In Re Dole Food Co., Inc. Stockholder Litigation–A $150 Million Hit To MFW Or Just A Case Of Bad Facts?

The approximate $150 million dollar judgment rendered jointly and severally against David Murdock, Dole’s Chairman and CEO, and C. Michael Carter, the company’s President, COO and GC, arising out of Murdock’s taking the company private, while cautionary, proves little more than Delaware can be a plaintiff friendly venue under the right fact pattern. As explained below, the case does not undermine the pathway for obtaining a business judgment standard of review for controlling stockholder take private transactions established in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”). It is yet another reminder, however, of the need for exercising a high degree of care in navigating the dangerous shoals such transactions present and the need to engage skilled advisors before embarking on the journey. Fortunately, for them, the Special Committee in Dole did just that and not only escaped liability but earned substantial praise from the Court for their efforts.

Dole Is Not A Departure From But Rather Consistent With MFW

In MWF, the Delaware Supreme Court accepted the invitation/suggestion arising from a series of Chancery Court decisions to give controlling shareholders a path to obtain business judgment review for take private transactions providing the controlling stockholder employed certain procedural protections from the outset of any proposed transaction. (See e.g. In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604 (Del. Ch. 2005). Those cases were an outgrowth of the interesting dichotomy discussed at length by Vice Chancellor Strine in In re Pure Res., Inc., S’Holders Litig., 808 A.2d 421 (Del. Ch. 2002) whereby take private transactions by a controlling stockholder accomplished by means of a tender offer were subject to business judgment (providing there was full disclosure and no coercion) while the same transaction accomplished by a merger was subject to review under the entire fairness standard, even if accompanied by the “modest” benefit of burden shifting that result from the presence of an independent special committee or a fully informed vote of a majority of the minority.

In MFW, the Delaware Supreme Court harmonized those two approaches by holding that a take private transaction accomplished by means of a merger could also receive business

Judgment protection so long as the offer was conditioned at the outset by approval of an independent special committee as well as being subject to a non-waivable, fully informed majority of the minority vote of the unaffiliated stockholders. As explained by Chancellor Strine in his decision as affirmed by the Supreme Court, those two protections in tandem are more valuable to stockholders than the more abstract benefits derived from a higher standard of review because there is a “strong incentive [ ] created to give minority stockholders much broader access to the transactional structure that is most likely to effectively protect their interests…” and which “replicates the arm’s-length merger steps of the DGCL by ‘requir[ing] two independent approvals.'”

While the enshrinement of those procedural protections were certainly welcomed by practitioners looking for guidance as to how to best navigate the challenging waters of a controlling stockholder take private, the MFW opinion contained a lengthy footnote that the Court would not have granted defendants’ motion to dismiss.

That footnote led to questions about just how much protection the MFW holding really offered. Obviously, there is increased transaction risk in utilizing both devices. It is at least fair to ask, therefore, if the extra risk makes sense if a motion to dismiss is not likely to be available in the event of a court challenge. At first blush, the $148,190,590.18 verdict in Dole might seem to raise further questions about just how much reliance/value transactional planners should place on the MFW pathway, but that initial reaction is not merited on a close reading of the case. Rather, Dole merely emphasizes that the importance of “process” should not be confused with placing “form over substance.” According to Vice Chancellor Laster, the process in Dole was flawed from the outset and infected with fraud. Not surprisingly, therefore, the Court found that merely “mimicking MFW‘s form” is inadequate to support the application of a business judgment standard of review when the controller takes steps to deliberately undermine the very protections he put in place, particularly when coupled with “fraud” and false testimony.   Thus, rather than weakening the possible protections offered by MFW, the judgment in Dole is a predictable result given the Court’s factual findings.

Bad Facts/ Predictable Result

Dole involved a take private transaction by David Murdock who paid $13.50 per share for the shares of the Company he did not already own. Although not a majority stockholder, Murdock owned 40 percent of the company and served as the company’s chairman and CEO. Accordingly, the Court had little trouble finding Murdock a “de facto” controller. Murdock and his attorneys clearly understood this would be the case so they sought to bring themselves within the rubric of MFW by conditioning his original $12.00 offer on both the approval of an independent committee of directors (the “Special Committee”) and the affirmative vote of a majority of unaffiliated shares. As often happens and as was the case in MFW, Murdock made clear in his proposal that he was not interested in selling his shares and was only a buyer. However typical, Vice Chancellor Laster had a negative view of that proviso stating that it made the “go shop” merely “cosmetic.” While his view contrasts with that taken by Chancellor Strine in his MFW opinion with respect to the same proviso, it is difficult to say whether this reflects a different philosophical approach or merely reflects the accumulation of bad facts confronting Vice Chancellor Laster in Dole. As succinctly stated by the Court, “fraud vitiates everything.”

