09.04.2015
|
Updates
The Delaware Chancery Court ordered Dole Food Co. Inc. CEO David Murdock and General Counsel Michael Carter to pay Dole shareholders $148 million for fraud in connection with the company’s 2013 take-private deal. The August 27, 2015 decision is one of the largest awards ever to shareholders in a deal-related lawsuit.
The decision highlights several issues that can arise in take-private transactions, even those structured to avoid the entire fairness standard through adherence to the procedures outlined in In re MFW Shareholder Litigation. These include the need for a fully informed independent committee to review the proposed transaction, the importance of high quality and independent advisors, and the potential consequences when management fails to adhere to its fiduciary duties to the board and shareholders.
Vice Chancellor J. Travis Laster found that Murdock and his “right hand man” Carter deliberately drove down Dole’s stock price to allow Murdock to buy the company more cheaply. In addition, Vice Chancellor Laster found that Murdock and Carter subverted the process of Dole’s independent committee, which was charged with considering the fairness of the deal, by providing false financial projections to the committee.
Despite the virtual certainty of deal-related lawsuits following major transactions in recent years, this case stands out because of the egregious factual record and breaches of fiduciary duties that amounted to fraud, as well as the substantial damages award, which Vice Chancellor Laster determined represented an even “fairer” price in a transaction in which the deal price may ultimately have been at the low end of fairness.
Backstory Behind the Dole Decision
The decision followed a nine-day trial earlier this year on the conduct of Murdock and Carter during the $1.6 billion take-private deal in which Murdock, who already owned 40 percent of Dole, sought to regain exclusive control of the company. Murdock had previously taken Dole private in 2003, then sold 41 percent of the company in a 2009 initial public offering to pay down the company’s debt.
In June 2013, Murdock sent a proposal to Dole’s board of directors to buy the remaining 60 percent of Dole stock for $12 per share. In response, the board formed a committee comprised of four disinterested directors to review Murdock’s proposal. Murdock made it clear to the committee that he was a buyer and would not be a seller of his Dole shares.
According to Vice Chancellor Laster’s opinion, from the outset, Carter—Murdock’s trusted lieutenant and Dole’s chief operating officer, president and general counsel—took several actions to undermine the committee’s process. These include seeking: (1) to limit the scope of the committee’s authority to consider Dole’s alternatives; (2) to have the full board, not the committee, name the committee’s chairperson; and (3) to select the committee’s financial advisors.
Vice Chancellor Laster also concluded that Carter was instrumental in providing the committee with low-ball projections of the company’s expected financial performance. According to the opinion, Carter “used his control over Dole’s management” to ensure that the projections painted a conservative picture of the company’s financial outlook. After providing the false projections to the committee—and unbeknownst to the committee—Carter later met with the company’s lenders in a “secret meeting” on the same day and provided a much rosier (and more accurate) outlook for the company’s performance. When the committee sought to delay a critical meeting to determine whether to recommend Murdock’s bid to the full board until after they received the results of the company’s regular budget process, Carter lied about the status of the process, again denying the committee critical information.
Murdock and Carter also took a series of actions designed to drive down the company’s stock price before the transaction, including a handful of divestitures, pessimistic press releases and suspension of a share repurchase program under false pretenses. In addition, during the events leading up to the committee’s decision, Vice Chancellor Laster noted that Murdock repeatedly attempted to bully the board into taking actions that would facilitate his take-private efforts, which he did through threatening phone calls and requesting (and receiving) the resignation of a director who opposed a step in the process.
Despite the efforts of Murdock and Carter to drive down the stock price, conceal the company’s true projections and undermine the committee’s processes, the committee’s independent investment bankers, Lazard Freres & Co. LLC, were able to prepare their own independent projections, although they were handicapped in this effort by the lack of access to management’s estimates of cost-savings from a recent divestiture and anticipated revenues from proposed acquisitions. Based on these projections and the independent investigation and efforts of Lazard and the committee’s legal counsel, the committee ultimately negotiated a higher deal price of $13.50 per share. The transaction was narrowly approved by 50.9 percent of disinterested shares.
“What the Committee Could Not Overcome ... is Fraud”
In his 108-page opinion, Vice Chancellor Laster praised the committee for its “Herculean efforts” in determining that the original $12 offer price was too low and negotiating it up to $13.50. He also praised the committee for negotiating other favorable deal terms such as a $50 million equity commitment from Murdock to ensure the deal would close and a 30-day go-shop period in which the committee could solicit better offers.
But according to Vice Chancellor Laster, “what the Committee could not overcome, what the stockholder vote could not cleanse, and what even an arguably fair price does not immunize, is fraud.”
Vice Chancellor Laster emphasized that, while Murdock and Carter had structured the transaction to meet the procedural requirements set forth in In re MFW Shareholder Litigation that are necessary for a proposed transaction involving an interested shareholder to avoid review under the stringent standard of entire fairness, they “did not adhere to [MFW’s] substance.” The entire fairness standard requires that the interested transaction be the product of fair dealing and result in a fair price to the minority shareholders. To qualify for the application of the less demanding business judgment standard, MFW requires approval of the interested transaction: (1) by a committee of the board made up of disinterested and independent directors, and (2) by the affirmative vote of a majority of the unaffiliated shares. Although the Dole take-private transaction nominally met these requirements, Murdock and Carter did not engage in “fair dealing” given Vice Chancellor Laster’s conclusion that they deceived the committee and withheld from it information regarding the company’s true value. Because neither the independent committee nor the shareholders were able to accurately assess the fairness of the offer, the MFW procedural protections were ineffective.
