On August 27, 2015, Vice Chancellor Laster of the Delaware Court of Chancery held that David Murdock, a 40% stockholder and the Chairman of the Board and Chief Executive Officer of Dole Food Company, Inc., and C. Michael Carter, a director of Dole and its President, Chief Operating Officer and General Counsel, were personally liable to Dole stockholders for $148 million as a result of their fraudulent behavior in connection with a “going private” transaction proposed by Murdock.1 The court determined that Carter and Murdock, acting mainly through Carter, had undermined the efforts of the independent committee appointed by Dole’s Board of Directors to negotiate the transaction with Murdock on behalf of the other stockholders. The court noted that, even though the price negotiated by the parties was within the range of fairness, the plaintiff stockholders were entitled to a “fairer price” because, by engaging in “fraud, misrepresentation, self-dealing and gross and palpable overreaching,” Carter and Murdock deprived the committee of its ability to obtain a better result on behalf of the stockholders, prevented the committee from obtaining sufficient information to potentially say “no” to Murdock and foreclosed the ability of the stockholders to protect themselves by voting down the deal.2
This case is highly significant for stockholders and managers proposing “going private” transactions because it illustrates that egregious conduct may result in the proposing stockholders or managers becoming personally liable for the difference between the negotiated price and the price that the committee might have negotiated had the egregious conduct not occurred. The court also held that, because both Murdock and Carter violated their duty of loyalty to stockholders, the exculpation provisions of Dole’s by-laws did not apply to relieve them of personal monetary liability.
The Defendants’ Behavior
The court found the behavior of Murdock and his “right hand man”3 Carter to be extreme in its deviousness and duplicity. The court found that: (1) Carter issued discouraging press releases about Dole’s prospects shortly before Murdock proposed the buy-out in order to lower Dole’s stock price and thus the price Murdock would have to pay to buy the shares he did not already own; (2) Carter and Murdock favored a self-tender over an open market purchase program because they feared that the latter would increase the market price of the stock before the announcement of the buy-out; and (3) Murdock and Carter used the pretext of a ship purchase as an excuse to cancel the open market purchase program that the other directors had approved.
The court also found that, once Murdock had made his offer and the board of directors had formed a special committee to negotiate with Murdock, Murdock and Carter aggressively interfered with operation of the committee in the following respects: (1) Carter tried to limit the committee’s authority only to negotiating with Murdock, rather than seeking the best alternative for the stockholders; (2) Carter insisted on controlling the terms of non-disclosure agreements with competing bidders, thus giving Carter and Murdock insight into when the committee was giving non-public information to other bidders; and (3) Carter interfered with the committee’s decision to hire its own financial advisor by pushing the committee to hire an advisor with a long-standing relationship with Dole.
We believe that the following are the key takeaways from the Dole decision:
- Courts will carefully evaluate the conduct of management prior to announcing a going private transaction to see if management took any action to lower the stock price in order to make the price offered by the proposing stockholder more attractive. In Dole, the court held that management cancelled stock repurchases and underestimated cost savings in a deliberate effort to depress the stock price.
- Courts also will examine whether management gave the independent committee reliable information or acted to control the committee’s efforts to obtain for all stockholders the best price reasonably available. Dole found that management gave one set of projections to the committee and a more favorable set of projections to the banks that were financing the management offer, interfered with the negotiation of confidentiality agreements with other bidders, attempted to influence the committee’s selection of financial advisors, and arranged a due diligence session with lenders without the knowledge of the committee. The court found this behavior to be egregious.
- According to the court, “go shop” protections in merger agreements may be of limited value if the proposing stockholder holds considerable stock in the target – here, 40% – and publicly states that it is acting as a buyer, not as a seller.
- Complying with procedural protections – approval of an independent committee with appropriate authority and “majority of the minority” approval by the stockholders – will not necessarily give the board the benefit of the business judgment rule if the management team has withheld information from the board and tried to reduce the company’s stock price prior to making the offer.5
- Depending on the facts, a court may hold management personally liable for the difference between the price negotiated with the board of directors and the “fair” price as determined by the court. In this case, the difference was $148 million, and the court held that the controlling stockholder and his “right hand man,” by undermining the board process, are personally responsible for paying this amount to stockholders. The court held that typical exculpation provisions will not help management in cases involving this kind of behavior.
- The delivery to an independent committee of a customary financial advisor’s opinion that the agreed-upon price is “fair from financial point of view” will not protect the buy-out bidder from claims for damages if a court concludes that fraud by the bidder may have prevented the committee from negotiating an even higher price.
- Overall, we would emphasize that the facts of the Dole case are extreme in the fraud and disloyalty displayed by Dole’s controlling stockholder and its President. (The J. Crew management buy-out also illustrates other troublesome and dangerous practices.6) The Dole case should not make management buy-outs more difficult or dangerous for a management team that respects the job of the independent committee, avoids interference with its efforts to obtain for all stockholders the best price reasonably available and gives the committee access to complete and accurate information about the company.