Del Monte Corporation (“Del Monte”) and its financial advisor Barclays Capital (“Barclays”) recently agreed to the payment of $89.4 million as part of a settlement, now subject to court approval, of a putative shareholder class action challenging the $5.3 billion leveraged buyout of Del Monte by a group of private equity firms. The settlement followed a decision earlier this year by Delaware Chancery Court Judge J. Travis Laster that granted a preliminary injunction temporarily staying the consummation of the Del Monte merger. In re Del Monte Foods Co. Shareholders Litig., 25 A.3d 813 (Del. Ch. 2011). The Chancery Court’s decision and the proposed settlement highlight the potential litigation risks to an investment bank when it both advises the target of an acquisition and participates in the buy-side financing of the deal.
On November 25, 2010, Del Monte Foods Company announced that it had agreed to be acquired by a group of private equity firms including Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Partners (collectively, the “Buyers”). Barclays was a financial adviser to Del Monte and was also among several lenders that financed the acquisition of Del Monte. If the merger were approved by a vote of Del Monte’s shareholders, which was scheduled for February 15, 2011, each share of Del Monte stock would be purchased for $19 in cash.
Between November 30 and December 21, 2010, a series of putative shareholder class actions were filed alleging in part that Del Monte’s directors had breached their fiduciary duties in approving the merger. The plaintiffs sought, among other things, to enjoin the merger. The plaintiffs primarily challenged two decisions by the Board, namely (i) allowing Vestar to join KKR for a joint bid even though Vestar had been “the high bidder in a previous solicitation of interest,” and (ii) authorizing Del Monte’s advisor Barclays to participate in the financing of that winning bid.
The Preliminary Injunction
On February 14, 2011, the day before the scheduled shareholder vote on approval of the merger, the Chancery Court granted in part the plaintiffs’ motion for a preliminary injunction. The Chancery Court enjoined Del Monte from proceeding with the shareholder vote for a period of 20 days in order to provide “a final window during which a topping bid could emerge.”
The Chancery Court held that injunctive relief was appropriate because the plaintiffs had “established a reasonable probability of success on the merits of a claim for breach of fiduciary duty against the individual defendants.” The Chancery Court emphasized that, as in all cases, here “the buck stops with the Board,” the members of which were required to and allegedly did not take “active and direct roles in the sale process.” That said, the Court preliminarily found based on the incomplete record before it that Barclays had failed to disclose to the Board its alleged goal of “providing buy-side financing to the acquirer” and had “manipulated the sale process” to reach that goal.
First, Barclays “steered Vestar into a club bid with KKR, the potential bidder with whom Barclays had the strongest relationship.” A non-conflicted advisor, by contrast, may have “teamed Vestar with a different sponsor.” According to the Chancery Court, “[t]he record does not reflect meaningful Board consideration or informed decision making with respect to the Vestar pairing” and “[t]here are no minutes that suggest hard thinking about how acceding to KKR’s request might affect Del Monte.” As a result, “the prospect of price competition for Del Monte” was “materially reduced.”
Then, “Barclays asked KKR for a third of the buy-side financing” and, “[o]nce KKR agreed, Barclays sought and obtained Del Monte’s permission.” Barclays’ participation “as a co-lead bank was not necessary to secure sufficient financing for the Merger, nor did it generate a higher price for the Company.” The apparent result, according to the Chancery Court, was that Barclays would earn fees from providing buy-side financing to the Buyers while Del Monte paid an additional $3 million “to obtain a last-minute fairness opinion from a second bank.” In addition, the Board’s decision to allow Barclays to participate in the financing may have “taint[ed] the final negotiations” of the deal. The Chancery Court explained: “Without some justification reasonably related to advancing stockholder interests, it was unreasonable for the Board to permit Barclays to take on a direct conflict when still negotiating price. It is impossible to know how the negotiations would have turned out if handled by a representative that did not have a direct conflict.”
In the view of the Chancery Court, it was “not possible to remedy fully” the alleged breaches of fiduciary duty at this stage. The Chancery Court was not prepared to issue a more aggressive injunction to “split up the Vestar/KKR team and induce a topping bid from Vestar and a different partner,” because such an injunction would essentially block the proposed deal and send Del Monte “back to the drawing board.” Though the Chancery Court stated it was not a perfect solution, the 20-day “window” mandated by the preliminary injunction was designed to go “part of the way” by “limiting KKR’s leg-up and providing a final window during which a topping bid could emerge.”
The Chancery Court’s preliminary injunction further enjoined the parties to the merger from enforcing the “deal protection measures” set forth in their agreement until the 20-day window had passed and a rescheduled shareholder vote had been held. Those measures included a $120 million termination fee that the Buyers would have been entitled to in the event that Del Monte received a topping bid and terminated the existing merger agreement. The Chancery Court noted that such defensive measures would be “quite reasonable” in an “arms’ length deal untainted by self-interest.” In this case, however, it appeared that the Buyers “secured the deal protection measures as part of a negotiation that was tainted.” The preliminary injunction would ensure that the Buyers would “not benefit from the misconduct in which [they] participated.”
The Proposed Settlement
During the 20-day “window” ordered by the Chancery Court, Del Monte contacted 70 third-parties but did not receive a “topping bid.” On March 7, 2011, Del Monte shareholders approved the merger, with 75.15% of the outstanding shares voting in favor. Thereafter, Del Monte completed the merger.
Meanwhile, the plaintiffs amended their complaint to add Barclays as a defendant and to seek damages from it for allegedly aiding and abetting the breaches of fiduciary duties by Del Monte’s directors. After conducting some discovery and participating in a series of mediation sessions, all parties agreed to settle the lawsuit and, on October 5, 2011, requested approval of their settlement from the Chancery Court. Pursuant to that settlement, Del Monte and Barclays have agreed to pay $65.7 million and $23.7 million, respectively, for a total settlement of $89.4 million. The Chancery Court’s approval of the settlement remains pending.
The claims against Barclays were not litigated to conclusion and the Chancery Court’s findings on the preliminary injunction motion were necessarily based on an incomplete record. And, because the defendants in the Settlement Agreement denied any wrongdoing, it will never be known whether the plaintiffs could actually have proven any of their claims against Barclays. Nevertheless, this case demonstrates the risks that arise, and the types of allegations that can be made, when an investment bank advising the target of a potential acquisition also participates in the financing of that acquisition.