Delaware courts have a reputation for zealously protecting the rights of minority shareholders, and they delivered on that yesterday, socking billionaire David Murdock with a $148 million penalty for manipulating his 2013 takeover of Dole Foods.
The 108-page decision by Judge Travis Laster of Delaware Chancery Court was the latest in a string of big verdicts against insiders and investment banks for fleecing shareholders in takeover deals. In April, Laster ordered an affiliate of El Paso Corp., now part of Kinder Morgan, to pay $171 million for overcharging shareholders in a related master limited partnership for natural-gas assets. And in 2011, the Chancery Court ordered Grupo Mexico S.A. to pay $2.3 billion, including interest and legal fees, for overcharging Southern Peru Copper, which it controlled, for a Mexican mining subsidiary it also owned.
These cases represent the good side of shareholder litigation in Delaware. But 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. The problem for judges in Delaware and elsewhere is determining good from bad. The Dole case was brought by several pension funds represented by Grant & Eisenhofer, whose other victories include the El Paso case and a 2011 decision halting a proposed takeover of Del Monte Foods amid accusations of conflicts of interest at Barclays Capital, the advisor on the deal.
“They don’t come in wearing t-shirts saying `I’m a good case’ and `I’m a bad case,’” said Lawrence Hamermesh, a corporate-law expert at Widener University’s Delaware Law School. “You need good judges who can smell out the cases where there has been trouble, and throw out the cases where they just sue at the drop of a hat.”
There was plenty of trouble at Dole Foods, according to Laster’s opinion. Murdock, a 92-year-old billionaire who took control of Dole in 1985, had already taken the food company private once in 2003. He sold a 41% stake to the public again in 2009 at $12.50 a share, but the forceful high-school dropout never really took to working with independent directors, according to former Paramount Pictures Chief and Dole director Sherry Lansing, who testified Murdock “seemed frustrated with boards …he seemed not to like the push back.” (Murdock partially agreed, saying in a video deposition: “I‘m abrupt. I‘m always a strong-willed man. That‘s the reason why I get so many things done.”)
When Murdock decided to take Dole private again, the court found, he worked with a trusted lieutenant, Dole general counsel Michael Carter, to conceal favorable information from the company’s independent directors, who under Delaware law were charged with approving any offer.
Carter made “false disclosures” to the board about expected savings from divesting half the business and cancelled a recently adopted stock buyback program “for pretextual reasons,” Laster wrote.
“These actions primed the market for the freeze-out” by driving down Dole’s share price and undermining the market price as a “measure of value,” the judge said. After Murdock presented his proposal to buy the company for $12 a share, the judge wrote, Carter provided the committee with “lowball management projections.” The following day he gave Murdock’s own advisors and banks “more positive and accurate data.”
The judge praised Lazard Freres for its “Herculean efforts” in determining the $12.50 price was too low and negotiating it up to $13.50. (He wasn’t so kind to Murdock’s longtime bankers at Deutsche Bank, saying the bank acted improperly “by favoring Murdock and treating him as the bank’s real client” before the merger, but said the bank didn’t knowingly participate in the scheme.)
Shareholders not affiliated with Murdock approved the takeover by a slim 50.9% majority.
The final price may have been fair, Laster wrote, “but 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.” He calculated damages based on Lazard’s estimate of a true value of $16.24 a share and held Murdock and Carter jointly liable, meaning Murdock could be stuck with the whole bill. Murdock’s lawyers weren’t immediately available for comment.
“This is a case of a controlling stockholder buying the public shares and trying to use a process designed to make that fair, but the court finds he and his right hand man systematically undermined the process,” said Hamermesh. “If there’s anything Delaware corporate law is supposed to accomplish, it’s to prevent those in control from using their position to profit at the expense of public shareholders.”
Hamermesh said the opinion itself is “kind of boring,” other than the dollar amounts and allegations. Carter was accused of using the pretext of buying new ships to cancel a $200 million stock buyback program, for example, driving down Dow’s share price, without informing outside directors first.
The problem for judges is separating out cases like Dole from the hundreds of lawsuits that are based on little more than unfounded allegations a company’s directors shouldn’t have approved a takeover offer, or didn’t bargain hard enough, or had some conflict they failed to disclose.
Virtually every public-company merger worth more than $100 million now draws lawsuits, yet from 2011 to 2014, only four cases were actually resolved at trial in Delaware Chancery court. The vast majority settle for little more than fees for the plaintiff lawyers, with shareholders getting meaningless changes in disclosure documents – and the bill.
In a recent paper, “The Importance of Being Dismissive,” Hamermesh and Michael Wachter of the University of Pennsylvania Law School say judges hold the key to reducing the number of meritless lawsuits.
Since most plaintiff lawyers in M&A cases seek an injunction blocking the transaction, and time is money, the system in Delaware has evolved to where judges effectively decide the fate of a lawsuit based on the information presented in the pleading stage. And that’s a good thing, Hamermesh and Wachter argue: With this “triage system,” judges can get rid of the cases that will only enrich plaintiff lawyers at the expense of their supposed clients.
The critical question is whether directors who approved the takeover are disinterested. If they are, then the business judgment rule applies, under which companies are considered free to make decisions they perceive to be in their best interest without being subjected to second-guessing by the courts.
In cases where the people have clear conflicts, such as a major shareholder trying to buy out minority owners at the cheapest price possible, plaintiff lawyers have plenty of information at the outset to push the case into a more searching process, they argue.
“That’s already a case where the court’s antennae are way up,” Hamermesh told me.
Those cases contrast with routine M&A suits, where a strategic buyer has proposed a takeover at a price negotiated at arms’ length and approved by independent directors.
Then, “all you’ve got is somebody saying you could have done better,” Hamermesh said.
