A Closer Look at the Massive $148 Million Damages Award Against Dole’ s CEO and General Counsel

doleA frequent theme these days in the world of corporate and securities litigation is the complaint about merger objection litigation – how virtually every deal announced attracts at least one lawsuit, and how all too often the cases are resolved on the basis of a disclosure-only settlement and the payment of the plaintiffs’ attorneys’ fees, an arrangement that produce no benefit for anyone except the lawyers. However, a recent Delaware Chancery court post-trial opinion provides a sharp reminder that some merger transactions can include some real problems.

 

Interestingly, among the many voices railing against the bane of merger objection litigation, and also lambasting Delaware’s courts for doing to little to curb the supposed abuse, was that of Dole Foods and its former General Counsel and Chief Operating Officer, C. Michael Carter. Indeed, on August 2, 2015, the Wall Street Journal ran a front-page article referring to Dole’s condemnation of Delaware’s rampant litigiousness, and quoting Carter as saying that because of the litigiousness, company’s are souring on Delaware.

 

It turns out that there were some very company specific reasons why Dole in general and Carter in particular were querulous about Delaware’s courts. On August 27, 2015, in a massive 108-page post-trial opinion (here), Vice Chancellor Travis Laster, held that Dole’s CEO David Murdock, and Carter, whom Laster described as Murdock’s “right-hand man,” breached their fiduciary duties in connection with the November 2013 transaction in which an entity Murdock controlled acquired the 60% of Dole’s shares that Murdock did not already control. Laster’s opinion found that in connection with the process that led to the transaction, Murdock and Carter engaged in “fraud,” that prevented Dole’s shareholder from receiving a fairer price in the transaction. Laster held Murdock and Carter jointly and severally liable for damages of $148.1 million, plus pre- and post-judgment interest.

 

Laster’s opinion is long but it makes for some very interesting reading. The 91 year-old Murdock does not come off well in Laster’s opinion, at all. Laster describes Murdock as “an old-school, my-way-or-the-highway controller, fixated on his authority and the power and privileges that went with it.” In footnote 6 of the opinion, Laster writes about Murdock that “by dint of his prodigious wealth and power, he has grown accustomed to deference and fallen into the habit of characterizing events however he wants. That habit serves a witness poorly when he faces a skilled cross-examiner who has contrary documents and testimony at his disposal.”

 

As related in Laster’s opinion, Murdock had taken Dole private once before, in the early 2000’s. However, financial pressure during the financial crisis forced Murdock to sell part of Dole to public shareholders in an October 2009 IPO. According to the opinion, from the start, Murdock chafed with the constraints Dole’s public company status entailed and he soon began plotting to take the company private again.

 

As part of his plan to take the company private, Carter, Dole’s General Counsel, became the company’s President and COO. In that role, Carter took a series of steps Laster concluded were calculated to drive down Dole’s share price. Before Murdock made his proposal to take the company private, Carter made “false disclosures” about the savings Dole could achieve as the result of certain 2012 transactions. He also cancelled recently adopted stock repurchases “for pretextual reasons.”

 

Once the stock price had been driven down, Murdock and his advisers made their proposal to acquire the company for $12.00 a share. Carter then took steps to try to undermine the independent committee the board appointed to consider the bid. According to Laster, Carter gave the committee “lowball” projections that Laster found were “knowingly false” while a day later giving Murdock’s advisers more positive and accurate data. Carter, Laster found, “intentionally tried to mislead the Committee for Murdock’s benefit.” Despite Carter’s efforts, and using their own projections, the committee managed to negotiate an increased deal price of $13.50 a share.

 

Laster found that Murdock’s and Carter’s actions “deprived the Committee of the ability to negotiate on a fully informed basis” and “deprived the stockholders of their ability to consider the Merger on a fully informed basis.” Their conduct throughout the Committee process, Laster found “demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith.” Laster wrote that “what the Committee could not overcome, what the stockholder vote could not cleanse, and what even an arguably fair price does not immunize, is fraud.” The shareholders, Laster concluded, are entitled to a fairer price designed to eliminate the ability of the defendants to profit from their breaches of the duty of loyalty.” With respect to the $148.1 million damages award, Laster wrote: “Although facially large, the award is conservative relative to what the evidence could support.”

 

While holding Murdock and Carter liable, Laster found that director David DiLorenzo and Murdock advisor Deutsche Bank are not liable, because they did not participate in the breaches of duty that led to the liability. Thought Deutsche Bank “acted improperly” by favoring Murdock and treating him as the bank’s real client prior to the merger, even though the bank officially was representing Dole at the time.

