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U.S. judge says RBC liable in Rural/Metro buyout case

A Royal Bank of Canada (RBC) sign is seen in downtown Toronto, March 3, 2011. REUTERS/Mark Blinch
A Royal Bank of Canada (RBC) sign is seen in downtown Toronto, March 3, 2011. REUTERS/Mark Blinch

By Jonathan Stempel

(Reuters) - A Delaware judge said Royal Bank of Canada should be held liable to former shareholders of Rural/Metro Corp because it failed to disclose conflicts of interest that tainted the $438 million buyout of the ambulance operator.

Bankers at RBC Capital Markets were so eager to collect higher fees that they convinced Rural/Metro directors to sell the company in June 2011 to private equity firm Warburg Pincus LLC at an unreasonably low $17.25 per share, wrote Vice Chancellor J. Travis Laster of the Delaware Chancery Court.

Former Rural/Metro Corp shareholders are seeking about $172 million from Toronto-based RBC, representing the difference between the buyout price and what they believe the company was worth, according to published reports.

In a 91-page decision dated March 7, Laster, who presided over a four-day civil trial in the case last May, said RBC bankers also concealed their efforts to provide financing to fund the buyout and other transactions, offering the opportunity for "additional and far greater" fees that they coveted.

"RBC created the unreasonable process and informational gaps that led to the board's breach of duty," Laster wrote. "Under the circumstances, RBC's aiding and abetting of the board's breaches of fiduciary duty harmed Rural's stockholders."

Given how RBC misled Rural/Metro directors, "this is not a case where a board's independent sense of the value of the company is sufficient to carry the day," the judge added.

Laster said he would decide later how much RBC should pay former Rural/Metro shareholders in damages, including possibly damages for bad faith.

The decision may make it easier for shareholders to pursue lawsuits claiming they were short-changed in buyouts.

Delaware is the corporate home of more than half of the largest U.S. companies, in part because its laws are often considered more friendly to companies than laws of other states.

"We have reviewed the opinion and are considering our options," RBC spokeswoman Sanam Heidary said. "This process is not yet over so we cannot comment further."

Lawyers for the shareholders did not immediately respond on Sunday to requests for comment.

Last year, Rural/Metro directors and another adviser to the company, Moelis & Co, agreed to pay a combined $11.6 million to settle related litigation, without admitting wrongdoing.

In February 2011, Laster delayed a shareholder vote on the buyout of Del Monte Foods Co by a consortium led by KKR & Co after concluding that Barclays Plc's Barclays Capital unit had a conflict of interest by advising Del Monte while also providing financing for the buyers.

Del Monte and Barclays agreed the following October to pay $89.4 million to settle that case.

Founded in 1948, Rural/Metro provides ambulance and fire protection services in about 700 cities and towns in 21 U.S. states.

The Scottsdale, Arizona-based company filed for bankruptcy protection in August 2013 after struggling with accounting and billing problems, including what it called "an acute deficiency of cash receipts compared with cash expenditures," as well as too much debt.

It emerged from Chapter 11 protection in December after cutting debt in half and winning a $135 million infusion from bondholders.

The case is In re: Rural Metro Corp Stockholders Litigation, Delaware Chancery Court, No. CA-6350.

(Reporting by Jonathan Stempel in New York; Editing by Paul Simao)

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