met to consider the Special Committee’s progress for the first time since December 8, 2010.23 The minutes reflect that representatives of RBC and Moelis made a presentation to the Board “regarding the ongoing exploration of the potential sale of the Company” and reviewed the “next steps” in the “sale evaluation process.” Daniel made the presentation to the Board on behalf of RBC. Akin to its previous presentations, RBC failed to include valuation metrics and provided no opinion, 22 A2232. 23 The trial court found that the minutes prepared in connection with the March 15 meeting “have the feel of a document drafted in anticipation of litigation, and the rose-colored description of the sale process that appears in the minutes does not match up with what actually took place.” Rural I, 88 A.3d at 72. 23 preliminarily or otherwise, on the quality of the bids during its March 15, 2011 sale process update. Further, the minutes of the March 15 meeting suggest that RBC and Moelis “commented upon the detailed oversight provided by the Special Committee of independent directors throughout the process, noting frequent formal and informal communications involving the full committee or its chair (Mr. Shackelton).” RBC, at the meeting, also remarked upon the “formal meetings of the Special Committee that were held during the process.” Shackelton suggested that “the full Board had been updated from time to time at key points in the process.” The trial court found, however, that the description of the process in the minutes was “false,” in that the record presented to it contained evidence of only two formal meetings of the Special Committee: one on February 6, 2011 and one on February 22, 2011. According to the trial court, Davis was largely an absentee director and Walker deferred to Shackelton, who drove the process. Again, RBC does not plainly argue that these findings are clearly erroneous and, even if it did, we find no basis for such a conclusion. At the March 15 meeting of the Board, RBC and Moelis discussed the final bid deadline of March 21, 2011. The trial court found that RBC had designed the sale process ostensibly to give the winner of the EMS auction the opportunity to make a bid for Rural that included synergies. It determined that neither the Board nor the Special Committee considered the benefits that could inure to Rural’s advantage if the winner of the EMS process then sought to acquire Rural, because Rural could seek to extract a 24 portion of the synergies from a combination of AMR and Rural in the form of a higher price. CD & R, the private equity firm that won the bidding process for EMS and one of the Company’s six suitors, was a topic of discussion for the Rural directors on March 15. CD & R had advised RBC and Moelis that it would be unable to complete its due diligence and other review processes with respect to Rural until the completion of its acquisition of EMS, and that any bid it might submit would be conditioned accordingly. The minutes suggest that the Board discussed the following with respect to CD & R: [T]he potential for a higher purchase price from CD&R relative to other bidders due to the potential synergies that could be realized between [Rural] and AMR under common ownership by CD&R a possible delay in the March 21 deadline to accommodate CD&R and the impact on the enthusiasm of other potential bidders if the reason for the delay became known; the risk to [Rural’s] sale process of waiting for CD&R in view of the timing for the other potential bidders; the potential for dealing with CD&R via a “go-shop,” “fiduciary out” linked to a reasonable break-up fee, or other contractual provisions . . . . On the advice of RBC, Moelis, and legal counsel, the Board “concluded it was in the best interests of the Company to proceed with a bid deadline of March 21, and that CD&R would be encouraged by the Company’s financial advisors to submit its best and final bid at that time.” A March 15, 2011 RBC presentation to the Board reflects that CD & R communicated that it would not participate further in the Rural sale “due to its involvement in the EMS process[.]” The trial court found that RBC’s 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 25 Rural aggressively, thus giving Warburg an advantage over others who were still involved in evaluating EMS. The trial court concluded that Warburg knew that its competitors in the process lacked similar resources and that it did not need to incorporate as much of its anticipated gains in its price to outbid the other firms. Carney referred to the private equity firm’s challengers for the Rural acquisition as a “motley group because the EMS process put so many of the larger firms on the sidelines.”24 In addition to the competitive design issues faced by prospective financial buyers, the evidence indicates that strategic buyers were preoccupied. The March 15 minutes state: “Generally speaking, it was noted that it was unlikely that any potential strategic purchaser not affiliated with a private equity firm would have an interest in the ability [sic] to enter into a transaction on terms acceptable to the Company.”25 J.P. Morgan’s presentation to DiMino commented that “[t]he three other strategics are focused internally now[.]”26 Thus, the competitive dynamic was inhibited by the fact that potential strategic bidders for Rural were themselves tied up in change of control transactions at the time the Company was exploring a sale. The Board decided to proceed without reaching out to Falck A/S, a European company with an equity interest in Rural and a potential strategic bidder. The Board also decided not to extend the bid deadline.27 24 B251. 