United States: That's A Lot Of Pineapples — Delaware Court Of Chancery Holds Dole Executives Personally Liable For $148 Million In Damages From Breaches Of Fiduciary Duty And Fraud In Going-Private Transaction: Lessons For Deal Lawyers

In re Dole Food Co., Inc. Stockholder Litigation,¹ the Delaware Court of Chancery held two directors of Dole Food Company, one of whom was Dole's controlling stockholder, jointly and severally liable for $148 million in damages in connection with a going-private transaction by the controlling stockholder. In reaching his decision, Vice Chancellor Laster applied the entire fairness standard of review — even though Dole had standard exculpatory provisions in its charter protecting officers and directors and had apparently adopted the procedural safeguards for going-private transactions enumerated by the Court of Chancery in In re MFW Shareholder Litigation² and affirmed by the Delaware Supreme Court — because the evidence showed that the defendants, through their fraudulent actions, prevented the transaction from emulating a true arm's-length deal.

In a detailed post-trial opinion, Vice Chancellor Laster found that David Murdock — Dole's controlling stockholder, board chairman, and chief executive officer — and Michael Carter — Dole's president, chief operating officer, general counsel, director, and Murdock's "right-hand man" — acted intentionally and in bad faith and breached their duty of loyalty in taking the company private. The Court determined that, under the circumstances, even if the stockholders received an "arguably fair price," the stockholders were entitled to a "fairer price" designed to eliminate the ability of the defendants to profit from their breaches of the duty of loyalty. Vice Chancellor Laster therefore determined that the going-private transaction, which was valued at $13.50 per share of Dole stock, deprived the Dole stockholders of $2.74 in value per share, or approximately $148 million in aggregate damages. As the Court noted in determining that Murdock and Carter were liable, "[a]lthough facially large, the award is conservative relative to what the evidence could support."

In 2003, Murdock took Dole private in a leveraged buyout. Subsequently, in 2009, Dole needed access to the public capital markets to refinance its debt and Murdock reluctantly took Dole public again. In so doing, Murdock remained Dole's largest stockholder, controlling approximately 40% of the Company. Murdock's ongoing dissatisfaction with "the public company model" was apparent to others at Dole, and he "regularly considered the possibility of taking [Dole] private again." In order to do so, according to the Court, Murdock orchestrated a scheme of "pursuing a long-term strategy directed towards taking Dole private," which included spinning off high-margin Dole businesses to pave the way for a freeze-out in which he would buy what remained of Dole.

In furtherance of Murdock's plan, in 2012, Dole announced that it was undertaking a broad strategic review of its businesses, ultimately resulting in a series of divestitures of certain high-margin businesses, largely coordinated by Murdock. Following these strategic divestitures, Dole's board of directors appointed Murdock as chief executive officer and Carter as president and chief operating officer. The Court found that, at the same time that "internal discussions about the freeze-out were heating up," Carter began making public announcements intended to drive down Dole's stock price in advance of the going-private transaction, including understating available cost savings resulting from a certain Dole divestiture, undervaluing assets, and stating earnings would be lower than expected. As a result, Dole's stock price dropped after these announcements.

In 2013, Murdock proposed acquiring the remaining 60% of the Dole stock he did not own at a price of $12.00 per share (representing an 18% premium to Dole's then-current stock price). In response, the Dole board formed a special committee of disinterested and independent directors to evaluate the potential going-private transaction. The Court determined that from the start of the going-private transaction, Carter, on Murdock's behalf, undermined the special committee's process, attempting to strong-arm it into choosing his preferred committee chairperson, withholding data room access from the special committee's financial advisor, Lazard Frères & Co. LLC, furnishing false financial information to the special committee and Lazard, and providing "lowball management projections." The Court found that the committee and Lazard "recognized that Carter's projections were unreliable and engaged in Herculean efforts to overcome the informational deficit, but they could not do so fully," as their process was tainted by Carter's fraud. Ultimately, the special committee, relying on Lazard's advice, negotiated and accepted an increased going-private price of $13.50 per share from Murdock (representing a 32.4% premium), which "fell closer to the top of the range than the midpoint" of Lazard's analysis. A subsequent go-shop period yielded no other potential buyers. The transaction was then put to a vote of unaffiliated stockholders and passed with a "narrow majority" of 50.9%.

