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(Article from Securities Law Alert, September 2015)

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On August 27, 2015, the Delaware Chancery Court held that stockholders of Dole Food Company, Inc. were “not limited to a fair price” in connection with a going-private merger in which David H. Murdock, Dole’s Chairman and CEO, acquired all of Dole’s common stock that he did not already own (the “Merger”). In re Dole Food Co., Inc. Stockholder Litig., 2015 WL 5052214 (Del. Ch. 2015) (Laster, V.C.). Prior to the transaction, “Murdock owned approximately 40% of Dole’s common stock . . . and was its de facto controller.” Although Murdock had ostensibly followed the safeguards for controlling stockholder transactions laid out in MFW,[1] the court found that Murdock had not “adhere[d] to [MFW’s] substance.” The court determined that both Murdock and C. Michael Carter, Dole’s former Chief Operating Officer, had “breached their duty of loyalty” to Dole’s stockholders by “driving down Dole’s stock price” prior to the merger negotiations and “provid[ing] the [Special] Committee with lowball management projections,” among other actions. The court held that this “fraud tainted the approval of the Merger by the [Special] Committee, as well as the stockholder vote.” While the court found that the merger price “fell within a range of fairness,” the court determined that Dole stockholders were “entitled to a fairer price designed to eliminate the ability of the defendants to profit from their breaches of the duty of loyalty.”

Court Finds the Merger Was Not Entirely Fair in Light of Defendants’ Fraud

At the outset of its analysis, the court explained that “[w]hen a transaction involving self-dealing by a controlling stockholder is challenged, the applicable standard of judicial review is entire fairness.” “ The court found that in the case before it, “defendants had not made the showing necessary” under MFW to change the standard of review from entire fairness to the business judgment rule. The court also rejected defendants’ contention that “the burden had shifted to the plaintiffs to prove unfairness.”

The court stated that “[o]nce entire fairness applies, the defendants must establish to the court’s satisfaction that the transaction was the product of both fair dealing and fair price.” Under the Delaware Supreme Court’s decision in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), the concept of “[f]air dealing ‘embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained’” (quoting Weinberger, 457 A.2d 701). “Fair price ‘relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.’”.

Court Finds the Merger Was Not a Product of Fair Dealing

The court first considered “how the [Dole going-private] transaction was timed and initiated.” The court found that Carter had “primed the market” for Murdock’s going-private merger “by pushing down the stock” price. Specifically, the court determined that Carter had “intentionally given the market a subterranean estimate of Dole’s anticipated cost savings” in connection with ITOCHU Corporation of Japan’s acquisition of Dole Asia (the “ITOCHU Transaction”). The court also found that Carter had canceled Dole’s stock repurchase program for no legitimate business reason (other than to drive down Dole’s stock price). The court explained that “a calculated effort to depress the [market] price of a stock until the minority stockholders are eliminated by merger or some other form of acquisition constitutes unfair dealing.” (internal quotations and alterations omitted).

The court then addressed the merger negotiation process. The court explained that “in order to make a special committee structure work it is necessary that a controlling stockholder . . . disclose fully all the material facts and circumstances surrounding the transaction.” Specifically, a controller must disclose (1) “all of the material terms of the proposed transaction;” (2) “all material facts relating to the use or value of the assets in question to the beneficiary itself”; and (3) “all material facts which it knows relating to the market value of the subject matter of the proposed transaction.” The court stated that “[t]hese categories are intended to encompass all material information known to the fiduciary except that information that relates only to its consideration of the price at which it will buy or sell and how it would finance a purchase or invest the proceeds of a sale.” The court underscored that “[i]mplicit in the expectation that the controller disclose this information is the requirement that the controller disclose it accurately and completely.”

Here, however, the court found that Carter had provided the Committee with “a set of projections that contained falsely low numbers.” The court determined that these “knowingly false” projections were designed “to mislead the Committee for Murdock’s benefit.” The court concluded “[b]y providing the Committee with false information, Carter ensured that the process could not be fair.” The court further found that Carter had also “interfered with and obstructed the Committee’s efforts to manage the process and negotiate with Murdock in other ways as well.” For example, Carter had restricted the Committee’s “ability to consider and explore the viability of potentially superior alternatives” to Murdock’s offer. The court concluded that “[g]iven Carter’s activities, the negotiation of the Merger was the antithesis of a fair process.”