25 A616-17. 26 J.P. Morgan’s presentation suggested that EMS, AirMedical Group Holdings, and Air Methods were potential strategic acquirers. B150. 27 After the meeting, RBC told the remaining bidders that the timeline would not be extended, although Rural pushed the deadline out by 24 hours to March 22. 26 The Board then adopted a resolution which the trial court characterized as “granting the Special Committee the authority that Shackelton and RBC had assumed for themselves.”28 It states: NOW THEREFORE, BE IT RESOLVED, the Board of Directors hereby ratifies and restates its delegation to the Special Committee of the exclusive power and authority to (i) determine whether a Potential Transaction is or may be, at this time, in the best interests of the Company and its stockholders, and report its recommendations to the full Board of Directors, (ii) retain and work with outside advisors in a controlled and contained process to seek from various financial institutions indications of interest and possible transaction terms in respect of a Potential Transaction, (iii) review and evaluate the terms and conditions of such indications of interest and determine the advisability of advancing further in respect of such proposals and/or whether other strategic alternatives in respect of the Company should be explored, (iv) if it deems appropriate, solicit proposals for a Potential Transaction that would be in the best interests of the Company’s stockholders, (v) negotiate and finalize terms of any such Potential Transaction and, and [sic] (vi) report its findings and recommendations to the full Board of Directors[.] E. RBC’s Efforts to Secure Staple Financing and Warburg’s Final Bid Rural’s Engagement Letter with RBC and Moelis contains its most specific disclosures with respect to RBC’s buy-side financing ambitions in Section 2, which is entitled, “Certain Agreements of the Company.” Section 2.d) expressly provides that “RBC shall have the 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.”29 This language, however, does not capture 28 Rural I, 88 A.3d at 73. 29 A553. This provision of the Engagement Letter further provides: 27 2.d) Additionally, in connection with an AMR Acquisition Transaction or Alternative AMR Acquisition Transaction, RBC shall have the right to participate in the provision of any and all debt financings, on mutually acceptable terms, as appropriate, required for the completion of such Transaction, and shall have the opportunity to present credentials to the Board of Directors and senior management of the Company with a view toward being appointed to have a lead role in the underwriting, bookrunning, placing, managing or leading of various elements of such financing, as appropriate. Id. The Engagement Letter defines an “AMR Acquisition Transaction” as: [A]ny merger, consolidation or other business combination or acquisition transaction pursuant to which the Company is to acquire all or a majority of, or be combined with, American Medical Response, Inc. (“AMR”), or all or a majority of its business. For the avoidance of doubt, an AMR Acquisition Transaction shall not include a Sale Transaction or an Alternative AMR Acquisition Transaction. A560. The Engagement Letter defines an “Alternative AMR Acquisition Transaction” as: [A]ny merger, consolidation or other business transaction with respect to which the Company participates in conjunction with one or more other entities and which involves a merger, consolidation or other business combination or acquisition transaction pursuant to which the business and assets of Emergency Medical Services Corporation, the parent company of AMR, undergoes a change in control and the result of which is that the business and assets of AMR are combined with, or operated under a common management structure which includes, the Company. For the avoidance of doubt, an Alternative AMR Acquisition Transaction shall not include a Sale Transaction or an AMR Acquisition Transaction. Id. The Engagement Letter defines a “Sale Transaction” as: [A]ny (i) merger, consolidation, or other business combination transaction pursuant to which the Company is to be acquired by, or combined with, another entity, (ii) any sale or disposition by the Company of an interest in material assets of the Company, or (iii) any recapitalization, restructuring, or other transaction or series of transactions involving the sale or disposition of capital stock of or other equity interest in the Company which has the effect of transferring a majority in interest or control of the Company. For the avoidance of doubt, a Sale Transaction shall not include an AMR Acquisition Transaction or an Alternative AMR Acquisition Transaction. Id. Notably, these definitions all contemplate a transaction involving the Company—not transactions that are not inclusive of the Company. 