Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...
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.
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.
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.”
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.”
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.”
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.”
To contact the reporter on this story: Michael Greene in Washington at email@example.com
To contact the editor responsible for this story: Yin Wilczek at firstname.lastname@example.org
The opinion is available at http://www.bloomberglaw.com/public/document/IN_RE_DOLE_FOOD_CO_INC_STOCKHOLDER_LITIGATION_IN_RE_APPRAISAL_OF_/1.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)