On Thursday, August 27, 2015, Vice Chancellor J. Travis Laster found Dole Food Co., Inc. (“Dole”) Chief Executive Officer, David Murdock, and General Counsel, C. Michael Carter, liable to investors for $148 million in fraud damages resulting from Murdock’s and Carter’s intentional acts to drive the Dole share price down in anticipation of Murdock’s 2013 go- private deal.1
In November 2013 Murdock, the owner of 40% of Dole’s stock, paid
$13.50 per share to acquire the remaining 60% of the stock. The transaction was structured as a single-step merger.2 Shortly after the transaction was announced and before it closed, shareholders filed an action asserting breach of fiduciary duty and aiding and abetting a breach of fiduciary duty claims, alleging that they had not received a fair price due to the fraudulent conduct of Murdock and Carter, among others.3 Vice Chancellor Laster refused to expedite the lawsuit so the shareholders could pursue injunctive relief prior to closing, instead ruling that the shareholders could pursue damages following closing. The transaction closed, and the litigation proceeded on a post-closing basis.4
In In re MFW Shareholders Litigation the Delaware Chancery Court held that, in going private mergers involving a controlling shareholder, if the transaction is approved by a special committee of independent directors and approved by a fully-informed majority of the minority shareholders, it will be subjected to the deferential business judgment rule standard of review, rather than the more exacting entire fairness standard.5 In Dole, Vice Chancellor Laster found that while Murdock’s process for obtaining approval from the Dole board technically followed the procedure established in In re MFW, and affirmed by the Delaware Supreme Court in Kahn v. M & F Worldwide Corp., the misleading information that Murdock and Carter purposely provided to the board undermined the fairness of the process, and therefore the entire fairness standard of review, requiring that defendants prove the transaction was the product of fair dealing and fair price, would apply.6
Hoping to fit within the framework of In re MFW, Murdock conditioned his merger proposal on approval from a special committee composed of independent directors and a majority of the non-Murdock shareholders.7
Yet even these procedural safeguards could not vitiate the effect of Murdock’s and Carter’s fraudulent actions over the span of an eighteen-month scheme to (1) separate and realize the value of Dole’s higher-margin business, (2) make misleading press statements and deliberately erroneous business decisions in an effort to drive down Dole’s share price, and (3) then engage in a freeze-out to take Dole private on the cheap.
After a nine-day bench trial, Vice Chancellor Laster concluded that the evidence showed, among other things, that Carter issued press releases falsely stating Dole’s projected cost savings from selling a portion of its business and improperly suspended a share repurchase program for purely pre-textual reasons. Then, with respect to the information given to the special committee considering Murdock’s proposed transaction, Carter knowingly gave management projections that contained misleadingly low estimates.8 Vice Chancellor Laster noted that the special committee members “were too polite and professional to come right out and say it, but a court has to call things as they are. The projections Carter provided were knowingly false. Carter intentionally tried to mislead the Committee for Murdock’s benefit.”9
Carter also resisted the hiring of Lazard Frères & Co. LLC (“Lazard”) as an independent financial advisor because it had no prior relationship with Murdock; sought to limit the special committee’s scope of consideration; failed to inform the special committee of the projected economic benefit of the farms that Dole intended to purchase; and secretly helped Murdock prepare a hostile tender offer in case the special committee did not approve Murdock’s proposal.10 While Vice Chancellor Laster acknowledged that the agreed-upon $13.50 share price was within the range of fairness that Lazard determined at the time of the merger, he concluded that Carter’s refusal to share accurate financial projections and other deliberately misleading conduct, robbed the special committee and Lazard of the ability to negotiate on a fully-informed basis and to potentially say no to the merger. Thus, Murdock and Carter could not satisfy the burden of the entire fairness standard of review, and the Chancery Court found that Murdock’s purchase of the stock was not the product of fair dealing and the shareholders were entitled to a “fairer” price.11
Lessons and Best Practices
While the Chancery Court’s ruling that Murdock’s and Carter’s actions were fraudulent and breached their duty of loyalty may be appealed, Dole provides some important – and immediate – lessons for all corporations with controlling shareholders considering go-private transactions. Specifically, Dole makes clear that transactions to take a corporation private may require a high level of independent diligence by a special committee and its advisors to ferret out any potential fraud or unfairness by the controller prior to approval of the proposed transaction. Among other things, special committees should hire independent financial advisors capable of and willing to test management’s projections, if necessary.12 Also, if it appears that a controlling shareholder, or an officer or other designee acting at his behest, is engaging in obstructionist or other questionable behavior, such behavior should be met head-on with firm, determined action.13 Strong and qualified independent counsel can and should be of great assistance to the special committee in counteracting such behavior by the controller, should it occur.
Efforts to take a corporation private can be profitable for both the controlling and non-controlling shareholders. However, corporate boards, special committees and the parties who advise them should maintain steady vigilance in diligently assessing potential go-private transactions, because, notwithstanding the procedure set forth in In re MFW, such transactions may still draw close judicial scrutiny if there is any potential evidence of fraud or self- dealing by the controller or his designee, as the Dole decision makes clear.