28 RBC’s provision of financing to an acquirer of EMS in a transaction that does not involve Rural. Further, in Section 2.f), the Engagement Letter’s disclosures with respect to the EMS process provide that “RBC and Moelis shall have the 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.” This language refers to RBC’s possible participation in a transaction between Rural and EMS, but does not expressly touch upon RBC’s buy-side role in any EMS transaction not inclusive of Rural.30 The Engagement Letter, in Section 9 entitled, “Other Matters Relating to Engagement,” sets forth generic and boilerplate disclosures with respect to the provision of financial products by both RBC and Moelis. In part, it provides that RBC “may also provide a broad range of normal course financial products and services to [its] customers” and “may arrange and extend acquisition financing or other financing to purchasers that may seek to acquire the Company and/or to the same or different purchasers that may seek to acquire companies or businesses that offer products and 30 This provision of the Engagement Letter further provides: The terms and conditions relating to any such services will be outlined in a separate proposal and the fees for such services will be in addition to fees payable hereunder. Any such proposal will be negotiated separately and in good faith, set forth in a separate written agreement, and be consistent with prevailing industry practice. Notwithstanding the foregoing, any fees resulting from such advisory services shall be paid in the following manner: 60% of the fee will be paid directly to RBC and 40% of the fee will be paid directly to Moelis. A554. 29 services that may be substantially similar to those offered by the Company.” Section 9 fails to specifically state that RBC would seek to leverage its Rural engagement to provide financing in a separate EMS transaction, nor does it disclose that RBC would favor its interests as a lender over those of the Company. As to Section 9, the trial court held that, “[t]his generalized acknowledgment that RBC . . . might extend acquisition financing to other firms did not amount to a non-reliance disclaimer that would waive or preclude a claim against RBC for failing to inform the Board about specific conflicts of interest.”31 Section 4 of the Engagement Letter sets forth the agreement as to the compensation to be paid to RBC and Moelis for their services. For its fairness opinion, RBC was entitled to $500,000, payable upon the delivery of the opinion, “without regard to the conclusion reached in such opinion or whether such opinion [was] accepted or a Transaction [was] consummated.”32 The fairness opinion fee was to be credited against any transaction fee. Under Section 4, the Engagement Letter provided for various transaction fees. First, the Engagement Letter provided for a Sale Transaction Fee: In the event the Company consummates at any time a Sale Transaction pursuant to a definitive agreement or letter of intent or other evidence of commitment entered into (i) during the Term, or (ii) during the nine (9) 31 Rural I, 88 A.3d at 101 (citation omitted). 32 A555; Engagement Letter § 4.b). The Engagement Letter, in Section 4.c), also provided for an Announcement Fee: “In the event that . . . the Board of Directors requests a fairness opinion from either, but not both of, RBC or Moelis, an announcement fee (“Announcement Fee”) of $500,000 shall be payable to the Advisor . . . from which a fairness opinion has not been requested.” Id. The Announcement Fee was to be credited against the transaction fee or the termination fee for any transaction related to the Engagement Letter. Id. 30 months following the Term, the Company agrees to pay RBC and Moelis a total transaction fee . . . equal to the sum of (A) 1.00% of the Aggregate Transaction Value . . . to the extent that the price to be paid to stockholders of the Company is at or below $16.00 per share, and, in addition, (B) 3.0% of the Aggregate Transaction Value to the extent related to the price to be paid to stockholders of the Company in excess of $16.00 per share.33 The Sale Transaction Fee was to be paid at closing in the following manner: “60% of the fee will be paid directly to RBC and 40% of the fee will be paid directly to Moelis.” Second, if Rural consummated, at any time, an AMR Acquisition Transaction pursuant to an agreement entered into during a specified time period, the Company agreed to pay RBC and Moelis $3,500,000. Another provision addressed a transaction fee payable