Lessons from the $148M Fraud by Dole's GC and CEO

The decision followed a nine-day trial on the conduct of Murdock and Carter during the $1.6 billion take-private deal in which Murdock, who already owned 40% of Dole, sought to regain exclusive control of the company. In response to a proposal from Murdock to buy the remaining 60% of Dole stock for $12 per share, the board of directors formed a committee to review Murdock's proposal. Murdock made it clear to the committee that he was a buyer and would not be a seller of his Dole shares.

From the outset, Carter sought to undermine the committee's process, including by limiting the scope of the committee's authority to consider alternatives and selecting the committee's financial advisers. Carter was also instrumental in providing the committee with false projections of the company's expected financial performance. In addition, Vice Chancellor Laster noted that Murdock and Carter took a series of actions designed to drive down the company's stock price before the transaction. Murdock also repeatedly attempted to bully the board into taking actions that would facilitate his take-private efforts.

Despite the efforts of Murdock and Carter to undermine the board and committee's processes, and without knowledge of management's rosier (and more accurate) outlook, the committee's independent investment bankers prepared their own independent projections. Based on these projections and the independent investigation and efforts of Lazard and the committee's legal counsel, the committee ultimately negotiated a higher deal price of $13.50 per share.

'What the Committee Could Not Overcome ' Is Fraud'

In his opinion, Vice Chancellor Laster praised the committee for its “Herculean efforts” in negotiating the higher deal price and other favorable deal terms. But according to Vice Chancellor Laster, “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.”

Vice Chancellor Laster emphasized that, while Murdock and Carter had structured the transaction to meet the procedural requirements set forth in In re MFW that are necessary for a proposed transaction involving an interested shareholder to avoid review under the stringent standard of entire fairness, they “did not adhere to [ MFW's ] substance.”

The entire fairness standard requires that the interested transaction be the product of fair dealing and result in a fair price to the minority shareholders. To qualify for the application of the less demanding business judgment standard, MFW requires approval of the interested transaction by: 1) a committee of the board made up of disinterested and independent directors; and 2) the affirmative vote of a majority of the unaffiliated shares.

Although the transaction nominally met these requirements, Murdock and Carter did not engage in “fair dealing” given Vice Chancellor Laster's conclusion that they deceived the committee and withheld from it information regarding the company's true value. Because neither the independent committee nor the shareholders were able to accurately assess the fairness of the offer, the MFW procedural protections were ineffective.

Moreover, although the actual $13.50 per share transaction price may have fallen within the low end of a range of fairness, the shareholders were entitled to a “fairer price” under the circumstances. Vice Chancellor Laster observed that in a fiduciary duty action like this one, “the court can, and has in the past, awarded damages designed to eliminate the possibility of profit flowing to defendants from the breach of the fiduciary relationship.”

Dole's Lessons for Future Take-Private Transactions

Aside from the obvious admonition that controlling shareholders and company management should not commit fraud in take-private transactions, the decision highlights several issues that can arise in such transactions. Next month, we will discuss these issues, starting with the controlling shareholder's disclosure duty.

Karen Brunton Bloom is counsel at Perkins Coie, based in the Seattle office. Evelyn Cruz Sroufe is a corporate practice partner in the same office. Luis R. Mejia is a partner in the firm's office in Washington DC.

The Delaware Chancery Court ordered Dole Food Co. Inc. CEO David Murdock and COO and General Counsel C. Michael Carter to pay Dole shareholders $148 million for fraud in connection with the company's 2013 take-private deal. The Aug. 27 decision is one of the largest awards ever to shareholders in a deal-related lawsuit.

The decision highlights several issues that can arise in take-private transactions, even those structured to avoid the entire fairness standard through adherence to the procedures outlined in In re MFW Shareholder Litigation. These include the need for a fully informed independent committee to review the proposed transaction, the importance of high quality and independent advisors and the potential consequences when management fails to adhere to its fiduciary duties to the board and shareholders.

Backstory

The decision followed a nine-day trial on the conduct of Murdock and Carter during the $1.6 billion take-private deal in which Murdock, who already owned 40% of Dole, sought to regain exclusive control of the company. In response to a proposal from Murdock to buy the remaining 60% of Dole stock for $12 per share, the board of directors formed a committee to review Murdock's proposal. Murdock made it clear to the committee that he was a buyer and would not be a seller of his Dole shares.

From the outset, Carter sought to undermine the committee's process, including by limiting the scope of the committee's authority to consider alternatives and selecting the committee's financial advisers. Carter was also instrumental in providing the committee with false projections of the company's expected financial performance. In addition, Vice Chancellor Laster noted that Murdock and Carter took a series of actions designed to drive down the company's stock price before the transaction. Murdock also repeatedly attempted to bully the board into taking actions that would facilitate his take-private efforts.

Despite the efforts of Murdock and Carter to undermine the board and committee's processes, and without knowledge of management's rosier (and more accurate) outlook, the committee's independent investment bankers prepared their own independent projections. Based on these projections and the independent investigation and efforts of Lazard and the committee's legal counsel, the committee ultimately negotiated a higher deal price of $13.50 per share.

'What the Committee Could Not Overcome ' Is Fraud'

In his opinion, Vice Chancellor Laster praised the committee for its “Herculean efforts” in negotiating the higher deal price and other favorable deal terms. But according to Vice Chancellor Laster, “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.”

Vice Chancellor Laster emphasized that, while Murdock and Carter had structured the transaction to meet the procedural requirements set forth in In re MFW that are necessary for a proposed transaction involving an interested shareholder to avoid review under the stringent standard of entire fairness, they “did not adhere to [ MFW's ] substance.”

The entire fairness standard requires that the interested transaction be the product of fair dealing and result in a fair price to the minority shareholders. To qualify for the application of the less demanding business judgment standard, MFW requires approval of the interested transaction by: 1) a committee of the board made up of disinterested and independent directors; and 2) the affirmative vote of a majority of the unaffiliated shares.

Although the transaction nominally met these requirements, Murdock and Carter did not engage in “fair dealing” given Vice Chancellor Laster's conclusion that they deceived the committee and withheld from it information regarding the company's true value. Because neither the independent committee nor the shareholders were able to accurately assess the fairness of the offer, the MFW procedural protections were ineffective.

Moreover, although the actual $13.50 per share transaction price may have fallen within the low end of a range of fairness, the shareholders were entitled to a “fairer price” under the circumstances. Vice Chancellor Laster observed that in a fiduciary duty action like this one, “the court can, and has in the past, awarded damages designed to eliminate the possibility of profit flowing to defendants from the breach of the fiduciary relationship.”

Dole's Lessons for Future Take-Private Transactions

Aside from the obvious admonition that controlling shareholders and company management should not commit fraud in take-private transactions, the decision highlights several issues that can arise in such transactions. Next month, we will discuss these issues, starting with the controlling shareholder's disclosure duty.

Karen Brunton Bloom is counsel at Perkins Coie, based in the Seattle office. Evelyn Cruz Sroufe is a corporate practice partner in the same office. Luis R. Mejia is a partner in the firm's office in Washington DC.