The Delaware Court of Chancery recently issued a preliminary injunction in In re Del Monte Foods Company Shareholders Litigation (i) blocking the shareholder vote to approve the sale of Del Monte to a group of private equity firms led by KKR for a period of 20 days and (ii) precluding the enforcement of the deal protection measures, including the no-shop, matching-right and break-up fee provisions during that period, pending the shareholder vote to approve the transaction.
The court applied the traditional tests for determining whether an injunction was warranted: whether the plaintiffs have demonstrated (1) a reasonable likelihood of success on the merits; (2) an imminent threat of irreparable injury; and (3) that an injunction would not threaten more harm than good. Based on the preliminary record and not findings of fact after a full trial, the Court found that plaintiffs had satisfied those requirements with respect to their claims that the Del Monte Board had breached its fiduciary duty by failing to provide adequate oversight over its financial advisor, Barclays who, as a result of conflicts of interest arising from contemporaneously providing sell-side advice to the Del Monte Board and seeking to provide financing to the potential acquirors of Del Monte, “secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buyside financing fees” and taking actions that “materially reduced the prospect of price competition for Del Monte.” According to the Court, the Board did not act reasonably in consenting to Barclays participating in the buy-side financing because the board did not inquire as to whether KKR could finance the transaction without Barclays and granted its consent “without some justification reasonably related to advancing shareholder interests.” In addition, the Court was highly critical of KKR and Vestar, two members of the private equity group that agreed to acquire Del Monte, for allegedly making a joint bid in violation of anti-clubbing restrictions in the confidentiality agreements they signed with Del Monte and of Barclays for allegedly facilitating and hiding Vestar’s participation in KKR’s bid from Del Monte.
The Del Monte case highlights the need for a Board of Directors to carefully monitor and supervise the process pursuant to which a company is sold, particularly where its financial or other advisors may be alleged to have a conflict of interest. More active oversight by the Board and the earlier and more substantial involvement of unconflicted advisors can substantially reduce the risk that the adequacy of the Board’s oversight will be brought into question.