 

Laster had plenty of criticisms of Murdock and Carter, but he praised the “heroic efforts” of the committee, which despite Carter’s efforts, managed to generate a “credible and reliable projection of Dole’s business. The Committee and its adviser, Lazard Freres, acted with “integrity,” but couldn’t overcome Murdock and Carter’s “machinations.”

 

Discussion

As attention-grabbing as the damages award is and as sensational as Laster’s opinion is, his post-trial ruling is just another procedural development in a case that undoubtedly has further to run. Given the amount of money involved, Murdock and Carter undoubtedly will appeal (although they are going to have to consider carefully about the post-judgment interest that will continue to accrue in the interim). There may and likely will be more of this story to be told.

 

The $148.1 million damages award represents some type of milestone, although it is hard to say exactly what kind. It is a post-trial damages award, not a settlement. If it belongs anywhere, it belongs on the list of other eye-popping post-trial damages award, such as the $2.3 billion award (including interest and fees) against Group Mexico in the Southern Peru Copper case (about which refer here). Other cases on this same list would also include Laster’s $171 million award in April 2015 against a Kinder Morgan in connection with an El Paso pipeline transaction.

 

Laster’s post-trial conclusions about the transaction provides a vivid reminder that while merger objection litigation as a general phenomenon had gotten out of hand, there are from time to time merger objections that are legitimate. (Though the transaction involved here was, in substance, a taking-private deal, it was structured as a merger transaction through which DFC Merger Corp. acquired the shares of Dole that Murdock did not own. DFC Merger Corp. is owned by DFC Holding LLC, an entity Murdock controlled.)

 

That said, while there are meritorious cases from time to time, “they are isolated examples in a sea of bad cases, knee-jerk lawsuits plaintiff lawyers file practically every time a public company’s stock price falls or one company announces plans to buy another,” as Daniel Fisher wrote in an August 28, 2015 Forbes blog post (here) about the ruling.

 

As Alison Frankel described in her August 28, 2015 column about Laster’s ruling on her On the Case blog (here), the case should also “be a reminder to every lawyer tempted to put the interests of a commanding CEO before those of his real clients.” Though Murdock is “the most obvious bad guy” in this story, Carter, according to Frankel, is “the real black hat.” Instead of helping Dole’s board fulfill its responsibilities, Carter “subverted them.” This case, Frankel says, is “a corporate governance morality tale about a lawyer who should have known better.”

 

Laster’s ruling also sounds a precautionary note about taking private transactions, and in particular the danger in transactions of that type for conflicts of interest and the pressure on interested parties to try to shape the transaction and related negotiations to favor their interests.

 

For many of this blog’s readers, Laster’s ruling raises some interesting D&O insurance-related issues. There is no mention in Laster’s opinion about Dole’s insurance and I have no knowledge one way or the other whether or not Dole’s insurance was involved in this lawsuit. However, to the extent Dole’s insurance is involved, its carriers likely will take the position that Laster’s ruling represents an “adjudication” of fraud and intentional misconduct sufficient to trigger the fraud exclusion typically found in most policies. Murdock and Carter would, if faced with this argument, undoubtedly argue that even if there has been an adjudication, it is not yet “final” owing to the pendency of their appeals (assuming here, as I expect they will, that Murdock and Carter will appeal).

 

While the outlines of the likely dispute can be conjectured, what seems probable is that Dole’s insurance carriers will contend that there is no coverage under the company’s insurance program for the damages award that Laster entered against them.

 

Interestingly, even if the carriers were to conclusively establish that coverage is precluded for Murdock and Carter, they would not be entirely off the hook here. Laster found that DeLorenzo, a director and former Dole President and COO, was not liable. Dole’s D&O insurers likely would remain liable at least for DeLorenzo’s attorneys’ fees.

 

Laster’s ruling against Murdock and Carter also raise recoupment issues, both with respect to an insurance that was advanced in their defense and any amounts that Dole advanced in their defense. Again, should either the insurers or Dole seek recoupment at this point, Murdock and Carter likely would argue that because the case is not yet final, there is no basis for recoupment. However, if the verdict withstands appeal and at the point the case does become final, Murdock and Carter could face efforts by the insurers and/or Dole to recoup amounts advanced for the individuals’ defense, which would obviously add to the individuals’ woes.

 

For a recent post discussing an appellate court ruling upholding an insurer’s right of recoupment following a corporate executive’s guilty plea, refer here. As I have previously noted (for example here), the extent of a carrier’s right of recoupment often may depend on the language of policy, and in particular whether or not the policy expressly preserved the carrier’s right of recoupment.