in the event Rural consummated an Alternative AMR Acquisition Transction. Third, if the Company received a break-up fee or other termination fee in connection with a Sale Transaction, Rural agreed to pay RBC and Moelis 20% of the break-up or termination fee received by the Company. Like the other fees, 60% was payable directly to RBC and 40% was payable directly to Moelis. Thus, with the exceptions of the fairness opinion fee and termination fee, the fees that RBC and Moelis were to receive were contingent upon the Company consummating a transaction. On March 18, 2011, RBC sent Warburg executed commitment papers, but Warburg did not respond. The trial court found that, on the day before the merger was approved, RBC’s most senior bankers made a final push to obtain Warburg’s financing business. The evidence clearly supports the trial court’s findings. For example, a contemporaneous RBC internal memorandum documented that the bank’s “[d]eal team 33 A555; Engagement Letter § 4.d) (alternations removed). 31 [was] working with Warburg Pincus on a final round bid.” The memorandum continued: “Other banks potentially providing papers to our sponsor include [Credit Suisse Securities (USA) LLC], Jeffries [Finance LLC] and [Citigroup Global Markets Inc.]” As part of its push to secure Warburg’s business, RBC bankers sought internal approval to underwrite 100% of a $590 million financing package for Warburg. RBC’s bankers stated the following in their memorandum regarding the Rural deal: [Warburg], covered by David Daniels, is a top tier client of the Financial Sponsors Group. RBC has an active dialogue with [Warburg] across all of its industry verticals and has generated [approximately] $6mm in fees from deals with this sponsor. We are supporting the proposed financing commitment associated with the purchase of [Rural] as it will further strengthen our relationship and lead to additional deal flow with [Warburg]. Before the bid deadline, Carney emailed a Warburg colleague with an update on the Rural process: “I think we are in a good position. [DiMino] likes us a lot, the bankers are pulling for us, and we are the premier firm involved in the process.”34 On the extended bidding deadline of March 22, 2011, Warburg submitted a bid at $17.00 per share, and CD & R submitted an indication of interest at $17.00 per share, subject to further diligence. American Securities “indicated that their current valuation was below their initial indication of interest on February 1, 2011 of $16.00 to $17.00 per share and that they expected remaining diligence would take approximately 2-3 weeks[.]”35 On March 23, the Special Committee met to discuss the offers received from Warburg and CD & R. Conrad, Holland, DiMino, Wilson, RBC, and Moelis were also 34 B251. 35 A834. 32 present at the meeting by invitation. Munoz and his colleagues at RBC debated whether to provide valuation materials to the Special Committee to enable them to evaluate the bids. Munoz was worried that RBC would be asked about valuation. The trial court found that, with bids in hand, the relationship between RBC and Shackelton changed. Before the bids, they shared the goal of wanting the Company sold. But Shackelton wanted more than $17.00 per share, and RBC “just wanted a deal.” At this point, DiMino became RBC’s “principal ally” in the boardroom. Like RBC, DiMino had an incentive to sell the Company and continue managing it for Warburg. As evidence of this, in advance of the Special Committee meeting, Munoz scheduled a call with Shackelton to “manage him.”36 The trial court determined that the Special Committee decided not to engage further with CD & R, and that “[t]he Special Committee directed RBC and Moelis to engage in final negotiations with Warburg over price.”37 RBC reviewed the offers with the Special Committee on March 23, 2011. “Warburg’s offer constituted a proposal to acquire all of the Company’s outstanding common stock for $17 per share, with no further confirmatory due diligence. Along with its offer, Warburg had submitted fully committed equity and debt commitment letters . . . .”38 With respect to CD & R, the minutes reflect that RBC represented to the Special Committee that the private equity firm’s “offer constituted a proposal to acquire all of the outstanding Company Common Stock for $17 per share, subject to confirmatory due diligence. CD&R’s offer letter 36 B285. 37 Rural I, 88 A.3d at 76. 38 A804. 