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From Securities Regulation Daily, August 27, 2015

Dole’s CEO, aide hit with $148M damages award for unfair merger

By Anne Sherry, J.D.

For breaching their duty of loyalty in connection with CEO David Murdock’s 2013 purchase of Dole Food, Murdock and former COO C. Michael Carter owe the shareholder class $148 million in damages. The Delaware Chancery Court opinion describes fraudulent conduct by Carter to undermine the use of Dole’s stock price as a measure of value and withhold information from the merger committee, even as he was providing that information to Murdock’s bankers. The damages award amounts to $2.74 per share, a reasonable approximation of the additional value that may have been achieved had the committee seen the full picture of Dole’s prospects (In re Dole Food Co., Inc. Stockholder Litigation, August 27, 2015, Laster, J.).

Background. In November 2013 Murdock purchased Dole, paying $13.50 per share to acquire the approximately 60 percent of its common stock that he did not already own. Using In re MFW Shareholders Litigation (Del. Ch. 2013) as a blueprint, Murdock conditioned his initial $12-per-share offer on approval from a committee of disinterested and independent directors and the approval of holders of a majority of unaffiliated shares. This committee negotiated the price increase to $13.50 per share, which its investment bank, Lazard, opined fell within a range of fairness. (In contrast to its rebukes of Murdock and Carter, the court praised the efforts and work product of the committee and Lazard.) A 50.9 percent majority of unaffiliated stockholders narrowly approved the merger.

Fraud. The court found that in 2012, before Murdock made his proposal, Carter made false disclosures about the savings Dole could achieve by selling half of its business. This action, along with his cancellation of a stock repurchase program, drove down Dole’s stock price. After Murdock’s proposal, Carter provided the merger committee with lowball management projections. The next day, Carter held—in violation of the committee’s procedures—a secret meeting in which he provided Murdock’s advisors and financing banks with more positive and accurate data. Critically, at that meeting, Carter told Murdock’s bankers that Dole could substantially increase its income by spending $100 million to buy farms that would produce a $15 million initial return.

The committee and Lazard recognized that Carter’s projections were unreliable and attempted to overcome the information deficit, but they were never able to obtain full and accurate information, particularly about Dole’s ability to improve its income by cutting costs and acquiring farms. After the merger closed, Dole bought farms in the amount that Carter had discussed at the secret meeting of lenders.

Analysis. The court’s determination that the merger was not a product of fair dealing did not require “an overly granular analysis” given that Carter engaged in fraud that deprived the committee and its advisors of the ability to negotiate a fair transaction. As to the fair price analysis that makes up part of the entire fairness review, the committee’s negotiations and Lazard’s discounted cash flow analysis would have provided powerful evidence of fairness in the absence of fraud. However, adding to the DCF analysis a reasonable assessment of the value of the cost savings and farm purchases ($2.74 per share) increased the fairness range to between $14.14 and $16.82, suggesting that the $13.50 per share merger price was not fair.

Liability and damages. The court held Murdock and Carter personally liable, and also imposed aider-and-abettor liability on DFC Holdings, LLC, Murdock’s acquisition vehicle for the merger. Recognizing that uncertainties in damages calculations are resolved against the wrongdoer, the court considered that the award could go as high as $6.84 per share. However, this finding would treat all of the upside from the cost-cutting and farm purchase initiatives as certain and assume that the committee could extract all of the incremental benefits from Murdock. If extinguishing all possibility of profit were the goal, that award would be appropriate, but the court wrote that it seemed unrealistic and harsh. A middle ground valuation, taken from the estimates of one of the defendants’ experts, resulted in the $2.74 per share award to the plaintiffs. Murdock, DFC Holdings, and Carter are jointly and severally liable for the $148 million total award.

Former officer David A. DeLorenzo and Deutsche Bank were found not liable to the plaintiffs. Because the damages award may have mooted the pending appraisal proceeding, the court directed the parties to meet and confer about whether further rulings are necessary.

The case is No. 8703-VCL.

Attorneys: Stuart M. Grant (Grant & Eisenhofer P.A.), Randall J. Baron (Robbins Geller Rudman & Dowd LLP) and Marc A. Topaz (Kessler Topaz Meltzer & Check, LLP) for Plaintiffs. Stuart M. Grant (Grant & Eisenhofer P.A.) for Hudson Bay Master Fund Ltd., Hudson Bay Merger Arbitrage Opportunities Master Fund Ltd., and Ripe Holdings LLC. Kevin G. Abrams (Abrams & Bayliss LLP) for Merion Capital LP, Merion Capital II, LP, Magnetar Capital Master Fund Ltd., Spectrum Opportunities Master Fund Ltd., Magnetar Global Event Driven Master Fund Ltd., and Blackwell Partners LLC. J. Clayton Athey (Prickett, Jones & Elliott, P.A.) and Peter M. Stone (Paul Hastings LLP) for David H. Murdock and DFC Holdings, LLC. Bruce Silverstein (Young Conaway Stargatt & Taylor, LLP) and Andrea E. Neuman (Gibson Dunn & Crutcher LLP) for C. Michael Carter, David A. DeLorenzo and Dole Food Company, Inc. Stephen C. Norman (Potter Anderson & Corroon LLP) and David B. Hennes (Fried, Frank, Harris, Shriver & Jacobson LLP) for Deutsche Bank AG, New York Branch and Deutsche Bank Securities Inc.

Companies: Hudson Bay Master Fund Ltd.; Hudson Bay Merger Arbitrage Opportunities Master Fund Ltd.; Ripe Holdings LLC; Merion Capital LP; Merion Capital II, LP; Magnetar Capital Master Fund Ltd.; Spectrum Opportunities Master Fund Ltd.; Magnetar Global Event Driven Master Fund Ltd.; Blackwell Partners LLC; DFC Holdings, LLC; Dole Food Company, Inc.; Deutsche Bank AG, New York Branch; Deutsche Bank Securities Inc.

MainStory: TopStory DirectorsOfficers FraudManipulation MergersAcquisitions DelawareNews

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