Of note, the Court did not limit its analysis of the facts to events that occurred once Murdock presented his proposal to the company’s board. Instead, noting that the concept of fair dealing “encompasses actions taken by the controller in the period leading up to the formal proposal” Vice Chancellor Laster remarked that Murdock had previously taken the company private and had been reluctantly forced to take it public again when necessary to raise funds to deal with the impeding maturity of a large tranche of debt, when market conditions made refinancing the debt very difficult. In fact, Murdock admitted at trial that he “‘never really wanted’ to sell equity to the public, but ‘it was a necessity’ because of the financial issues he faced.”

The Court then went on to discuss Murdock’s long standing plan to separate Dole’s higher margin business to realize the value of that business to facilitate debt repayment before taking the remaining company private. Once that phase of the plan was accomplished, it was followed by actions the Court found designed to lower the value of the remaining business prior to the proposed buyout. For example, management and the company’s financial advisor believe the company could realize significant savings (in the range of $50-125 million) once the higher margin businesses were sold. Although the Company had previously announced the expectation of significant savings, in the months leading up to Murdock’s proposal, Carter made a series of announcements lowering expectations that the savings could be achieved, which had a significant effect on Dole’s stock price.

At the same time, Murdock was recommending to the board a share repurchase plan that would have assisted him in a subsequent take private by reducing the number of unaffiliated shares in the market. The concept was presented to the board with two potential mechanisms, a self tender and an open market purchase program. Seeking to avoid the “risk of share price appreciation” given the extended time frame of the open market purchase plan, Murdock and management favored the self tender approach. The independent directors rejected management’s recommendation and voted instead to implement the share repurchases through the open market purchase mechanism.

That decision prompted a series of angry voice mail messages to certain independent directors from Murdock and ultimately to the request that one of the directors resign from the board. Two weeks later, Carter came up with a pretext to cancel the repurchase program. The Company’s announcement that it was suspending the share repurchase program resulted in another significant drop in stock price. As specifically noted by the Court, Carter’s explanation for why he thought it necessary to cancel the open market purchase plan did not hold up under cross examination at trial.

The Court then addressed defendants’ post offer conduct in an even less flattering light.   As an initial matter, the Court criticized the short time frame given the Committee to decide whether to accept the offer (approximately seven weeks) supposedly because “time [was] of the essence.” At trial, however, Murdock admitted that the deadline was “artificial” designed to make the board act quickly. Once the Committee was established, Murdock and Carter tried to: i) choose the Committee Chair; ii) circumscribe the Committee’s charter; iii) control the terms of non-disclosure agreements with other potential bidders; and iv) influence the selection of the Committee’s financial advisor.

Of greatest concern to the Court was Carter’s involvement in preparing the projections for use by the Committee. Not mincing words, Vice Chancellor Laster stated that Carter provided “false information” to the Committee by revising projections created earlier by management in a rigorous ” bottom-up process.” Instead of following the same procedure utilized by the Company in the ordinary course, Carter had projections prepared from the “top down.” The “updated” projections were so significantly lower than the prior projections that the Committee’s financial advisor deemed them unreliable, forcing the Committee to prepare its own projections. Significantly, Carter gave more positive information to Murdock’s lenders, including all of the cost savings previously forecast but omitted from the revised projections given to the Committee.

Thereafter, while negotiations were ongoing between Murdock and the Committee, Carter resumed the annual bottom up budgeting process and instructed management to correct certain of the “unreasonable assumptions” made in the revised forecast given to the Committee just a few weeks earlier. According to the Court, Carter not only instructed that the information being developed should “not be circulated” but also lied about the process being underway when asked a direct question by the Committee’s counsel. It should come as a surprise to no one, therefore, that Vice Chancellor Laster described these facts as “fatal” to the process.

