In an August 27, 2015 decision, Vice Chancellor Laster of the Delaware Chancery Court found that the chief executive officer (David H. Murdock) and president and general counsel (C. Michael Carter) of Dole Food Co., Inc. breached their duty of loyalty to Dole and its stockholders in a $1.6 billion going-private acquisition of the company in November 2013, and held them personally liable for payment of $148 million in damages.
In one sense, the decision is unremarkable: The vice chancellor found that Murdock and Carter had committed fraud in negotiating and securing approval of the transaction, chiefly by withholding critical projected cost savings and revenue information from Dole’s special board committee and stockholders. With a finding of fraud, a holding that a breach of the duty of loyalty has occurred and that damages are payable follows easily.
The broader value of the decision rests in the practical transactional advice that can be mined from it. A factual chronology, compiled from the decision, sets the stage.
Murdock had taken Dole private once before, in a 2003 leveraged buyout. But to deal with significant debt in the context of the 2008 financial crisis, Dole sold 41 percent of its shares in an October 2009 initial public offering. Murdock, who retained ownership of approximately 40 percent of Dole following the IPO and indisputably controlled it, had regularly considered taking Dole private again from then on, and had begun active planning for the transaction at issue by April 2012. To that end, Murdock sold significant personal assets in 2012 to enhance his liquidity, and Dole sold approximately half of its business in late 2012, enabling it to pay down substantial debt. In November 2012, Dole announced its expectation that the sale would also enable it to achieve approximately $50 million in annual savings.
In January 2013, however, Carter caused Dole to announce that Dole’s expected 2013 cost savings from the 2012 sale would be closer to $20 million, and Dole’s stock price dropped. Three weeks later, Carter prompted another Dole press release, announcing that Dole’s expected 2013 adjusted EBITDA would be at the low end of its earlier guidance range and announcing a reduction in the earlier-announced valuation of certain assets. On February 22, 2013, Dole, at Carter’s instigation, announced that the performance of its fresh fruit business was continuing its declining trend. Following Dole’s board’s approval of a stock repurchase program on May 8, 2013, Carter had the company issue a May 28, 2013, press release announcing an indefinite suspension of the program. Dole’s stock price dropped 10 percent following that announcement.
Murdock, working with Deutsche Bank as his financial advisor, delivered his $12.00 per share going-private proposal to the Dole board on June 10, 2013. He conditioned the transaction on approval by an independent special committee of the board and a favorable vote of a majority of the company’s unaffiliated shares, and stated that he was a buyer and not a seller. The board formed a special committee the next day. Two of the committee’s four members had significant prior and continuing business dealings with Murdock. The committee enlisted Lazard Frères as its financial advisor and Sullivan & Cromwell and Richards Layton & Finger as its legal advisors.
Lazard requested an update of the December 2012 three-year financial performance projections that Dole management had prepared using its traditional “bottom-up” analysis. Carter took charge of the updating process and delivered, on July 11, 2013, projections that were significantly lower than the December 2012 projections. These projections reflected only $20 million of the earlier-projected $50 million of savings from the 2012 sale and did not forecast income from the company’s continuing quest and plans to purchase fruit farms in Latin America. The next day, Carter met with Murdock’s financial advisor, in a session that the committee and its advisors were not informed of, and told Murdock’s advisor that the company would outperform the July 11 projections by realizing more cost savings than the July 11 projections reflected and by realizing income from the purchase of fruit farms.
The committee and its advisors, skeptical about the substance and quality of the July 11 projections, developed the committee’s own projections using the December 2012 projections as a starting point. Near the end of negotiations on the merger agreement, Carter had management prepare new projections that were higher than the July 11 projections, but kept those new projections from the committee and its advisors. Murdock’s acquisition entity and Dole signed the merger agreement, establishing a $13.50 per share merger price, on August 11, 2013. The Dole stockholder meeting was held on October 31, 2013, with 50.9 percent of the unaffiliated shares voting in favor of the transaction. The transaction closed in November 2013.