 

eeric15_200x200Upcoming Advisen European D&O Conference: On Thursday, November 19, 2015, Advisen will be holding its pan-European Executive Risk Insights Conference at the SCOR Headquarters in Paris. The program will address developments in policy wordings, claims trends and include discussions from European risk managers on the issues facing their organizations today. The agenda will also include sessions on crucial risk issues in Europe, including privacy and network security issues, anti-corruption, board diversity, the rise of the activist investor and regulatory developments. Victor Peignet, Chief Executive Officer of SCOR Global P&C SE will give the keynote address. Information about the conference, including registration instructions, can be found here. I will be participating in a panel at the conference about rising global anti-corruption enforcement and its impact on executive liability.

The Great War: A Book List

gunsofaLast August, in conjunction with the centennial of the start of World War I, I re-read Barbara Tuchman’s classic account of the war’s first days, The Guns of August. Tuchman is a great writer and she tells the story of the war’s first weeks well. One thing she captures particularly well is the way that poor military planning based on fatally flawed assumptions brought on catastrophes that affected all of the combatants.

 

Unfortunately, Tuchman’s book has some flaws and some critical omissions. Tuchman is a great story-teller, but all too often her desire to tell the story interferes with her account. There are too many sentences like this one, relating to Belgium’s war minister: “Baron de Broqueville, Premier and concurrently War Minister, entered the room as the work concluded, a tall, dark gentleman of elegant grooming whose resolute air was enhanced by an energetic black mustache and expressive black eyes.” Maybe it is just me, but when a war looms, the minister’s grooming, moustache and eyes are hardly relevant. Even if his mustache was — as improbable as it seems – “energetic.”

 

And whether or not you like the way she tells the tale, the problem is that her rendition is hollow at its core. Although Tuchman dutifully recites Bismarck’s famous quip that “some damn foolish thing in the Balkans”  will start the next war,  and although she dutifully if tersely recounts how the assassinations of the heir presumptive to the Austro-Hungarian throne, Franz Ferdinand, and his wife, Sophie, triggered the war, she does not explain why the events in the Balkans threatened war so portentously, as Bismarck predicted, or even why the assassination of an Austrian Archduke would provoke a war that drew all of the major powers into what became at the time the most destructive war that the world had ever seen. Indeed, though she does a great job detailing the flaws of the various combatants’ war plans, she does little to explain why they were preparing for war in the first place and why all of the major powers viewed war as inevitable.

 

So, after finishing Tuchman’s book, I set out on what has proven to be a year of reading to try to gain a better understanding of what happened and why. Continue Reading

Reps and Warranties Insurance: Increasingly Indispensable Part of M&A Deals

paperstackRepresentations and warranties insurance has been around for years, but it is becoming an increasingly important part of M&A transactions, according to an August 24, 2015 Law 360 article (here). According to the article, more buyers are “embracing representations and warranties insurance” in order to “stand out in crowded auctions,” particularly where the seller is a private equity firm. The insurance product is “increasingly deemed a prerequisite toward sealing middle-market deals.” Continue Reading

Third Circuit: FTC May Pursue Data Breach Enforcement Action against Wyndham Worldwide

third circuit blueOn August 24, 2015, in a ruling that was much-anticipated because of its potential implications for the regulatory liability exposures of companies that have been hit with data breaches, the Third Circuit affirmed the authority of the Federal Trade Commission to pursue an enforcement action against Wyndham Worldwide Corp. and related entities alleging that the company and its affiliates had failed to make reasonable efforts to protect consumers’ private information. This ruling confirms that, in addition to the disruption and reputational harm that may follow in the wake of a successful cybersecurity, companies may also face a regulatory action from the FTC as well, as discussed further below. The Third Circuit’s opinion can be found here. The August 24, 2015 statement of the FTC’s Chair about the Third Circuit’s opinion can be found here. Continue Reading

The Short-Termism Debate: Are There D&O Liability Issues Involved, Too?

short termIn recent months, commentators from across the political spectrum, largely in response to perceived excesses of activist investors, have called for changes to discourage “short-termism” – that is, the perceived excessive focus of businesses on short-term results rather long-term value creation. Voices ranging all the way from Democratic Presidential candidate Hillary Clinton (about which refer here) to Republican SEC Commissioner Daniel Gallagher (refer here) have voiced their concerns about what they characterize as the inappropriately short term focus that they suggest is driving American business decision-making. This topic raises a number of issues of importance for a variety of different constituencies, including, as discussed below, those of us in the D&O insurance industry. Continue Reading

