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From Securities Regulation Daily, October 8, 2014

Chiquita investors sue over proposed inversion deal with Irish company

By Lene Powell, J.D.

A pension fund shareholder brought a putative class action against Chiquita Brands International and its board for breach of fiduciary duty relating to a proposed merger with an Irish corporation, saying that Chiquita executives and board members thwarted a better offer because it did not give them assurances of a future role in the newly merged company. The pension fund seeks an injunction to prevent the October 24 shareholder vote from going forward until the alleged breaches of fiduciary duties are remedied (City of Birmingham Firemen’s and Policemen’s Supplemental Pension System v. Chiquita Brands International, Inc., October 7, 2014).

Competing offers. Chiquita, a leading marketer and distributor of bananas, salads, and other fruits and vegetables, announced in March 2014 that it had agreed to merge with Fyffes, PLC, an Irish corporation and leading international importer and distributor of bananas, pineapples and melons. The merger would form a new entity, ChiquitaFyffes.

Under the terms of the transaction, Chiquita stockholders would own 50.7 percent and Fyffes stockholders would own 49.3 percent of ChiquitaFyffes. The new board of directors would consist of an equal number of directors from each company, as well as one mutually agreed-upon independent director. David McMann, the head of Fyffes, would serve as CEO of ChiquitaFyffes, while Edward Lonergan, the CEO of Chiquita, would be the Chairman of the ChiquitaFyffes board of directors. Additional members of senior management would hail from both companies. Under a termination-fee provision, each party agreed to pay a fee of 1 percent of the party’s equity value to the counterparty if the transaction agreement was terminated for various reasons.

In August 2014, Brazilian orange juice conglomerate Cutrale Group and a Brazilian investment company Safra Group (Cutrale-Safra) announced that they made an all cash offer to acquire all outstanding shares of Chiquita common stock for $13 per share (Cutrale-Safra Proposal). Cutrale-Safra stated that the implied value that Chiquita shareholders were to receive in the original Fyffes transaction was only about $10 per share. Cutrale-Safra did not need financing and were able to finance the deal themselves.

Revised offer. According to the complaint, the Chiquita Board at first declined to negotiate with Cutrale-Safra but then bowed to pressure and announced that it had given certain confidential information to Cutrale-Safra. Shortly after allowing the Cutrale-Safra parties access to due diligence materials, the Chiquita board announced that it had agreed to new terms with Fyffe. Under the new proposal, Chiquita shareholders would own 59.6 percent of ChiquitaFyffes, and the Fyffes shareholders would own 40.4 percent of the combined entity. Still, according to Cutrale-Safra, this revised transaction would only value the Chiquita shares at $11.89 per share—about 10 percent less than Cutrale-Safra offered. In addition, the new offer raised the termination fee from 1 percent to 3.5 percent.

The market recognized that Fyffes got the better end of the bargain, said the pension fund, because, after the initial announcement of the ChiquitaFyffes deal but before the Cutrale-Safra offer, Fyffes shares increased by 21 percent while Chiquita’s shares declined 21 percent. In addition to being a poor bargain for Chiquita, the ChiquitaFyffes deal carried risks. The combined entity might not realize the $60 million in synergies that Chiquita management touted, as European antitrust regulators have already placed shipping exclusivity restrictions on any combined company. Also, the tax advantages Chiquita seeks by becoming an Irish company might be diminished or eliminated by U.S. legislation restricting offshore tax inversions. And, by incorporating in Ireland, Chiquita’s shareholders’ rights would be diminished in a number of ways. The cash-out Cutrale-Safra Proposal would eliminate all risks associated with a merger, particularly a merger with a foreign entity, the fund said.

Breach of fiduciary duty. According to the pension fund, the Chiquita board breached its fiduciary duties by failing to maximize shareholder value in agreeing to the inferior Fyffes deal. In particular, they breached their duties by negotiating a merger that favored Fyffes shareholders over Chiquita shareholders; by failing initially to negotiate with Cutrale-Safra, which offered a superior proposal; and by agreeing to increase the termination fee, making it all but certain that the proposed transaction would be consummated. By relinquishing key management roles to Fyffes and securing themselves positions with the combined ChiquitaFyffes company, the Chiquita board negotiated an unfair deal for the Chiquita shareholders, said the complaint.

The fund seeks: (1) a declaratory judgment that the merger agreement is unenforceable; and (2) an injunction preventing the October 24 shareholder vote on the merger from going forward until the breaches of fiduciary duties are corrected, as well as other remedies. The suit also seeks compensatory damages and costs.

The case is No. 1:14-cv-06200-NLH-AMD.

Attorneys: James E. Cecchi (Carella Byrne Cecchi Olstein Brody & Agnello PC) for City Of Birmingham Firemen’s and Policemen’s Supplemental Pension System.

Companies: City Of Birmingham Firemen’s and Policemen’s Supplemental Pension System; Chiquita Brands International, Inc.

MainStory: TopStory CorporateGovernance MergersAcquisitions DirectorsOfficers NewJerseyNews NewLawsuitsNews

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