The Court’s Liability Analysis

Based on those facts, Vice Chancellor Laster held that the transaction failed to satisfy either prong of the entire fairness test. After pointing out that “[f]airness does not depend on the parties subjective beliefs” and that “[n]ot even an honest belief that the transaction was entirely fair will be sufficient to establish entire fairness,” the Court pointed to several things that precluded defendants from satisfying their burden of proving fair dealing. With respect to the “timing and initiation” aspects of fair dealing, the Court placed heavy emphasis on defendants’ “‘calculated effort to depress…'” Dole’s stock price. As to how the transaction was negotiated, Vice Chancellor Laster emphasized that a committee cannot be “effective” if it is not fully informed. While acknowledging that a controlling stockholder does have the right to withhold certain information such as the top price he is willing to pay, the Court identified the following areas that must be disclosed: (i) all of the material terms of the proposed transaction; ii) all material facts relating to use or value of the assets in question to the beneficiary itself….including alternative uses for the assets or “hidden value”; and (iii) all material facts which it knows relating to market value of the subject transaction including any forthcoming changes in legal regulation or technological changes that would affect value. As summarized by the Court this disclosure obligation includes “all material information known to the fiduciary except…information that relates only to its consideration of the price at which it will buy or sell and how it would finance a purchase or invest the proceeds of a sale.” Obviously, the “knowingly false” projections given by Carter to the Committee failed to satisfy this broad obligation.

With respect to fair price, Vice Chancellor Laster noted that a fair price is not a specific number but rather falls on a spectrum. That range has, however, “more salience when the controller has established a process that stimulates arm’s length bargaining, supported by appropriate procedural protections.” The Court also pointed out that the “best price” a fiduciary is willing to pay is not the same thing as a “fair price” and even a “fair price” is not adequate if it is not the best alternative available for the corporation and its stockholders.” Furthermore, to the extent the price would have still been inside the range of fairness if the Committee’s analysis reflected the more positive numbers Carter provided to Murdock’s lenders (a proposition for which the Court expressed substantial doubt), Vice Chancellor Laster found the stockholders were entitled to a “fairer” price base on defendants’ breaches.

Lessons Learned

For controlling stockholders, the lessons are fairly simple and straightforward. Beyond the obvious of not giving false testimony, intentionally manipulating the stock price down before making a proposal and not giving false financial information to a special committee or violating its procedures, it is important to keep an appropriate distance from the process. If you have made the decision to incur the transaction risk of going the MFW route do not shoot yourself in the foot by injecting yourself into the committee’s process. Attempting to put a thumb on the scales by choosing the members of the committee, its chair or the committee’s advisor will come back to haunt you and is simply not worth the risk. While it is not per se improper for a general counsel to make recommendations for advisors (legal or otherwise), it would be prudent to recommend only those firms who have either no prior relationship with the company or the controller or at least no material relationships. Any such list should not only identify all past relationships but also strongly recommend that the committee members supplement any list with names of their own.

Let the committee decide on the scope of its charter and accompanying resolutions. As a majority or controlling stockholder, the odds of someone making a bid when you have declared yourself exclusively a buyer are small at best and you can always vote your shares against any such proposal in the unlikely event an offer does come over the transom. Thus, giving the committee the right to evaluate alternatives is not a major concession and helps create an appropriate record.

Stay out of the process of preparing or updating projections and do not deviate from whatever methodology is used by the company in the normal course. If you think the projections are too optimistic, you can make that point in the price negotiations but be prepared to have good explanations for why the projections are too aggressive. There can be lots of reasons projections need to be revised downward but it is a “red flag” that requires rigorous analytical support.

From the Committee stand point the lessons are fewer, which is what you would expect given the Court’s high praise for their efforts. But there are a few things worth noting: i) make sure to get a representation that the committee has been furnished all projections prepared for any purpose by the company; ii) inquire if the projections were prepared for the deal or in the normal course and whether the projections were prepared in a different fashion than that usually employed; (iii) find out who participated in the preparation or review of the projections and encourage your financial advisor to meet with appropriate individuals below the CFO level as part of their diligence; (iv)have your financial advisor run appropriate sensitivity analysis on the projections and be prepared to take appropriate steps if the numbers management provides simply do not add up; (v) make sure to get all forecasts and other financial information provided to lenders; (vi) stand your ground on the scope of your charter and authorizing resolutions particularly when you make up a majority of the board; (vii) while it is certainly better to have one than not, do not place too much reliance on a “go shop” provision when the controller has made clear he is not a seller. Finally, always remember, a real ability to say no is what replicates a true arms-length negotiation and that, along with a majority of the minority vote and full disclosure are your greatest protections.

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