On August 27, 2015 the Delaware Court of Chancery issued a post-trial decision, In re Dole Food Company, Inc. Stockholder Litigation, that held two of Dole’s directors, David Murdock and Michael Carter, personally liable for over $148 million in damages, plus interest. Murdock, Dole’s CEO and chairman, and Carter - Dole’s COO, president and general counsel - were found liable for intentionally driving down Dole’s stock price prior to, and for interfering with the special committee’s efforts to obtain a fair price for Dole’s minority stockholders in, Murdock’s take-private transaction. Murdock was found liable as director, officer and controlling stockholder. Murdock’s financial advisor (and lender) fared better: It was found not liable on an aiding and abetting claim. The special committee’s financial advisor fared best – Vice Chancellor Laster went out of his way to compliment the financial advisor as having performed admirably. The decision underscores that, in a controlling stockholder transaction, the MFW conditions, as detailed below, must be followed in both form and substance to obtain deferential review – it must replicate an arm’s length, third-party deal. Additionally, the presence of independent and diligent committee members and financial advisors to a special committee and a “fair” price cannot purify a transaction tainted by fraud.
In November 2013, Murdock, who owned approximately 40 percent of Dole, paid $13.50 per share to take the company private. His initial offer was $12 per share, which represented a premium to the then-current trading price of $10.20. In his initial letter to Dole’s board of directors, Murdock stipulated his offer on the conditions set forth in MFW. In MFW, the Court of Chancery extended the existing standard of review rule, namely, that in a controlling stockholder take-private transaction, enhanced judicial scrutiny would apply, but the burden of proving entire fairness would shift from the defendants to the plaintiffs having to demonstrate that either the price or the process was not fair when there was (i) a well-functioning special committee or (ii) approval from an informed majority of minority stockholders. MFW held that in such a context, the approval of a special committee of independent directors and a majority of the minority stockholders not only would switch the burden from the defendants to the plaintiffs, but also would permit the deal to fall under the deferential business judgment rule, rather than the enhanced scrutiny of the entire fairness standard of review.
Accordingly, Murdock required (i) approval from a committee of the board made up of disinterested and independent directors and (ii) the affirmative vote of the holders of a majority of the unaffiliated shares. The special committee approved the transaction with the advice of its independent financial advisor, and the transaction was subsequently approved by a very slim majority (50.9 percent) of Dole’s unaffiliated stockholders. However, Murdock and Carter were found to have undermined the special committee throughout the process, including but not limited to Carter (i) seeking to restrict the special committee’s (and its advisor’s) authority; (ii) providing advice to Murdock, his financial advisor and legal counsel; (iii) making public pronouncements that had the effect of driving down the price of Dole’s shares (including suspending a stock buyback program that was in place); (iv) intentionally supplying the special committee with inaccurate and underwhelming projections (in particular regarding the plans to purchase farms and the amount of expected synergies); and (v) withholding more promising financial information and business plans – information that was being shared with Murdock’s financial advisor. The information deficit extended to the unaffiliated stockholders, who were likewise in the dark as to full circumstances. The actions toward the special committee (and by extension, the unaffiliated stockholders), in addition to a litany of other egregious acts, led the court to find that Murdock and Carter had:
“deprived the Committee of the ability to negotiate on a fully informed basis and potentially say no to the Merger. Murdock and Carter likewise deprived the stockholders of their ability to consider the Merger on a fully informed basis and potentially vote it down. Murdock and Carter’s conduct throughout the Committee process, as well as their credibility problems at trial, demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith.”
The court noted that the special committee and its financial advisor acted with integrity and diligence, but despite their “Herculean efforts to overcome the informational deficit, … they could not do so fully.” Even assuming the approved deal price of $13.50 per share fell within the range of fairness, the court found that the stockholders were “not limited to a fair price [but were] entitled to a fairer price designed to eliminate the ability of [Murdock and Carter] to profit from their breaches of the duty of loyalty.”
Murdock and Carter argued that the standard of review for the breach of fiduciary duty claim should have been the business judgment rule because they complied with the conditions set forth in MFW noted above. The court concluded that having those two prongs in place was not enough to sustain a business judgment rule review, however, because the defendants were engaging in activities designed to neuter the prongs. “[I]f a duly empowered committee asks for information, a corporate officer, employee, or agent has a duty to provide truthful and complete information.” The court found that Carter, on behalf of Murdock, intentionally withheld vital information and provided the special committee and its financial advisor with false information. As result, despite having a properly constituted special committee in place and an affirmative vote of the “majority of the minority” stockholders, the entire fairness standard of review applied.
The defendants sought to demonstrate that the price paid was in the range of fairness. However, the court was unpersuaded by Murdock and Carter’s market indicators analysis, which included every transaction Dole had considered since Murdock attempted to sell to Del Monte in 2009, and indicated that the price paid was within the range of fairness. Vice Chancellor Laster found such analysis wanting, and found that the only time Murdock really considered selling all of Dole was after the financial crisis, when he and the company were overburdened by debt (a problem solved by taking Dole public). The court found such transactions were not indicative of Dole engaging in an “ongoing, multi-year market check” of Dole’s value and, more critically, were unpersuasive because they did not account for Murdock being “particularly unwilling to sell during the period surrounding [his take-private effort], which [was] the only relevant timeframe.”