Moreover, although Vice Chancellor Laster concluded that the actual $13.50 per share transaction price may have fallen within the low end of a range of fairness, based on Lazard’s independent financial analyses, indications of Dole’s value from earlier offers and the testimony of expert witnesses, Vice Chancellor Laster held that the shareholders were entitled to a “fairer price” under the circumstances.
Vice Chancellor Laster observed that in a fiduciary duty action like this one, “the court can, and has in the past, awarded damages designed to eliminate the possibility of profit flowing to defendants from the breach of the fiduciary relationship.”
The $148 million award is comprised of an incremental increase of $2.74 per share for Dole shareholders, for which Murdock and Carter are jointly and severally liable. The court emphasized that Murdock’s and Carter’s actions were “intentional and in bad faith,” and Murdock and Carter should not be allowed to profit from their bad deeds. As the court stated, “although facially large, the award is conservative relative to what the evidence could support.”
Dole’s Lessons for Future Take-Private Transactions
Virtually every large public company transaction in recent years has drawn lawsuits, yet very few are actually resolved at trial. The vast majority of such suits settle for fees to plaintiff lawyers and changes to disclosure documents for shareholders. The Dole decision stands out because it proceeded through to trial and resulted in such a large financial award.
Aside from the obvious admonition that controlling shareholders and company management should not commit fraud in take-private transactions, the decision highlights several issues that can arise in such transactions:
- Controlling Shareholder’s Disclosure Duty. Where the company’s controlling shareholder has a forceful personality and low regard for board process, directors may be under substantial pressure to conform to the controlling shareholder’s wishes and must be on the alert for indications that they are not receiving information critical to their decisions. Vice Chancellor Laster made it clear that, to function appropriately, an independent committee must be fully informed. The controlling shareholder must “disclose fully all the facts and circumstances surrounding the transaction.” These include all material terms, all material facts relating to the use or value of the assets, and other material facts of which it is aware, such as technological or regulatory changes that may affect the market value of the assets.
- Independent Advisors Must Act Independently. High quality and independent advisors are key to overcoming disclosure issues and other threats to an independent committee process. In Dole, Vice Chancellor Laster praised both the investment bankers and the counsel to the committee for helping the committee to recognize the inaccuracy and incompleteness of the information they were receiving, even though the heroic efforts of the advisors to overcome the deficit were ultimately insufficient to provide the committee with all material information.
- General Counsel Must Put Company First. A general counsel of a public company must always remember that his or her client is the company acting through its duly authorized constituents, including management, the board and shareholders. When faced with the competing interests of constituents, Carter acted to carry out Murdock’s wishes. If a general counsel is put in a position of competing interests among management, the board and others, he or she must put the company’s interests first. In some cases, that may mean advising the retention of outside counsel to represent the interests of conflicted parties. While the committee in the Dole case had outside counsel, Carter effectively chose to represent the interests of Murdock himself at the expense of Dole and its shareholders.
- Controlling Shareholder Who is Not a Seller Restricts an Independent Committee. An independent committee negotiating with a controlling shareholder who has stated that it will not be a seller of shares faces severe limitations on its ability to develop competing bids in order to obtain a fair price for the remaining shareholders. In Dole, the committee negotiated a go-shop provision and actually went through the go-shop process, but Vice-Chancellor Laster found that, given the realities, that provision and the process were largely “cosmetic.” That fact made it even more important for the committee to obtain all information material to its negotiation with Murdock so that it could meaningfully determine whether Murdock’s offer was fair or whether it should be rejected.
- Intentional Breach of Loyalty. In a take-private transaction, company management is often in the awkward position of having to answer to both the controlling shareholder and an independent committee. In Dole, Carter was clearly aligned with Murdock, the controlling shareholder, and had no apparent compunctions about lying to, and otherwise deceiving, the committee. All officers, however, have a duty of candor—part of their duty of loyalty to the company—that prohibits them from misleading the board or the shareholders. Delaware cases have established that directors are entitled to receive all information that the company has that directors deem relevant to a decision. Consequently, the role of the officers must be to assist the independent committee in its deliberations by providing them with requested information as well as any requested analysis and their candid opinions. Failure to do so may hinder the committee’s deliberations and result in a flawed decision. If such failures are intentional, they will be a breach of the duty of loyalty that is not exculpated under the exculpation provisions in the company’s charter and will, therefore, subject the officers to joint and several liability for resulting damages.
- Risks for the Controlling Shareholder. The decision highlights the potential risks to the controlling parties associated with a transaction process that may adhere to the technical procedural protections of an independent director committee and “majority of the minority” shareholder approval but which may be viewed in hindsight as flouting the substance or spirit of those protections. The advisors to the controlling shareholder in a take-private transaction should make the controlling shareholder aware that, as a controlling shareholder, it has fiduciary duties to the remaining shareholders in addition to any duties as a director or officer. Breach of its duties will insure application of the entire fairness standard of review and could potentially cause the transaction to be enjoined. Furthermore, any breach of the duty of loyalty will not be exculpated and may subject controlling parties to personal liability for damages, as occurred in Dole.
- Tone at the Top. Finally, tone at the top and personal behavior matter. Vice Chancellor Laster referred repeatedly to specific examples of the manner in which Murdock and Carter treated people within the company, with references to bullying, abusive treatment, threats and inappropriate language. These facts influenced the court’s assessment of the evidence and credibility of witnesses, and they were a significant factor in the court’s decision finding Murdock and Carter liable.
The cases are In re Dole Food Company, Inc. Stockholder Litigation, Consolidated C.A. No. 8703-VCL and In re Appraisal of Dole Food Company, Inc., Consolidated C.A. No. 9079-VCL.
© 2015 Perkins Coie LLP