Ninth Circuit: Professional Services Exclusion Precludes Coverage Under Payroll Services Firm’s Management Liability Insurance Policy

ninth circuitThe problems that can arise from the wording of the professional services exclusion in the D&O insurance policy of a service company are perennial issues and a recurring topic on this blog (see most recently here). In an unpublished August 18, 2015 opinion (here), the Ninth Circuit affirmed the district court’s conclusion that coverage for a claim under a payroll services firm’s management liability insurance policy was precluded by the policy’s professional services exclusion. While the preclusion of coverage under the professional services exclusion in services firms’  D&O policies often can be questionable, this instance seems like a situation where the exclusion was applicable. As discussed below, however, there are still some important lessons from this case. Continue Reading

Fourth Circuit Affirms Dismissal of All Claims Against Failed Bank’s Directors, Revives Negligence Claims Against Bank’s Officers

ncOn August 18, 2015, in an interesting opinion that takes a close look at exculpatory bylaw issues and the business judgment rule under North Carolina law, the Fourth Circuit affirmed in part and reversed in part the district court’s dismissal of the failed bank lawsuit the FDIC had filed against former directors and officers of Cooperative Bank of Wilmington, N.C. The appellate court affirmed the dismissal of all of the claims against the director defendants but reversed the lower court’s ruling as to the negligence and breach of fiduciary duty claims against the officer defendants. Continue Reading

Guest Post: Update on Economic Analysis of Price Impact in Securities Class Actions Post-Halliburton II

renzocomolli_sm_0115 (1)

Renzo Comolli

Jorge Baez NERA photo

Jorge Baez

In its June 2014 opinion in Erica P. John Fund, Inc. v. Halliburton Co., the United States Supreme Court held that in connection with a motion for class certification in a securities class action lawsuit, a defendant should have the opportunity to try to rebut the presumption of reliance by showing that the alleged misrepresentation did not impact the defendant company’s share price. The case itself was remanded to the district court for further proceedings in light of the Supreme Court’s ruling. On July 25, 2015, the District Court issued its ruling on the motion for class certification based on the principles the Supreme Court enunciated. A copy of the District Court ruling can be found here.

 

In the following guest post, Renzo Comolli and Jorge Baez of NERA Economic Consulting take a look at the district court’s ruling on the class certification motion. Renzo and Jorge are both Senior Consultants for NERA.

 

I would like to thank Renzo and Jorge for their willingness to allow me to publish their article as a guest post here. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. Please contact me directly if you would like to submit a guest post. Here is Renzo and Jorge’s guest post.

 

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On 25 July 2015, the United States District Court for the Northern District of Texas issued the much-anticipated ruling on class certification in Erica P. John Fund, Inc. v. Halliburton Co. The economic analysis of price impact was front and center in the Court’s ruling.

This ruling follows the Supreme Court’s decision on price impact that is widely known as Halliburton II. Although this ruling involves facts that are unique to Halliburton’s particular disclosures, attorneys may look at it as a roadmap for guiding economic analysis of price impact in future cases in the post-Halliburton II world. Continue Reading

A Look at the Modern Business Judgement Rule

del1Under time-honored standards, and as developed over time by Delaware’s court, the business judgment rule is, as is often stated, a “presumption that in making a business decision, the directors of a company have acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation.” However, as discussed in an interesting paper, in more recent times, courts have had to consider these principles in more troubling contexts, such as takeover battles or controlling shareholder transactions. As a result the courts have developed what BYU Law Professor D. Gordon Smith in his August 6, 2015 post on the CLS Blue Sky Blog (here) calls “the Modern Business Judgment Rule.” A longer version of Professor Smith’s paper can be found here. Continue Reading

Cal. Supreme Court: Insurer May Seek to Recover Directly From Independent Counsel Allegedly Excessive or Unreasonable Fees

cal sup ctOn August 10, 2015, in an opinion that has already garnered a great deal of attention and commentary, the California Supreme Court ruled that an insurer that funded the payment for its insured of independent counsel (or “Cumis” counsel as independent counsel are known in California) in defense of a claim may seek to recover directly from the independent counsel law firm amounts the insurer paid that the insurer contends were excessive or unreasonable. Though the ruling represents a landmark of sorts, the California Supreme Court’s opinion is much narrower than many commentators have acknowledged, which will limit its applicability in other cases. A copy of the California Supreme Court’s opinion can be found here. Continue Reading

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