In this case, the Court of Chancery granted a preliminary injunction enjoining a stockholder vote and the enforcement of certain deal protection measures in an effort to restore the stockholders’ opportunity to receive a topping bid free of fiduciary misconduct caused, in part, by banker improprieties.
Between December 2009 and January 2010, Peter Moses (“Moses”), a managing director at Barclays, met with KKR, Apollo and other private equity firms to present various opportunities, including an acquisition of one of Barclays’ clients, Del Monte Foods Company (the “Company” or “Del Monte”). Thereafter, Apollo sent the Company a written expression of interest in an acquisition valued at $14-$15 per share. Upon receipt of Apollo’s offer, the Company reached out to Barclays, but Moses failed to advise the Del Monte board of directors (the “Board”) that he had already pitched such an acquisition to various private equity firms. Moses also failed to disclose that Barclays intended to seek a role in providing buyer-side financing. Moses recommended that the Board pursue a targeted, non-public process aimed at private equity firms. Six LBO firms and one strategic bidder executed confidentiality agreements and participated in the process. The confidentiality agreement included a provision that prohibited the parties from entering into any agreement or arrangement with any other person, including any other potential bidders or equity or debt financing sources, without Del Monte’s consent (the “No Teaming Provision”). Five LBO firms submitted bids, with Vestar Capital Partners (“Vestar”) submitting the highest bid at a range of $17 – $17.50 per share. Vestar’s bid was contingent on its ability to partner with another private equity firm. In its March 2010 meeting, the Board determined that it was not in the stockholders’ best interests to proceed with the process, and instructed Barclays to terminate the process and let the bidders know that the Company was not for sale.
In September 2010, Moses met with Vestar and suggested that it might be an “opportune” time to approach Del Monte again and that KKR would be an “ideal partner.” Moses also discussed the idea with KKR, notwithstanding the fact that Vestar and KKR were still subject to the confidentiality agreement (and the No Teaming Provision). In October 2010, KKR delivered to the Company a written indication of interest from KKR and Centerview Partners (“Centerview”) to acquire Del Monte for $17.50 in cash. Prior to delivering the indication of interest, KKR and Vestar agreed not to disclose Vestar’s participation at that time. The record revealed that Barclays worked with KKR to conceal Vestar’s role. The Board met and determined to pursue discussions with KKR without conducting a pre-signing market check. On November 8, 2010, the London Evening Standard reported that KKR had offered to acquire the Company for $18.50 per share. Later that day, KKR contacted the Board and raised its offer to $18.50 per share, but failed to mention Vestar’s participation. That same week, KKR “formally approached” Barclays to request the inclusion of Vestar as a member of the sponsor group and Barclays sought the Board’s permission to provide buy-side financing, even though Del Monte and KKR had not yet agreed upon a final price. The Board did not extract any additional consideration from any of the bidders or Barclays in exchange for such permissions. In late November 2010, Barclays worked with KKR to provide up to one-third of the debt, while at the same time negotiating the acquisition price with KKR. On November 24, 2010, KKR made its best and final offer of $19 per share, which the Board accepted. The parties executed a merger agreement that contained a 45-day go-shop period (with bi-furcated termination fees representing 1.13% of deal value/1.5% of equity value during the go-shop period, and 2.26% of deal value/3% of equity value thereafter), a no-solicitation provision, a limited fiduciary termination provision (which was contingent upon the entry into an “Alternative Acquisition Agreement”), and a match right. The Board permitted Barclays to run the go-shop process. When Goldman Sachs expressed interest in running the go-shop, KKR permitted Goldman Sachs to participate in 5% of the syndication rights for the acquisition financing, causing Goldman Sachs to drop its efforts with respect to the go-shop. Barclays contacted 53 parties during the go-shop, but received no indications of interest.
On January 12, 2011, Del Monte issued its definitive proxy statement, which included multiple false and misleading disclosures. After the completion of discovery in connection with plaintiff’s preliminary injunction application, Del Monte issued a proxy supplement, which mooted plaintiffs’ disclosure claims. The proxy supplement also disclosed that the Company learned significant facts about Barclays’ role and interactions with KKR and Vestar only as a result of the instant litigation.