The claim against Murdock’s financial advisor failed because plaintiffs were not able to show that the financial advisor “knowingly participated in the breaches of duty giving rise to fiduciary liability.” According to the court, the critical breaches were fraud relating to Carter withholding information regarding Dole’s cost-cutting plans and purchases of farms from the information presented to the special committee. The court found that Murdock’s financial advisor did not make, nor was it present for, any of the misrepresentations, and that it did not conceal any information from the special committee. Murdock’s financial advisor received the more accurate information at a meeting attended by Carter, Murdock and other lenders, but not members of the special committee, its counsel or its financial advisor. The court found that this was not dispositive, however, as Murdock’s financial advisor “did not have any reason to think that the information it received” was different from that of the special committee. Moreover, the court concluded that it was not the financial advisor’s job to call the special committee, its counsel or its financial advisor “to make sure everything was OK.” As result, “[it] was not directly involved, nor even secondarily involved, in the critical breaches of duty” and therefore was not liable for any resulting damages.
This decision is an important limitation on “gatekeeper” liability espoused by Vice Chancellor Laster in the context of a financial advisor representing the take-private buyer and not the target or its special committee. Despite concluding that Murdock’s financial advisor was not obligated to verify the information it received matched that given to the special committee, however, the court did indicate that financial advisors should consider the context and circumstances in which they are receiving information from the company and may be well served by taking extra efforts to ensure that all parties are receiving the same information. As noted above, the court found that the financial advisor was not required to reach out to the special committee to inquire whether it was working off of the same financial projections, but stated, “had they done so, it would have been commendable and insulated them from any risk of liability relating to the meeting” (emphasis added). In the end, while exonerating the financial advisor and providing some limitations on aiding and abetting liability, the court is also suggesting that financial advisors should be mindful of circumstances that can serve to make a transaction “not fair,” particularly a lack of access to full and complete information.
The court found that Murdock’s financial advisor was likewise not liable for using confidential information gleaned from its representation of Dole prior to Murdock’s take-private transaction, in part because sharing of such information between an affiliated stockholder and its advisor is not an inherent breach of fiduciary duty and because it resulted in no harm to the stockholders. The court did consider the possibility that liability may have applied if such sharing of confidential information between different engagement groups at a financial advisor was what led causally to damages, serving as notice that a financial advisor should take pains to avoid any conflicting loyalties between its representation of a company and a major stockholder in the company. Financial advisors may want to consider more stringent screening procedures to ensure engagement teams representing a company client and a stockholder client don’t exchange confidential company information without permission from the company or otherwise engage in activities that could give rise to questions about colluding on behalf of one client against the other.
The court found that the special committee and its financial advisor acted admirably and with integrity and diligence in the face of Carter’s misinformation, interference and obstruction with the special committee’s efforts to manage the process and negotiate with Murdock. The special committee and its financial advisor recognized that the financial projections it received from Carter were not “an accurate representation of the value of the Company,” and they developed their own independent projections. The court found that although they succeeded in generating credible and reliable projections regarding Dole’s business, they never received full and accurate information about cost savings and farm purchases. As a result, their range of fairness analysis was tainted and the process was not fair. The court’s praise of the special committee and its financial advisor was conditioned in many respects on their diligent efforts to prepare independent financial projections in the face of shoddy management projections. It follows that going forward, financial advisors should consider proactive identification and response to flaws in financial projections, particularly in a controlling stockholder transaction, of vital importance. Financial advisors also may seek to require additional certifications and representations from the company, in particular, representation letters from chief financial officers attesting to the accuracy of the financial information provided. In our view, financial advisors should be in the business of attempting to prepare their own projections only in the rarest of circumstances.
In its analysis of the independence of the special committee members, the court also noted the personal connections between Murdock and each of the committee members, and found that each member had “entanglements with Murdock” – with Mr. Conrad (chair of the special committee) having the most entanglements. The court had reservations about Conrad’s independence because of his ties to Murdock, but found him “independent in fact” after hearing him testify and interacting with him at the trial; the court had “no concerns” about the independence of the rest, based in large part on the special committee’s performance in the face of Murdock and Carter’s machinations. The court’s finding indicates that “entanglements” between committee members and the controlling stockholder in a take-private transaction are not dispositive, but they do need to be overcome by “independent” actions.
Ultimately, the court found Murdock and Carter personally liable for over $148 million in damages. That amount, which will likely be appealed, may not be the only damages sought from Murdock and Carter as a result of their actions in this case. The opinion does not investigate the issue, but because the court implies that Carter made the public pronouncements that dropped Dole’s share price by a combined 23 percent in an effort to lower the price Murdock would have to pay in his take-private purchase, there is a question as to whether stockholders who sold their shares in the wake of Carter’s pronouncements have a cause of action against Murdock and Carter.
This opinion serves as a reminder that to ensure business judgment rule review, MFW conditions must be true to form and substance; attempts to negate the processes by which stockholders are to receive a fair price will render review of the take-private transaction and preceding transactions subject to the entire fairness standard. With respect to a “fair” price, this decision reiterates that although a price paid may fall within in the range of reasonableness, the transaction may not be fair because the process was tainted and therefore not fair, requiring a “more fair” price to be determined. A fair price will not shield bad conduct from liability as courts seek to prohibit defendants from profiting from their bad deeds.