Vice Chancellor Laster’s opinion provides instructive insight into a number of conflicted-party transaction issues, including assessing controlling shareholder status; identifying the appropriate standard of judicial review; the composition and functioning of special committees; the application of the entire fairness standard to facts at hand; assigning value to contingent future events for transaction valuation and damages assessment purposes; and the distinctions between evaluating transactional fairness and individual exposure to liability.
Controlling Shareholder Status; Standard of Review
The opinion proclaimed Murdock’s controlling stockholder status with dispatch, noting his 40 percent ownership interest; referring to him as “an old-school, my-way-or-the-highway controller”; flagging Murdock’s own testimony that he “was ‘the boss’”; and observing, based on documentary and testimonial evidence, that “[c]riticizing Murdock was unthinkable.” Similarly, with respect to Murdock’s “right-hand man” Carter, the opinion noted that “Dole’s executives could not envision anyone failing to carry out Carter’s instructions.”
As to the standard of review, the “merger was an interested transaction [with a controlling shareholder], so entire fairness provided the baseline standard of review.” Murdock had attempted to secure a business judgment rule review instead by conditioning his proposal on (i) approval from a board committee of disinterested and independent directors and (ii) the affirmative vote of holders of a majority of the unaffiliated shares, following guidance in the late May 2013 Chancery Court decision in In re MFW Shareholders Litigation. Vice Chancellor Laster found, however, that allegations and evidence regarding Murdock’s and Carter’s activities, and the relationships between certain committee members and Murdock, created triable questions of fact regarding the committee’s independence, cementing entire fairness as the controlling standard of review for the transaction.
Committee Composition and Functioning
The vice chancellor detailed his initial reservations about the close ties between two of the four committee members and Murdock, and Murdock’s threatening behavior toward one of the two. The vice chancellor ultimately found, however, that the record at trial demonstrated that the committee and its advisors had carried out their tasks with integrity. But their “commendable efforts” to negotiate a fair price and terms were rendered “useless and ineffective” by Carter’s fraudulent activity – “Fraud vitiates everything.” In other words, even a fairly formed, well-motivated, well-advised, properly functioning committee cannot salvage a finding of entire fairness when the committee is denied the full complement of information it needs to discharge its function.
Application of the Entire Fairness Standard
Generally. The opinion’s entire fairness analysis led with the familiar recitation that entire fairness comprises fair dealing and fair price, and that fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.”
Fair Dealing. The vice chancellor noted that the transaction timing issue encompassed actions taken by the controller in the period leading up to the formal proposal. He found that Murdock and Carter had deliberately depressed the price of Dole’s stock before the transaction by issuing misleading press releases (outlined in “Background” above), and that those actions constituted unfair dealing.
With reference to how the transaction was negotiated, Vice Chancellor Laster first observed that an effective special committee must be fully informed, and that a controller transacting with such a committee must disclose “all material information known to [him] except that information that relates only to [his] consideration of the price at which [he] will buy . . . and how [he] would finance a purchase. . . .” The vice chancellor found that Murdock and Carter had instead knowingly provided false financial projections to the committee and noted, with respect to Carter’s position as a Dole officer, that “if a duly empowered committee asks for information, a corporate officer, employee, or agent has a duty to provide truthful and complete information.”
Vice Chancellor Laster also detailed numerous other transaction process deficiencies in Carter’s dealings with the committee. Carter (i) sought to restrict the committee’s mandate to an up-or-down decision on Murdock’s offer rather than being authorized to explore potentially superior alternatives; (ii) attempted to steer the committee’s selection of its financial advisor and to limit the scope of the advisor’s activities; (iii) insisted on having involvement in the confidentiality agreements being executed by the committee on Dole’s behalf; (iv) secretly assisted Murdock in preparing a hostile tender offer to pressure the committee, if necessary; (v) convened a meeting of Murdock’s bankers with Dole management without informing the committee, in violation of the committee’s transaction process directions; (vi) defied the committee’s instruction to suspend Murdock’s bankers’ access to the transaction data room; and (vii) secretly advised Murdock and his counsel on how to negotiate against the committee. The vice chancellor characterized these actions as “the antithesis of a fair process.” (In addition, upon the formation of the committee, Murdock, Carter, and another director had sought to have the full board choose the committee’s chairman but were outvoted by the board’s majority (which also composed the committee).)
