The November 1, 2013 transaction in which David Murdock, Dole Food Company’s Chairman and CEO, acquired the Dole shares he did not already own has already been the subject of extensive litigation. Indeed, in 108-page August 27, 2015 post-trial opinion (here), Delaware Court of Chancery Vice Chancellor Travis Laster found that and Murdock and C. Michael Carter, Dole’s COO and General Counsel, had employed “fraud” to drive down the Dole’s share price to lower the amount Murdock paid in the deal. Laster entered a damages award against Murdock and Carter, jointly and severally, of $148.1 million, as discussed here. On December 7, 2015, Murdock and Dole reached an agreement to pay the shareholders a total (including interest) of $113.5 million, with the remainder of the judgment amount to be paid to the plaintiffs in a separate appraisal action, as discussed here. As part of the settlement, the defendants gave up their right to appeal the Chancery Court rulings and judgment.
The recent settlement seemingly brought an end to the shareholder litigation over the November 2013 transaction. However, it now appears that there may be another round of litigation yet to go.
On December 9, 2015, a plaintiff shareholder filed a securities class action lawsuit in the federal court in Delaware, against Dole, Murdock, and Carter. A copy of the plaintiff’s complaint can be found here. The lawsuit was filed on behalf of a class of Dole shareholders who sold their shares between January 2, 2013 and October 31, 2013. As might be expected, the complaint quotes extensively from Laster’s opinion. Notwithstanding the overlap between the Delaware Chancery suit and the new complaint, there are important differences between the cases. As discussed below, the securities class action complaint also presents a number of interesting issues and questions.
Both the prior Chancery Court lawsuit and the newly filed securities suit involve the events preceding the transaction in which Murdock paid approximately $1.6 billion to acquire the publicly traded shares of Dole. In both cases, the respective plaintiffs allege that through a series of actions beginning in January 2013, Murdock and Carter acted deliberately to drive down Dole’s share price so that, as the securities action plaintiff alleges in its recently filed complaint, Murdock could “buy the Company on the cheap.”
In his post-trial opinion, Laster found that Carter, whom Laster described as Murdock’s “right hand man,” 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.
Murdock’s and Carter’s 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.”
In its recently filed securities class action lawsuit complaint, the plaintiff, after reciting Laster’s post-trial factual conclusions in the Chancery Court lawsuit, asserts that the plaintiff class “incurred significant harm as a result of Defendants’ fraud.” The plaintiff seeks to recover damages from the defendants under Sections 10(b) and 20 of the Securities Exchange Act of 1934.
- The Differences Between the Two Lawsuits: My initial reaction on hearing of this latest lawsuit was to ask myself, why isn’t the more recent lawsuit duplicative of the earlier Chancery Court suit? Didn’t the shareholders already recover their damages in the judgment and post-judgment settlement? However, after a quick read of the newly filed complaint and a moment’s reflection, I realized that the earlier suit and the more recent suit were filed on behalf of different groups of shareholders. The Delaware Chancery Court suit was filed on behalf of shareholders who sold their shares in the November 1, 2013 transaction. The newly filed securities suit was filed on behalf of the shareholders who sold their shares before the transaction, during the period between January and the end of October 2013, when the defendants were, as Laster found, driving down Dole’s share price. The class in the securities suit will claim that they were damaged because when they sold their shares, in the period prior to the November 1, 2013, they received less than their shares were worth as a result of defendants’ price deflating conduct.
- Impact of the Settlement of the Settlement of the Chancery Court Lawsuit on the securities lawsuit?: I do wonder about the arrival of this latest complaint just after the settlement of the Chancery Court lawsuit. I am not sure how the two events are related, but it does seem that the securities suit filing was timed to follow after the Chancery Court case was settled. I also wonder whether there is anything in the claim release the defendants received in the Chancery Court case settlement that would affect the securities lawsuit plaintiff’s claims. There has been a lot out of the Delaware Chancery Court recently highly critical of overly broad claim releases in connection with lawsuit settlements (see for example here), which could have had some impact on the scope of the release that the defendants could obtain in the settlement, but just the same, I would have expected that defendants counsel would have tried to get as broad of a release as possible (even, perhaps a release of all claims that had been asserted or that could have been asserted in the Delaware Chancery Court lawsuit). I suspect that plaintiff’s counsel in the securities lawsuit was fully informed about the scope of the release in the Chancery Court settlement before filing the securities suit, but I still wonder whether or not there might be any issues there.
- Price Deflation, Not Price Inflation: One particularly interesting aspect of the securities suit is the way in which the plaintiff class is alleged to have been harmed. The typical securities lawsuit will allege that the defendants drove up the defendant company’s share price, and that the plaintiff class members were harmed because they paid an inflated price when they acquired their shares. Here, the allegation is exactly the opposite. The plaintiff does not allege that the class members overpaid when the bought their shares. Rather, the plaintiff alleges that, because of the defendants’ actions driving down the share price, the class members were under-compensated when they sold their shares. There will some interesting damages calculations questions involved in coming up with the class members’ damages, since the defendants supposedly drove down the share price in a series of actions that took place over time. The different class members were damaged in different degrees depending on when they sold their shares.
- Impact of the Adverse Interest Doctrine?: At least as a theoretical matter, it might be conjectured that the company will seek to rely on the “adverse interest doctrine” in order to try to argue that Murdock and Carter’s knowledge of their efforts to drive down the share price should not be attributed to the company for purposes of determining the company’s scienter. Based on Laster’s findings, the company could well argue that Murdock and Carter were acting for their own interests and not in the interests of the company. However, plaintiff could argue, in reliance on the Ninth Circuit’s recent decision in the ChinaCast Education Corp. case (discussed here), in which the Ninth Circuit held that rogue executive’s knowledge will nevertheless be imputed to the company when an innocent third-party has relied on the executive’s representations made with apparent authority. However, even if the defense were theoretically available and viable, it would an odd sort of argument for the company to try to make now, given that Murdock now owns 100% of the company.
- Effect of the Fraud Exclusion?: In addition to the issue noted above, there is another reason why I would be interested in being able to take a look at the settlement agreement in the Chancery Court case. I am curious to see if any portion of the Chancery Court settlement is to be funded by D&O insurance. I suspect it is not, given Laster’s explicit findings of fraud. These findings would seem to represent the kind of “adjudication” of fraud that would trigger the conduct exclusion typically found in most D&O insurance policies; I suspect the carrier would not be persuaded that the subsequent settlement could somehow “cure” the findings of fraud, even if the settlement stipulates that the parties to the settlement are not agreeing to and expressly dispute the findings of fact in Laster’s post-trial opinion. By the same token, I would expect the D&O insurance carriers to contend with respect to the recently filed securities suit that the post-trial findings preclude coverage as well. One possible complication in this analysis would arise if the policy in question had language found in many policies requiring the adjudication to be “final” and non-appealable.” I wonder whether the post-trial interposition of the settlement would undercut the carriers’ contention that Laster’s “adjudication” was “final.”
- Interrelatedness and the Claims Made Date: Setting aside the possible complications arising from the fraud exclusion is the question of whether this later lawsuit would trigger coverage under the D&O insurance program in place at the time the most recent lawsuit was filed, or whether the more recent lawsuit would be deemed to have been first made at the time that the Chancery Court lawsuit was first filed. The carrier would undoubtedly take the position that the subsequent lawsuit is interrelated with the earlier lawsuit. However, to the extent that coverage under the program in place at the time the Chancery Court suit was filed was not otherwise precluded by operation of the conduct exclusion, I suspect that the prior program is exhausted or substantially exhausted.