33 reiterated its previous statements to RBC and Moelis that CD&R was unable to fully commit to a definitive transaction to acquire [Rural] until the closing of its acquisition of [EMS] . . . .”39 The Special Committee ultimately rejected the proposals received from Warburg and CD & R. The minutes do not reflect a discussion of valuation or the design of the sale process. The trial court observed that the Board had no valuation materials beyond a one-page transaction summary that compared the metrics implied by a $17.00 per share offer to the metrics implied by Rural’s closing market price of $12.38 on the prior day. According to the minutes, Shackelton, Davis, and Walker proceeded on that basis as follows: [T]he Special Committee determined that the purported offer from CD&R did not provide the Company any certainty of a successful transaction, and did not otherwise present a compelling case for pursuing a transaction with CD&R at this time, given that it did not have committed financing and that it did not provide any indication of the merger agreement terms it would require. The Special Committee directed RBC and Moelis to contact Warburg to engage in further negotiations to improve its offer in terms of the price to be paid to the stockholders of the Company . . . .40 The trial court found that RBC “encouraged DiMino to drum up director support for Warburg’s bid” and presented a board book “designed to convince [the Board] to accept Warburg’s bid . . . .”41 RBC’s internal communications before the March 23 meeting of the Special Committee reflect the bank’s position that closing on the Warburg offer and obtaining the private equity firm’s buy-side financing business were its 39 Id. 40 A805. 41 Rural I, 88 A.3d at 96. 34 priorities when advising the Board. Munoz emailed his RBC colleagues on March 23: “Let’s all plan to do a call w/ Shackelton before [the] Board call. Need to send him the 1- 2 [valuation] pages we discussed to him [sic] before we get on [the] phone. Need to manage him before he gets on w/ [the] Board.”42 On March 24, Munoz emailed Daniel: “Told dimino to start working the board. He said he’ll start calling each of them tomorrow.”43 Munoz also emailed DiMino: “Focus on [the] board today. Let me know if you need more tidbits to help you. Once again, last time [Rural’s] stock was at $17 was in 1998.”44 Shackelton contacted Carney, the head of Warburg’s acquisition team, on March 25, 2011. Carney shared with a colleague, Elizabeth “Bess” Weatherman, the following: “The Chairman (who I gather is in his early 30s) and I just spoke for 15 minutes. Pleasant tone. He offered to drop the Go Shop, give us a voting agreement, and move a bit on the break-up fee if we agreed to bump to $17.50. I declined.”45 Carney concluded his sale process update to Weatherman by remarking: “I know [Rural’s] bankers are now nervous and want to get something done.”46 On March 25, Warburg increased its bid to $17.25 per share. Warburg’s bid materials did not include staple financing from RBC.47 42 B285. 43 B286. 44 B287. 45 B291. 46 Id. 47 Warburg’s March 22 bid included three commitment letters, one from each of Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., and Jeffries Finance LLC. Collectively, the commitment letters provided Warburg with 100% financing for the transaction. 35 Following Warburg’s submission of its bid, RBC did not disclose to its client that it continued to seek a buy-side financing role with the private equity firm. As to the Board, the trial court concluded that “[t]he Rural directors did not provide any guidance about when staple financing discussions should start or cease, made no inquiries on that subject, and imposed no practical check on RBC’s interest in maximizing fees.” For example, DiMino was asked at trial: Q. Now, between this date, December 23rd, and early February, do you recall a single conversation you had with Mr. Munoz or anyone else at RBC in which you specifically discussed with them what they were doing with regard to achieving staple financing from -- from any potential buyer of RBC [sic]? A. No.48 In his deposition testimony, Carney confirmed that RBC continued to push for Warburg’s financing business, even after Warburg’s bid excluded the bank’s commitment papers: Q. And at some subsequent date did RBC express interest -- continued interest in offering debt financing to Warburg Pincus? A. As I recall, yes. Q. And what do you recall of the nature of that expression of interest by RBC? A. My recollection is that RBC was just -- was trying to find a way to participate in the debt financing somehow. ... Q. . . . And was there any subsequent discussion with RBC, perhaps more definitive or more following up, on a subsequent date? 48 A2211-12. 36 A. . . . I do recall that we had additional conversations with RBC because they continued to try to find a way into the financing, and we continued to tell them that that was not going to happen.49 When directed by the Special Committee to engage in final price negotiations with Warburg, RBC again did not disclose that it was continuing to seek a buy-side financing role with Warburg. On Saturday, March 26, 2011, senior bankers at RBC continued to press Warburg to include RBC in the financing package.50 Munoz testified at trial as follows: Q. . . . So the most senior people at RBC are trying to make a last effort to see whether RBC can get involved in the staple on Saturday, March 26th; correct? A. Yes.51 Blair Fleming, RBC’s Head of U.S. Investment Banking, as an inducement, offered to have RBC fund a $65 million revolver for a different Warburg portfolio company.52 Later, in an email to Munoz, Fleming stated: “I’m gonna call warburg myself. We just committed 65 to their effing revolver.”53 F. RBC’s Manipulation of the Valuation Process On Saturday, March 26, 2011, the RBC fairness opinion committee met to discuss Warburg’s bid for Rural. In addition to Daniel and Munoz, several members of the RBC deal team attended the meeting. Ali Akbar and Allen Morton, along with Daniel, served 49 B610. 