On August 27, 2015, Vice Chancellor Laster of the Delaware Chancery Court found David Murdock, the CEO and controlling stockholder of Dole Food Company, Inc., and C. Michael Carter, Dole’s President, COO and General Counsel, personally liable to Dole’s stockholders for approximately $148 million of damages resulting from misconduct and breaches of their fiduciary duties to Dole’s stockholders in connection with Dole’s November 2013 going private transaction. While the case did not make new law, Vice Chancellor Laster’s opinion serves as a stark reminder that:
- Simply adopting the MFW conditions for a going private transaction, discussed below, will not rule out evaluation of the transaction under Delaware’s entire fairness standard; and
- A fiduciary’s failure to act in good faith (in this case, by misleading the markets and undermining the independent director process) can result in substantial personal liability even if the price and terms negotiated with the independent directors are arguably “fair” and are approved by a majority of the disinterested stockholders.
Murdock acquired a substantial interest in Dole in 1985 and first took Dole private in 2003. In 2009, faced with difficulty in refinancing Dole’s debt, Murdock took Dole public. After the IPO, Murdock owned approximately 40% of Dole’s common stock.
As the economy improved, Murdock began to explore the possibility of once again taking Dole private, and on June 10, 2013 he delivered to Dole’s board a proposal to acquire the 60% of Dole’s common stock that he did not own at a price of $12.00 per share, a premium to the most recent trading price of $10.20 per share. Murdock structured his offer to be subject to:
- The approval of a committee of disinterested and independent directors; and
- The affirmative vote of a majority of disinterested stockholders so that, under the (then recently decided) In re MFW Shareholders Litigation case (later affirmed under the name Kahn v. M&F Worldwide Corp.), the transaction would be reviewed under the traditional Delaware business judgment rule standard.
Dole’s board then formed a special committee of disinterested directors to negotiate Murdock’s offer. The special committee hired its own investment bankers and outside counsel. After negotiations with the special committee, Murdock ultimately increased his price to $13.50 per share on August 1, 2013, and Dole’s special committee approved the offer.
The transaction was structured as a one-step merger, which was approved by a slim majority of Dole’s disinterested stockholders. The merger (a $1.6 billion transaction) closed on November 1, 2013. After the merger closed, a group of former Dole stockholders sued Murdock, Carter and another interested director for breach of fiduciary duty and fraud, and a separate group of former Dole stockholders commenced an appraisal proceeding.
As a preliminary matter, Vice Chancellor Laster decided that, “despite mimicking MFW’s form, Murdock did not adhere to its substance”, and therefore the transaction would be reviewed under the entire fairness standard. According to the Vice Chancellor, Murdock and Carter had undermined the Dole special committee from the start; two of the most flagrant actions were Carter’s intentionally supplying the committee with “lowball” projections and withholding from the committee financial information and business plans that he was sharing with Murdock’s advisors. As a result of this misconduct, the committee, despite the diligence of its members and the “Herculean” efforts of the committee’s financial and legal advisors (which allowed them to overcome “most of Murdock’s and Carter’s machinations”), could not make a fully informed decision on Murdock’s proposal.
Vice Chancellor Laster made similar findings with respect to the effectiveness (or lack thereof) of the “cleansing” vote of a majority of Dole’s disinterested stockholders. The Vice Chancellor found that in the months leading up to Murdock’s initial June 2013 proposal, the actions of Murdock and (primarily) Carter misinformed the markets as to Dole’s prospects and amounted to downward manipulation of the stock price expressly designed to allow Murdock to buy the publicly traded shares at an advantageous price. In particular, the court found that Carter had:
- Caused Dole to issue press releases falsely stating Dole’s projected cost savings from the sale of its foreign business in late 2012 (resulting in a 13% decline in Dole’s stock price);
- Guided markets to the low end of published earnings estimates when Dole’s previous policy had been not to comment on such estimates; and
- Improperly suspended a share repurchase program for purely pre-textual reasons.
This last action resulted in a 10% drop in Dole’s stock price and took place in late May of 2013, at a time when, according to the evidence, Murdock and his advisers were putting the finishing touches on the initial buyout offer.
In assessing damages, Vice Chancellor Laster explored whether, assuming the $13.50 per share price was within a reasonable range of “fairness”, the plaintiffs should be entitled to additional consideration. Ultimately the Court decided that, given the repeated misconduct, unfair dealing and breaches of fiduciary duties by Murdock and Carter, “the [Dole] stockholders are not limited to an arguable fair price. They are entitled to a fairer price designed to eliminate the ability of the defendants to profit from their breaches of the duty of loyalty.” The court calculated damages based upon an increased value per share in the amount of $2.74, or an aggregate of $148,190,590.18.
This opinion reaffirms that formulaic compliance with the going private conditions established in MFW is not a panacea. The controlling stockholders, interested directors and executives, special committee, and their respective advisors must observe those conditions in substance as well as form. The Court’s clear message is that a controlling stockholder transaction must truly mimic an arms’-length, third-party deal to be afforded the protections of Delaware’s business judgment rule, and that even a well-advised committee of independent and disinterested directors cannot overcome actions by interested parties that deprive the committee from negotiating, and the stockholders from considering the proposal before them, on a fully-informed basis.