Finally, the court determined that “Carter’s fraud tainted the approval of the Merger by the Committee, as well as the stockholder vote” because neither the Committee nor the stockholders had “the benefit of full information” regarding the Merger.

The court concluded that “[t]he evidence at trial established that the Merger was not a product of fair dealing.” The court emphasized that “fraud vitiates everything.” Here, the court found that the fraud “rendered useless and ineffective the highly commendable efforts of the Committee and its advisors to negotiate a fair transaction that they subjectively believed was in the best interests of Dole’s stockholders.”

Court Finds the Merger Price May Not Have Been Fair

The court then turned to “[t]he second aspect of the entire fairness inquiry”: fair price. The court found the evidence at trial “indicate[d] that without accounting for Carter’s fraud, the $13.50 per share [Merger] price fell within a range of fairness.” The court explained that “[i]f the Committee and [its financial advisor, Lazard] had not been misled, then the Committee’s negotiations and Lazard’s analysis would have provided powerful evidence of fairness.” Here, however, the court determined that “Carter’s actions tainted both the negotiation process and Lazard’s work product.”

The court found that “[m]odifying Lazard’s discounted cash flow (‘DCF’) analysis to take into account the information that Carter misrepresented or withheld suggest[ed] that the $13.50 per share price may have been below the range of fairness.” The court determined that “the first issue [was] cost-cutting” in connection with the ITOCHU Transaction. The court found that “Murdock and Carter [had] delayed Dole’s cost-cutting program until after the [Merger}, then achieved more than $30 million in incremental savings.” The second issue was the additional income that Dole would later receive from purchasing farms as part of a vertical integration initiative. While the court found that some adjustment to fair value was necessary to account for both issues, the court explained that there was “uncertainty” at the time of the Merger as to “how much Dole actually could achieve in cost savings, as well as the number of farms that Dole could buy and the value they would generate.” The court determined that “it would [have] overvalue[d] the incremental cash flows available from these sources to treat them for valuation purposes as being just as certain as the cash generated by Dole’s core operations.”

Notably, the court rejected defendants’ contention that it could not “consider anything that happened after the Merger closed and must ignore both the cost savings that Dole actually achieved, as well as its farm purchases.” The court found Delaware law “clear” that when “the company’s business plan as of the merger included specific expansion plans or changes in strategy, those are corporate opportunities that must be considered part of the firm’s value.”

Based on the court’s own modified DCF analysis, which took into account Dole’s cost-saving plans and its expected farm acquisitions, the court found that the merger price was not necessarily fair. However, the court acknowledged that even if it had the benefit of complete information concerning Dole, Lazard “may have concluded that the price was still fair, albeit at towards the lower end of fairness.”

Court Finds Fraud Rendered the Merger Unfair, and Entitled Dole Stockholders to a “Fairer” Price

The court concluded that “Carter’s conduct rendered the Merger unfair” in its entirety. Even if the Merger price “fell within a range of fairness,” the court held that Dole stockholders were “entitled under the circumstances to a ‘fairer’ price.” The court reasoned that “by engaging in fraud, Carter [had] deprived the Committee of its ability to obtain a better result on behalf of the stockholders, prevented the Committee from having the knowledge it needed to potentially say ‘no,’ and foreclosed the ability of the stockholders to protect themselves by voting down the deal.”

Court Awards Damages to Prevent Defendants from Profiting from Their Breaches of Fiduciary Duty

The court found that both Murdock and Carter had breached their duty of loyalty to the Dole corporation and its shareholders, and were consequently “personally liable for damages resulting from the Merger.” The court explained that “[o]nce disloyalty has been established,” then Delaware law “require[s] that a fiduciary not profit personally from his conduct.”

Based on “modest estimates,” the court calculated a fair value for Dole of $16.24 per share. The court stated that “[t]he $2.74 [additional] per share figure suggest[ed] that Murdock and Carter’s pre-proposal efforts to drive down the market price and their fraud during the negotiations reduced the ultimate deal price by 16.9%.” The court awarded damages based on this difference in fair value, amounting to a total of $148,190,590.18.