Attorneys Provide Key Takeaways of Dole Decision

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By Michael Greene

Sept. 8 — A recent Delaware Chancery Court decision finding two Dole executives liable for over $148 million in damages made clear that conditioning take-private transactions on approval by an independent committee and a vote of unaffiliated stockholders will not immunize these transactions from judicial scrutiny, practitioners say.

The attorneys told Bloomberg BNA that the ruling does not necessarily reflect a change in Delaware law or the court's increased skepticism of management buyouts. Instead, they say the decision highlights the importance of not undermining MFW's procedures and that special committees and advisors will not be held liable when they properly perform their duties.

Large Damages

In an Aug. 27 decision, the chancery court found the Dole executives liable in a lawsuit arising from Chief Executive Officer David Murdock's buyout of the company. 

According to a Debevoise & Plimpton LLP client update, the ruling represents “the second largest award to stockholders by a Delaware court in connection with” a mergers and acquisitions transaction.

The defendants had crafted the buyout to be conditioned upon procedures established in Kahn v. M&F Worldwide Corp., 88 A.3d 635, 2014 BL 71689 (Del. 2014). In MFW, the Delaware Supreme Court held that a going-private merger conditioned up-front by the controlling shareholder on approval by an independent committee and an unaffiliated shareholder vote is entitled to “business judgment rule” deference instead of the enhanced entire-fairness review.

However, in the Dole decision, Vice Chancellor J. Travis Laster concluded that fraud can render even highly commendable efforts by the special committee and its advisors useless.

`Window Dressing.'

Jason M. Halper, a partner at Orrick, Herrington & Sutcliffe LLP and co-chairman of his firm’s financial institutions litigation practice, said in an e-mail to BBNA that one of the key takeaways from the court decision is that “companies cannot get the benefit of deferential business judgment rule review in controller transactions by employing ‘window dressing.'”

He added that this case was taken out of MFW's framework because the court found that the fraud prevented the committee from accurately assessing the controller's bid.

Echoing this sentiment, Matthew L. DiRisio, a partner in Winston & Strawn LLP’s New York office, stated in an e-mail that “[t]echnical adherence to the MFW structure will not warrant the application of the business judgment rule if the special committee's ability to independently and effectively evaluate the transaction was undermined by the controller or management, even where the committee is independent, well advised and performs to the best of its ability.”

Credibility Determinations

Practitioners also noted that the decision highlights the importance of understanding that take-private transactions will be subjected to heightened judicial scrutiny.

According to a King & Spalding LLP client alert, the Dole decision makes clear that “corporate boards, special committees and the parties who advise them should maintain steady vigilance in diligently assessing potential go-private transactions, because, notwithstanding the procedure set forth in In re MFW, such transactions may still draw close judicial scrutiny if there is any potential evidence of fraud or self-dealing by the controller or his designee.”

In agreement, DiRisio stated that in management buyout cases, particularly those involving a controlling stockholder, “the court will take a hard look at management's conduct leading up to the announcement for signs of stock price manipulation (designed to make management's bid appear more attractive) or other effort to prime the company for” a take-private transaction.

“The importance of the Court’s credibility determinations at trial is difficult to overstate,” Halper said in his e-mail.

“Ultimately, the Court’s decision turns on its assessments of witness credibility, including contrasting trial testimony with either inconsistent deposition testimony or contemporaneous documents,” Halper continued. “It will be very difficult for a party to prevail where its trial themes and evidence are inconsistent with contemporaneous evidence.”

Committee and Advisor Liability

Conversely, attorneys said the decision will be welcomed by special committees and financial advisors.

“In contrast to a series of recent decisions critical of financial advisors to sellers’ boards or committees, the court commended the work of Lazard, financial advisor to the Dole special committee, including for recognizing that it could not reasonably rely on financial information provided by management and then going about creating its own financial projections,” Halper said.

According to DiRisio, one of the key takeaways from the court decision is that “a financial advisor will not be held liable for its client's breach of fiduciary duty—even where the breach amounts to fraud—so long as the advisor was unaware of the breaches that ultimately harmed the stockholders.”

He added that “even in the context of what the Court deemed egregious duty of loyalty breaches and damages to minority stockholders, well-functioning special committees and their financial advisors who pressure-test financial information from management and strive for complete and accurate information in evaluating a proposed transaction will not face liability for others' misconduct.”

No Sea Change in Delaware 

According to DiRisio, the decision does not indicate some “sort of a sea change in Delaware law.” Instead, he believes the ruling “is more a reflection of bad facts than an indictment” of management buyouts.

Echoing this sentiment, Halper stated that he does not believe the Dole decision undermines the utility of MFW. Instead, he found that the court's ruling makes “clear that to get the benefits of that decision in terms of deferential business judgment rule review, complete and accurate information needs to be made available to the committee and shareholders assessing and voting on the deal.”

He additionally told BBNA that he did not think that this decision reflects the court showing increased skepticism of management buyouts generally because “the application of the entire fairness standard to most of these types of transactions already reflects a perceived need for enhanced scrutiny. The issue here was the controller’s repeated fraud that prevented the committee and its advisors from doing their jobs effectively.”

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