A 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 too 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, companies 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 own. 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. Laster did observe that 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.”
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 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 has 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 any 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.
Upcoming 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.