On February 14, 2011, the Delaware Chancery Court preliminarily enjoined the vote on the $5.3 billion leveraged buyout of Del Monte Foods Company by certain private equity firms for a period of 20 days. In addition, during the 20-day period, the court enjoined the parties from enforcing the deal protection devices contained in the merger agreement, including the no-solicitation and match-right provisions and the termination fee provisions relating to topping bids and change of recommendation. The court held that Del Monte’s board of directors breached their fiduciary duties by failing to provide oversight of its investment banker, which breach was aided and abetted by the lead private equity firm.
The court initially noted that the board’s decisions would normally be regarded as reasonable for purposes of enhanced scrutiny. However, the court noted that Del Monte’s investment banker “secretly and selfishly manipulated the sale process to engineer a transaction that would permit [it] to obtain lucrative buy-side financing fees.” The court noted that the investment banker withheld the following information from the Del Monte board:
- It did not disclose the behind-the-scenes efforts of its Del Monte coverage officer to put Del Monte into play.
- It did not disclose its explicit goal, harbored from the outset, of providing buy-side financing to the acquirer.
- It did not disclose that, without Del Monte’s authorization or approval, it steered two private equity firms into a club bid in violation of confidentiality agreements that prohibited them from discussing a joint bid without written permission from Del Monte.
- Late in the process, at a time when the investment banker was negotiating the deal price, it asked the winning bidder for a third of the buy-side financing. Only after the bidder agreed did the banker seek and obtain Del Monte’s permission.
The court concluded that the director defendants failed to act reasonably in connection with the sale process. The court noted, however, that since the board sought in good faith to fulfill its fiduciary duties, but failed because it was misled by its investment banker, the exculpation under Section 102(b)(7) and full protection under Section 141(e) makes the chances of a judgment for money damages small.
The court enjoined the vote on the merger and the enforcement of the deal protection measures to give stockholders “the opportunity to receive a pre-vote topping bid in a process free of taint from [Del Monte’s investment banker’s] improper activities.”
In re Del Monte Foods Company Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011).