Fraud Renders Dole Special Committee Work Useless and Subjects Controller and Officer Committing Fraud to Personal Liability for $148 Million in Damages
In a recent decision, Vice Chancellor Laster held that David H. Murdock, the chairman, chief executive officer and 40 percent stockholder of Dole Food Company Inc., and C. Michael Carter, Dole’s president, chief operating officer, general counsel and secretary, had breached their duty of loyalty to the stockholders of Dole in connection with a going private transaction proposed by Murdock. Murdock and Carter were found liable to the stockholder class for an additional $2.74 per share or $148 million in damages, representing a “fairer price.” Vice Chancellor Laster determined that Carter engaged in fraud to mislead the special committee appointed to consider the proposed merger from Murdock regarding the value of Dole.
Murdock had conditioned his going private proposal on both the approval of an independent special committee and the affirmative vote of the holders of a majority of the unaffiliated shares of Dole, seeking to obtain review of the transaction under the favorable business judgment standard pursuant to recent Delaware decisions. Allegations regarding Murdock and Carter’s activities and relationships between certain committee members and Murdock created triable issues of fact regarding the committee’s independence. Laster found that the record at trial demonstrated that the committee was independent, and engaged in “highly commendable efforts,” together with its legal and financial advisors, to negotiate a fair transaction for the Dole stockholders. The committee and the unaffiliated Dole stockholders approved the merger.
Nevertheless, after trial Laster concluded that Carter had perpetrated fraud on the committee and applied the entire fairness standard to review the transaction. Fairness has two aspects: fair dealing and fair price. Laster found that the merger was not the product of fair dealing, due to Carter’s conduct. Laster found that Carter had engaged in “fraud, misrepresentation, self-dealing and palpable overreaching.” Laster then concluded that even if the merger price negotiated by the committee fell within a range of fairness, the stockholders were, under the circumstances, entitled to a “fairer” price.
Laster held that “fraud vitiates everything,” noting that the concept of entire fairness “certainly incorporates the principle that a cash-out merger must be free of fraud and misrepresentation.” Laster observed that “[a]n important element of an effective special committee is that it be fully informed in making its determination.” Carter provided knowingly false projections to the committee. The chair of the committee concluded that the projections were “not an accurate representation of the value of the Company” and the committee and its bankers created, on an expedited basis, their own set of projections. However, the committee never received accurate information about the cost savings Dole could achieve, or accurate information about additional farm purchases producing material upside to the Company’s future performance, and thus, “by providing the committee with false information, Carter ensured that the process could not be fair.”
Laster held that Carter, described as Murdock’s “righthand man,” was personally liable both as an officer and director, noting that Carter consistently acted to promote Murdock’s interests and was to run Dole after the going private transaction. Among other things, Laster found Carter had intentionally released information that pushed down Dole’s stock price in advance of the going private proposal; cancelled a stock repurchase program to further depress the stock price; participated in planning with Murdock for a hostile tender offer against Dole in the event the merger was not approved; sought to restrict the committee’s authority and that of its advisors, created “lowball management projections” for the committee; disregarded the process established by the committee regarding access to information; insisted on reviewing every NDA negotiated by the committee, providing insight into potential alternative bidders; and provided more positive financial information to Murdock’s lenders as well as to other Dole management in connection with the internal budgeting cycle without telling the committee.
Murdock was also personally liable as the controlling shareholder and a Dole director “by orchestrating an unfair, self-interested transaction;” also as a buyer, he “derived an improper benefit” from the transaction. Laster explained: “As an interested party, a finding of unfairness will subject [him] to liability for breach of the duty of loyalty regardless of [his] subjective bad faith.”
Beyond Vice Chancellor Laster holding Murdock and Carter personally liable for $148 million in damages due to their fraud against the special committee, this case provides some additional helpful insights on special committees and controllers that will be valuable to controllers, directors and their respective advisors:
- Committee Skepticism and Diligence Demonstrates Effectiveness. Laster noted the highly commendable efforts of the committee and their financial advisors to negotiate a fair transaction, in particular pointing out that the committee and bankers created their own independent projections. Indeed, the committee succeeded in generating a credible and reliable projection regarding Dole’s business, except where the committee could not obtain full or accurate information. The committee undertook these actions after reviewing projections provided by Carter compared to the plans committee members had previously seen in board meetings. These efforts are a fine example of a committee acting as an arm’s length negotiator on behalf of the unaffiliated stockholders, leveraging committee members’ knowledge of the business to identify the need for independent valuation information. Alas, these efforts were trumped by Carter’s fraud.
- Controller’s Aggressive Behavior Can Create Suspicions as to Committee Independence. Laster noted that the adverse response by Carter and Murdock to the outside directors’ opposition to a self-tender proposed by Murdock prior to going private factored into his concern about the committee’s independence and led to the trial. Laster took note that Delaware courts have “long worried about a controller’s potential ability to take retributive actions against outside directors if they did not support the controller’s chosen transaction and whether it could cause them to support a deal that was not in the best interest of the company or its stockholders.” He explained that “when controllers actually make retributive threats, that fact is evidence of unfair dealing.” In this case Murdock and Carter “had shown the outside directors that if they went in a different direction than Murdock wanted, they risked losing their Board seats, and the decision they staked their position on would be nullified.”  Laster nonetheless found the committee to be independent, even in the face of Murdock’s bullying. This personal fortitude is commendable, and what is called for from special committees in cases with strong-willed controllers. Controllers might also take note of the Court’s special sensitivity to such behavior.
- Controllers Must Provide Complete and Accurate Information To Obtain the Benefit from a Special Committee. Remember that here Murdock made the offer conditioned on the approval of the special committee and the approval of a majority of the unaffiliated stockholders—he wanted the benefits of an independent review. Unfortunately, Carter’s fraud negated the value of the process undertaken by the committee. The key problem with the fraud here was that it deprived the committee of the ability to negotiate on a fully informed basis and potentially say no to the proposed merger, and likewise deprived the stockholder of the same right to potentially vote down the merger. Given that the merger was approved, rather than trying to unwind it the court held that the stockholders were “not limited to a fair price,” but rather are “entitled to a fairer price designed to eliminate the ability of the defendants to profit from their breaches of the duty of loyalty.” In light of the remedy imposed here, controllers should remember, as they interact with a special committee, that the controller’s duty is to “disclose fully all the material facts and circumstances surrounding the transaction.” The controller need not share “information disclosing the top price that a proposed buyer would be willing to or able to pay, or the lowest price that a proposed seller would accept.”
- Actions to Compromise the Authority of the Special Committee Create Skepticism as to Independence. Beyond the fraudulent projections and withholding of key information regarding cost savings and the proposed farm purchases, Carter interfered with the special committee process. Carter limited the scope of the committee’s authority to eliminate consideration of alternatives (although in fact the committee did so). He insisted on control over the NDAs issued by the committee, and thus knew when the committee provided confidential information to an interested party. He objected to the scope of engagement of the financial advisor. These types of actions do not promote confidence that the committee is being given full authority and the ability to negotiate at arm’s length.