50 A2192-93. 51 Id. 52 A2192; B329. 53 B326. 37 on the “committee.” Morton “had previously been the head of M&A at RBC U.S., and . . . Akbar, [was a] managing director in the M&A group.”54 The committee members reviewed the fairness presentation and letter, and “recommended certain changes” to the same.55 The record evidence supports the trial court’s factual finding that, on the deal front, RBC worked to lower the analyses in its fairness presentation so Warburg’s bid looked more attractive. Specifically, the trial court found that RBC made a series of changes to its fairness analysis. First, RBC decided not to rely on the single comparable company for valuation purposes. The record evidence reflects that RBC’s preliminary fairness opinion deck applied peer group trading multiples to various valuation metrics. In the final draft of the fairness presentation, however, RBC represented to the Board that it “[d]id not rely on comparable company analysis for valuation purposes.” The comparable company analysis nevertheless remained in the fairness materials, although it was removed from the valuation football field.56 Second, the trial court found that RBC modified its precedent transaction analysis by reducing the low end multiple used in both the management case and “consensus” case, with the effect being that the alteration lowered the bottom end of the management 54 A2403. At the time of the transaction, RBC’s fairness committee formation process was ad hoc, such that “anyone who was a managing director in the M&A group could serve on the fairness committee. And each time there was a fairness opinion to be discussed, [RBC] needed to have at least two independent members, independent meaning the non-sponsoring member . . . .” Id. Daniel was the sponsor, and Morton and Akbar were the “independent members.” Id. Akbar had never served on a fairness committee. 55 A824; A2124. 56 Valuation football fields are used to summarize valuation ranges in connection with business combinations. Typically, they provide the valuation ranges corresponding to each of the valuation methodologies used for a given M & A transaction. 38 case precedent transaction range and “consensus” case precedent transaction range. The morning draft of the fairness opinion presentation used a multiple range of 7.5x to 9.5x, implying a low end per share valuation of $15.49 for the management case. The afternoon draft that was ultimately presented to the Board used a range of 6.3x to 9.5x, resulting in a low end per share valuation of $11.54 for the management case. The trial court also found that, on the morning of Saturday, March 26, 2011, “the ‘consensus’ precedent transaction range was $13.31 to $19.15. On Saturday afternoon, it was $8.19 to $16.71, entirely below the deal price.” In altering its analysis, RBC decided to weigh heavily the 2004 acquisition of AMR by Onex Partners at 6.3x EBITDA, a course of action it had discredited earlier. The trial court observed that this change was inconsistent with RBC’s December 2010 pitch book, where RBC assigned AMR a lowend multiple of 8.0x and suggested that Rural pay 8.4x for AMR. This change was also inconsistent with RBC’s view, expressed throughout the sale process, that Rural’s operating metrics were objectively superior to AMR’s. Finally, the trial court determined that RBC lowered the “consensus” Adjusted EBITDA for 2010 from $76.5 million to $69.8 million to make the Warburg “deal look more attractive.”57 In material presented to the Board before it had the March offer from Warburg in hand, RBC added back approximately $6.3 million in certain one-time expenses when calculating Rural’s Adjusted EBITDA for 2010. The preliminary draft of the fairness opinion presentation contained a Consensus Adjusted EBITDA figure of $76.5 million and, in a footnote, RBC noted that “EBITDA is adjusted for stock based 57 Rural I, 88 A.3d at 77. 39 [sic] compensation, gain on sale of assets and one time [sic] expenses.”58 The morning draft also suggested that “[c]onsensus pro forma adjustments would be unlikely” to account for certain of the one-time expenses.59 The final fairness presentation deck stated that “Wall Street research analysts covering [Rural] do not make pro forma adjustments[.]”60 The Consensus Adjusted EBITDA figure in the final draft was $69.8 million.61 Munoz, in the lead up to finalizing the fairness opinion presentation, emailed his colleagues saying that RBC would “need to add some bullets that say Wall Street analyst [sic] do not reflect any of these one-time expenses. Something to explain why we are not adjusting[.]”62 Similarly, after receiving the fairness opinion deck, Daniel had several questions with respect to the valuation analysis. In a message to Munoz and other RBC bankers with comments to the initial draft of the fairness presentation, he noted: 10: I thought we were looking @ an ebitda multiple around 9.0. What’s changed? 