After the going-private transaction was announced, but before it closed, Dole stockholders sued the Dole board of directors for breaches of their fiduciary duties. The plaintiffs argued that because the going-private transaction involved self-dealing by a controlling stockholder, the applicable standard of judicial review is entire fairness, with the defendants having the burden to demonstrate both a fair process and a fair price. Because the transaction was structured to adhere to the form previously laid out by the Delaware Court of Chancery in MFW and subsequently upheld by the Delaware Supreme Court — i.e., (i) "approval from a committee of the Board made up of disinterested and independent directors" and (ii) conditioning entry into the transaction on "the affirmative vote of holders of a majority of the unaffiliated shares," the defendants countered that the transaction should be evaluated under the business judgment rule. The Court found that because Murdock had "only mimicked MFW's form but [did not] adhere[] to its substance," this was insufficient to escape entire fairness review. In applying the entire fairness standard rather than the more lenient business judgment rule, the Court concluded that Carter and Murdock breached their duties of loyalty and were personally liable to the plaintiffs.

Lessons Learned

The decision in Dole Food Co. is a reminder that personal liability will attach to officers and directors where they breach their fiduciary duty of loyalty (and, in the case of Carter, commit fraud), even where the charter contains exculpation provisions. In Murdock's case, the Court found that the exculpatory provisions set forth in the charter did not apply to Murdock, and that he was personally liable, because he breached his duty of loyalty to the plaintiff stockholder class by eliminating Dole's unaffiliated stockholders for an unfair price in an unfair transaction. In addition, the Court found Murdock liable in his capacity as a director for breaching his duty of loyalty by orchestrating an unfair, self-interested transaction and also as the buyer deriving an improper personal benefit from the going-private transaction. The Court found Carter liable both as a director and as an officer for violating his duty of loyalty and for acting not in good faith.

On the other hand, the Court did not find any of the other defendants liable. The Court found that both the special committee and its legal and financial advisors acted with integrity. Indeed, the Court found that, because of the diligence of its members and their advisors, the special committee overcame most of Murdock and Carter's machinations. What the special committee could not overcome, according to the Court, was fraud.

The Court determined that the formation of a special committee will not serve as a layer of protection in a going-private transaction if the special committee is rendered "useless and ineffective" through the interference of management such that it becomes "ineffective as a bargaining agent for the minority stockholders." By their actions, the Court found that Murdock and Carter deprived the special committee of the ability to negotiate on a fully-informed basis and potentially say no to the going-private transaction.

This case also adds to a line of Delaware cases dealing with the interplay of fair price and fair process in an entire fairness review.³ At least in the context of a going-private transaction where the process is tainted by fraudulent acts, while "[f]air price can be the predominant consideration in the unitary entire fairness inquiry . . . stockholders are not limited to a fair price. They are entitled to a fairer price designed to eliminate the ability of [fiduciaries] to profit from their breaches of the duty of loyalty." To this end, the conditions established by MFW must be followed not only in form but also in substance, and a controlling stockholder transaction must emulate an arm's-length deal to be afforded the business judgment deferential standard of review.

Footnotes

1 No. 8703-VCL, 2015 Del. Ch. LEXIS 223 (Del. Ch. Aug. 27, 2015).

2 67 A.3d 496 (Del. Ch. 2013), aff'd sub nom., Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).
³See, e.g., In re Trados Inc. S'holder Litig., 73 A.3d 17 (Del. Ch. 2013) (unfair process by fiduciaries can nevertheless produce a fair price that survives entire fairness review); Ross Holding & Mgmt. Co. v. Advance Realty Grp., LLC, No. 4113-VCN, 2014 Del. Ch. LEXIS 173, at *114 (Del. Ch. Sept. 4, 2014) ("Robust procedural protections may support a determination that price was fairly within a range of reasonable values, and a failure of process may prevent a Court from reaching such a conclusion.").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.