With reference to the transaction’s structure and approval, the vice chancellor stated that Carter’s fraud (primarily with respect to the financial projections) tainted both the committee’s approval of the merger and the stockholder vote, and that therefore neither of those forms of approval provided evidence of the transaction’s fairness. He observed that there were laudatory features of the merger agreement and that Lazard had sought other bidders diligently, but that Murdock’s refusal to entertain any alternative transaction negated the salutary effect of certain of the merger agreement’s features, such as a go-shop provision with a low breakup fee.
Fair Price. In focusing on the fair price element of the entire fairness analysis, the vice chancellor offered several important precepts. First, for purposes of determining fairness, the court’s task is to determine whether the price falls within a range of fairness, not to pick a single number. Second, while a fair price can be the predominant consideration in an entire fairness inquiry, and has occasionally carried the day despite the absence of a fair process, “[m]ost often, the two aspects of the entire fairness standard interact.” Third, assuming for the sake of argument that the $13.50 per share price fell within a range of fairness, the plaintiffs, in light of the defendants’ fraud, misrepresentation, self-dealing, and gross and palpable overreaching, “are entitled . . . to a ‘fairer’ price” because the fraud deprived the committee of its ability to obtain a better result, prevented the committee from having the knowledge necessary potentially to say no, and foreclosed the stockholders’ ability to protect themselves by voting the transaction down.
Valuation and Damages Assessment
In analyzing the fair price implications of Carter’s misleading projections regarding future cost savings and planned farm purchases, the vice chancellor emphasized that elements of future value that are known or susceptible of proof as of the date of the merger may be considered. More directly, “when . . . the company’s business plan as of the merger included specific expansion plans or changes in strategy, those are corporate opportunities that must be considered part of the firm’s value.” He characterized Dole’s plans to cut costs and buy farms to improve profits as part of Dole’s “operative reality” at the time of the merger. Further discussion in the opinion indicates that incremental cash flows from planned operations should not, however, be treated for valuation purposes as “just as certain” as cash generated by existing core operations.
The opinion also set forth important principles regarding damages in cases arising from a breach of the duty of loyalty. First, an award exceeding the fair value of the plaintiffs’ shares may be appropriate, particularly when fraud, misrepresentation, self-dealing, or overreaching is involved. Second, the scope of recovery for a breach of the duty of loyalty is not to be determined narrowly. Third, when a breach of duty is established, uncertainties in awarding damages are generally resolved against the wrongdoer. And finally, in a plenary breach of fiduciary duty action, the court can award damages designed to eliminate the possibility of profit flowing to defendants from the breach – that principal “does not rest upon the narrow ground of injury or damage to the corporation.”
Transactional Fairness and Individual Liability
Following his determination that the transaction was not entirely fair to the company and its stockholders, Vice Chancellor Laster observed that the entire fairness test has only a “crude” relationship to the liability that any particular fiduciary has for involvement in the transaction. He stated that when a self-dealing transaction is determined to be unfair, only the self-dealing fiduciary is subject to damages without an inquiry into his subjective state of mind. That inquiry is required, however, in order to determine whether any other director has breached his or her duty of loyalty.
Based on these premises, the vice chancellor found Murdock liable for breach of his duty of loyalty in both his controlling stockholder and director capacities, and found Carter liable for breach of his duty of loyalty in both his director and officer capacities. A third director, who plaintiffs contended should have advocated and voted against the transaction because he knew it undervalued the company, presented a “close call” but was exonerated because he did not know about Murdock’s and Carter’s specific misconduct and was entitled to rely on the committee’s recommendation of the transaction. The four committee members’ loyalty to the company and stockholders was not questioned.
The In re Dole Foods Co., Inc. decision does not create new doctrine; rather, it applies fundamental fiduciary duty principles to an extraordinary set of facts with a high degree of clarity. While a close read of the decision leaves a few lingering questions, the decision serves as a useful guide for transaction participants on the subjects that it addresses. That same close read also suggests, though the decision does not address the proposition overtly, that a special committee and its advisors may be prudent to secure continuing direct access to the management and other company personnel who are involved in producing the information that the committee and advisors need in order to discharge their responsibilities.