20: maybe it’s just because I’m tired but I think it’s confusing in terms of what ebitda we’re applying. . . . This isn’t reader friendly enough. 21/22: I’d like thoughts on why there’s [sic] no qualitative comments here. I know our internal discussions + justification. But for a new reader, the fact that we only have 1 comp and that the most recent precedents are 58 B305. 59 B316. 60 A873. 61 Id. The evidence shows that certain Wall Street firms suggested that one-time expenses needed to be added back and others chose to exclude those expenses when calculating the 2010 Adjusted EBITDA for the Company, although those that refrained from adding the expenses back generally noted the one-time adjustments in the text, as RBC acknowledges. Thus, we do not find the trial court’s factual determinations to be clearly erroneous. 62 B327. 40 higher than our deal raises issues. While I know we will explain to [the Board and Special Committee], is there a reason why we don’t do so in the text. [sic]63 The record reveals that Munoz coordinated between the senior RBC bankers lobbying Warburg and the RBC deal team working on the fairness opinion, but he did not disclose RBC’s activities to the Board. Further, the trial court found that RBC “failed to provide Rural’s Board or the Special Committee with a preliminary valuation analysis” for three months.64 The trial court noted that, in fact, beyond the December 2010 RBC pitch book—which contained materially different analyses and which only the Special Committee was privy to—the Board had not seen valuation materials before March 27, 2011.65 The evidence supports the Court of Chancery’s conclusions. The investment bankers were well aware that they “had not provided any preliminary valuation analysis since December 23, 2010, and had only provided [the] December 23 book to the Special Committee,”66 as opposed to the entirety of the Board. Munoz testified at trial as follows: Q. And isn’t it the case, sir, that it was not until Sunday night, March th 27 , that RBC delivered to Rural/Metro’s board or special committee a DCF analysis of the management projections that had been sent to the bidders back in January? A. We did -- that was the -- we did a DCF in December and, yes, the next time we did a DCF was, yes, at that time; right. 63 B293. 64 Rural I, 88 A.3d at 95. 65 Id. The trial court found that the December pitch book showed that Rural’s value on a standalone basis exceeded what a private equity bidder willingly would pay for the Company. It found that the evidence at trial established that the value of Rural as a going concern exceeded what the stockholders received in the merger. 66 Id. at 100. 41 Q. Next time you did a DCF after that pitch book on December 23rd was on March 27th, 2011; correct? A. Yes. That’s all that the company asked and requested, yes.”67 Before the meeting at which the Board resolved to sell the Company, Munoz shared with his RBC colleagues: “I’m worried that someone will . . . ask about our views on [Rural] valuation.”68 In a March 23 email thread with his banking colleagues, the RBC Managing Director reiterated that he was “afraid [the] board will ask us of our high level views [on valuation] today.”69 After Daniel told Munoz that RBC had not planned on providing valuation materials that day, Munoz repeated: “Ok. But we will be asked and to convince [S]hackelton we need to show valuation. Perhaps we just put together 2- 3 pages and just send to [S]hackelton[.]”70 The trial court found that, in performing its DCF analysis, RBC used an exit multiple range of 7.0x to 8.0x, which did not match up with the range used for RBC’s precedent transaction analysis. On the basis of that exit multiple range, RBC’s DCF analysis in the preliminary fairness opinion deck reflected a range of $16.49 per share to 67 A2107-08. Munoz continued: Q. . . . And then with that caveat of sharing the EMS transaction multiple, did you actually share a precedent transaction analysis or a comparable company analysis between December 24th and March 26th? A. The only thing I believe we shared during that time frame was the EMS transaction. We did not share both a comparable and a precedent. A2108. 68 B252. 69 B284. 70 Id. 42 $21.35 per share.71 When Munoz saw the DCF analysis during the afternoon of March 26, he emailed his RBC colleagues: “I thought we were going to try to reduce dcf?”72 RBC’s final DCF analysis reflected a range of $16.28 per share to $21.07 per share. Notably, the LBO analysis deck, dated February 9, 2011, which was provided to DiMino by RBC, employed an exit multiple range of 7.8x to 8.3x. On March 26, RBC’s ad hoc committee “approved the fairness opinion