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

Last month, we discussed the fact that 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. We conclude this discussion herein.

Where the company's controlling shareholder has a forceful personality and low regard for board process, directors may be under pressure to conform to the controlling shareholder's wishes and must be on the alert for indications that they are not receiving complete information. Some of these indications are listed below.

High-Quality and Independent Advisers

In Dole, Vice Chancellor Laster praised both the investment bankers and counsel to the committee for helping the committee to recognize the inaccuracy and incompleteness of the information they were receiving, even though the heroic efforts of the advisers to overcome the deficit were ultimately insufficient to provide the committee with all material information.

General Counsel Must Put the Company First

A general counsel of a public company, regardless of that counsel's other titles, must always remember that his or her client is the company acting through its duly authorized constituents, including management, the board and shareholders. If a general counsel is put in a position of competing interests among management, the board and others, he or she must put the company's interests first. In some cases, that may mean advising the retention of outside counsel to represent the interests of conflicted parties.

Controlling Shareholder Who'Is Not a Seller Restricts an Independent Committee

An independent committee negotiating with a controlling shareholder who has stated that it will not be a seller of shares faces severe limitations. In Dole, the committee negotiated a go-shop provision and actually went through the go-shop process, but Vice-Chancellor Laster found that, given the realities, that provision and the process were largely “cosmetic.” Thus it was even more important for the committee to obtain all material information so that it could determine whether Murdock's offer was fair.

Intentional Breach of Loyalty

In a take-private transaction, company management is often in the awkward position of having to answer to both the controlling shareholder and an independent committee. All officers, however, have a duty of candor that prohibits them from misleading the board or the shareholders. The role of the officers must be to assist the independent committee by providing them with requested information as well as any requested analysis and their candid opinions.

Risks for the Controlling Shareholder

The decision highlights the potential risks to the controlling parties associated with a transaction process that may adhere to the technical procedural protections of an independent committee and majority shareholder approval but which may be viewed in hindsight as flouting the substance of those protections. A controlling shareholder in a take-private transaction should be aware that, in that capacity, it has fiduciary duties to the remaining shareholders in addition to any duties as a director or officer.

Tone at the Top

Vice Chancellor Laster referred to specific examples of the manner in which Murdock and Carter treated directors and people within the company, with references to bullying, abusive treatment, threats and inappropriate language. These facts influenced the court's assessment of the evidence and credibility of witnesses, and were a significant factor in finding Murdock and Carter liable.

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.

Last month, we discussed the fact that 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. We conclude this discussion herein.

Where the company's controlling shareholder has a forceful personality and low regard for board process, directors may be under pressure to conform to the controlling shareholder's wishes and must be on the alert for indications that they are not receiving complete information. Some of these indications are listed below.

High-Quality and Independent Advisers

In Dole, Vice Chancellor Laster praised both the investment bankers and counsel to the committee for helping the committee to recognize the inaccuracy and incompleteness of the information they were receiving, even though the heroic efforts of the advisers to overcome the deficit were ultimately insufficient to provide the committee with all material information.

General Counsel Must Put the Company First

A general counsel of a public company, regardless of that counsel's other titles, must always remember that his or her client is the company acting through its duly authorized constituents, including management, the board and shareholders. If a general counsel is put in a position of competing interests among management, the board and others, he or she must put the company's interests first. In some cases, that may mean advising the retention of outside counsel to represent the interests of conflicted parties.

Controlling Shareholder Who'Is Not a Seller Restricts an Independent Committee

An independent committee negotiating with a controlling shareholder who has stated that it will not be a seller of shares faces severe limitations. In Dole, the committee negotiated a go-shop provision and actually went through the go-shop process, but Vice-Chancellor Laster found that, given the realities, that provision and the process were largely “cosmetic.” Thus it was even more important for the committee to obtain all material information so that it could determine whether Murdock's offer was fair.

Intentional Breach of Loyalty

In a take-private transaction, company management is often in the awkward position of having to answer to both the controlling shareholder and an independent committee. All officers, however, have a duty of candor that prohibits them from misleading the board or the shareholders. The role of the officers must be to assist the independent committee by providing them with requested information as well as any requested analysis and their candid opinions.

Risks for the Controlling Shareholder

The decision highlights the potential risks to the controlling parties associated with a transaction process that may adhere to the technical procedural protections of an independent committee and majority shareholder approval but which may be viewed in hindsight as flouting the substance of those protections. A controlling shareholder in a take-private transaction should be aware that, in that capacity, it has fiduciary duties to the remaining shareholders in addition to any duties as a director or officer.

Tone at the Top

Vice Chancellor Laster referred to specific examples of the manner in which Murdock and Carter treated directors and people within the company, with references to bullying, abusive treatment, threats and inappropriate language. These facts influenced the court's assessment of the evidence and credibility of witnesses, and were a significant factor in finding Murdock and Carter liable.

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.