In In re Dole Food Co., Inc. Stockholder Litigation, the Delaware Court of Chancery awarded $148,190,590 in damages against Dole’s controlling shareholder and President for breaching their duty of loyalty when conducting a going-private transaction. Though based on egregious facts, the decision serves as a reminder to officers, directors and controlling shareholders of the importance of abiding by the exacting requirements of the entire fairness test when conducting interested transactions.
In Canada, going-private transactions in publicly-traded entities are regulated by Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (MI 61-101), which sets forth a series of procedural requirements to address the conflicts of interest raised by such transactions, including in certain circumstances the involvement of an independent committee, a formal valuation and approval by minority shareholders. Although the regulatory regime is different in Canada, the opinion of the Court of Chancery provides valuable lessons for directors and controlling shareholders involved in going-private transactions.
Dole Food Company conducted an initial public offering in 2009 on the initiative of its sole shareholder, a Mr. Murdock. Approximately 41% of the shares were offered to the public with Murdock retaining the balance of the shares. Soon after, Murdock began to consider taking Dole private again, dissatisfied with the constraints associated with its public company status. Starting in 2010, Murdock explored various transactions, including a spin off transaction followed by a buyout of the company.
In 2012, Dole announced a strategic business review pertaining to select business of the company. This process, strongly influenced by Murdock as controlling shareholder, led to the sale of Dole’s Asian operations to ITOCHU Corporation. Following this transaction, the board of directors appointed Murdock as CEO and a Mr. Carter (referred to by the Court as the controlling shareholder’s “right hand man”) as director, President and COO. According to the court, the buyout was the next step in the controlling shareholder’s long-term plan.
In the subsequent months, the new Dole President undertook various actions that purported to depress the stock price. In early 2013, he revised the earnings guidance to lower the anticipated cost savings associated with the ITOCHU transaction. He then cancelled a stock repurchase program, invoking the need to secure funding for the acquisition of new company ships. These actions led the market for Dole’s shares downward.
In the spring of 2013, Murdock made his proposal for a going private transaction. The proposal was structured in accordance with the Delaware Court of Chancery’s opinion in In re MFW Shareholders Litigation, i.e. it was conditioned on the approval of a special committee of independent and disinterested directors and of the majority of the minority of the shareholders. Assisted by its financial and legal advisors, the special committee negotiated with the controlling shareholder (who insisted that he was a “buyer, not a seller”) and ultimately agreed on a price of $13.50, a significant improvement over the initial $12 offer. Following the special committee’s recommendation, the board approved the offer, which included a nominal break-fee and a 30-day go-shop period. The transaction was then approved (just barely) by 50.9% of the minority shareholders.
In the wake of the transaction, the plaintiff shareholders launched an appraisal suit and an action claiming damages for breach of the duty of loyalty, claiming that the transaction was not entirely fair.
The Court stated that the going private transaction was subject to the entire fairness test as it was an interested transaction involving Dole’s controlling shareholder. Therefore, the board bore the burden of demonstrating that the transaction was fair to the stockholders. This requires that both fair dealing (i.e., process) and fair price (i.e., substance) be demonstrated. The Court held that this burden was not met, concluding that there was neither fair dealing nor a fair price.
With respect to fair dealing, the Court stressed that the requirement incorporates the principle that the transaction must be free of fraud or misrepresentation. In this case, the Court found that the process was tainted by fraud on the part of Dole’s President. The fraud “rendered useless and ineffective the highly commendable efforts of the Committee and its advisors to negotiate a fair transaction that they subjectively believed was in the best interest of Dole’s stockholders”. Specifically, the Court emphasized that the President attempted to depress the market price of Dole’s stock; for example by providing updated management forecasts to the Committee that included inaccurate numbers that made the company’s prospects appear worse than they were. Finally, the Court found that the President interfered with and obstructed the Committee’s efforts to manage the process and negotiate with the controlling shareholder in other ways, including by seeking to restrict the Committee’s mandate and resisting the Committee’s hiring of an independent financial advisor. The Court summarized the impact of these activities by stating that “the negotiation of the Merger was the antithesis of a fair process”.
The Court also examined whether the transaction price fell within a range of fairness. Fair price requires that the tribunal considers whether the transaction was one “that a reasonable seller, under all of the circumstances, would regard as within a range of fair value; one that such a seller could reasonably accept”. The Court remarked that leaving aside the President’s fraud, the Committee’s negotiations, the investment bank’s fairness opinions and market indications supported a price that fell within the range of fairness. Once the impact of the fraud was factored in, the price of $13.50 “may have fallen within the lower end of a range of fairness”. Still, the Court held that the plaintiffs were entitled to a fairer price, one not tainted by the President’s fraud.
Turning to liability, the Court found Murdock to be liable as Dole’s controlling shareholder for having breached his duty of loyalty to the shareholders by eliminating the minority shareholdings for an unfair price in an unfair transaction. The Court also found Murdock liable as a Dole director in that he breached his duty of loyalty by orchestrating an unfair, self-interested transaction from which he derived an improper personal benefit. As for the President (Carter), the Court held that he breached his duty of loyalty as a director and an officer of Dole. Indeed, for the Court “Carter demonstrated that his primary loyalty was to Murdock, not to Dole or to its unaffiliated stockholders”. Further, the Court ruled that Carter was not entitled to exculpation from personal liability as director under Section 102(b)(7) of the Delaware General Corporation Law since he had breached his duty of loyalty and his acts and omissions were not in good faith. Thus, the Court held that the controlling shareholder and the President were jointly and severally liable for damages of $148,190,590.