In its application, plaintiffs alleged claims for breach of fiduciary duty against the director defendants and aiding and abetting by the sponsor group. Plaintiffs sought a preliminary injunction enjoining the stockholder vote, scheduled to take place on February 15, for up to 45 days. To obtain a preliminary injunction, a plaintiff must demonstrate three elements: (i) the probability of success on the merits; (ii) that plaintiffs will suffer irreparable injury if an injunction is not granted; and (iii) that the balance of the equities favor the issuance of an injunction. With respect to the first element, the Court first noted that the Boards’ actions were subject to enhanced scrutiny and analogized the instant case to the Court of Chancery’s decision in In re Toys “R” Us, Inc. S’holders Litig., 877 A.2d 975 (Del. Ch. 2005). In that case, the Court of Chancery considered whether an investment banker’s role in providing stapled financing created a conflict of interest that merited injunctive relief. In Toys “R” Us, however, the investment bank’s initial request to provide buy-side financing was rejected, and only permitted after the execution of the merger agreement. Vice Chancellor Strine ultimately determined that the banker’s appearance of conflict did not have a causal influence on the board process, but cautioned that “it is advisable that investment banks representing sellers not create the appearance that they desire buy-side work...” Applying those principles to the facts at hand, Vice Chancellor Laster concluded that Barclays’ activities “went far beyond” what took place in Toys “R” Us, observing that Barclays sought permission to provide buy-side financing while price negotiations were still ongoing. The Board’s consent to Barclays’ request was, in the Court’s view, unreasonable. The Court was also troubled by Barclays active concealment of Vestar’s role in the process, which “materially reduced the prospect of price competition for Del Monte,” and the potential that Barclays’ conflict tainted the go-shop process. Given Barclays’ role in providing buyside financing (which nearly doubled its fees on the transaction), Barclays was strongly incentivized to ensure that the transaction closed with KKR. Although the Board may have been deceived by its financial advisor, the Board was nevertheless obligated to taken an active and direct role in the sale process. The Court likened this case to the facts of Mills Acquisition Co v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989), wherein the Delaware Supreme Court observed that “when a board is deceived by those who will gain from ... misconduct, the protections [namely Section 141(e)] girding the decision itself vanish. Decisions made on such a basis are voidable at the behest of innocent parties to whom a fiduciary duty was owed and breached...” For such reasons, the Court concluded that plaintiffs established a reasonable likelihood of success on the merits of their claim that the director defendants failed to act reasonably in connection with the sale process. The Court made a similar finding with respect to the aiding and abetting claim, reasoning that although KKR/Centerview/Vestar was free to seek the lowest possible price through arms’ length negotiations, it was not permitted to “knowingly participate” in the Board’s breach of fiduciary duty.
Plaintiffs also demonstrated that there would be irreparable harm if the injunction was not granted. Absent an injunction, the Del Monte stockholders would be deprived of the opportunity to receive a prevote topping bid in an untainted process. The Court recognized that although the stockholders could seek monetary damages, such remedy would only come at great cost, time and imprecision. The Court also acknowledged that the director defendants may have defenses under Sections 102(b)(7) and 141(e) of the General Corporation Law. And although neither the sponsor group nor Barclays would be entitled to the protections of those statutory provisions, the Court acknowledged that those defendants may have other arguments against liability. The unique nature of the sale opportunity, together with the difficulty of crafting a post-closing remedy, counseled in favor of granting equitable relief.
With respect to the final element, the balancing of hardships, the Court found that this element also counseled in favor of granting a preliminary injunction. Although a delay subjects the merger to market risk, without an injunction, the stockholders would have lost the opportunity for a competitive process that could lead to a higher sale price. Vice Chancellor Laster noted that the Court of Chancery has issued preliminary injunctions designed to cure pre-vote harm, primarily in the context of enjoining merger votes pending curative disclosures. Here, an injunction would partially remedy the harm caused by Barclays by providing a final window during which a topping bid could emerge. The Court, however, rejected plaintiffs’ request for a 30‑45 day delay, opting for a 20-day delay in the merger vote, reasoning that the transaction was actively shopped for 45 days without a single bidder coming forward and the Company had been subject to a passive market check since the deal was announced in January. In addition, the Court enjoined the enforcement of certain of the deal protection devices pending the stockholder vote. In particular, the Court enjoined the enforcement of the no-solicitation and match right provisions, the termination fee provision relating to the receipt of topping bids and the limitation on the Board’s ability to change its recommendation. Such deal protections were enjoined on the grounds that they were the product of a fiduciary breach that cannot readily be remedied post-closing after a full trial, and the Court reasoned that KKR should not be permitted to benefit from the misconduct in which it participated. Relying on Paramount Commc’ns Inc. v. QVC Networks Inc, 637 A.2d 34 (Del. 1994) and ACE Ltd. V. Capital Re Corp., 747 A.3d 95 (Del. Ch. 1999), the Court held that KKR’s bargained for contractual rights, secured by KKR through aiding and abetting the Board’s fiduciary duty, must give way to the superior equitable rights and interests of the Del Monte stockholders.
The full opinion is available here.