In re Dole Food Company, Inc. and the Cost of Going Private

James Jian Hu is an associate in the corporate and mergers & acquisitions practice at Kirkland & Ellis LLP. The views expressed in this post represent solely those of the author. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On August 27, 2015, Vice Chancellor Laster authored a widely anticipated opinion providing valuable guidance on steering clear of a flawed process in a going-private transaction. David H. Murdock, the CEO and Chairman of Dole and a 40% shareholder, and C. Michael Carter, the General Counsel, President and COO of Dole and characterized as Murdock’s right-hand man, were found personally liable for $148 million to Dole shareholders. A number of considerations detailed in the court’s opinion serve as valuable reminders for practitioners guiding a controlling stockholder in a going-private process in the interest of minimizing post-closing litigation risk and liability exposure.

No longer a “clear day” after a going-private plan is conceived

A year before Murdock took Dole private, Dole’s CFO prepared a memo setting forth potential strategic options for Dole at Murdock’s request. The CFO memo outlined possible value creating actions including the divestiture of Dole’s packaged foods and fresh vegetables divisions to be followed by Murdock taking the remaining business private. The CFO memo was to a large extent borne out by later events and therefore colored the court’s interpretation of Murdock’s and Carter’s actions leading up to the going-private transaction.

For example, after Dole’s sale of its Asia business (which the court found to be an outgrowth of the initially planned divestiture of packaged food and fresh vegetables divisions), Carter publicly announced a revised annual cost savings estimate from the divesture that was $30 million lower than a previously announced figure. Discrediting Carter’s claim that he honestly believed the incremental $30 million of savings was not achievable, the court found that Carter intentionally guided the market down to create an artificially low stock price ahead of Murdock’s imminent take-private bid. In a separate episode, Carter decided to cancel a board-approved share repurchase program without consulting the board in advance. Carter claimed that he was worried about Dole’s compliance with its debt covenants in light of new capital expenditure plans. The court viewed the cancellation as another manipulative attempt to depress Dole’s share price. As observed by the court, one aspect of the “fair dealing” requirement in a going-private transaction is “when the transaction was timed” and “how it was initiated.” Carter’s actions to prime the market ahead of Murdock’s bid therefore violated this requirement of fair dealing.

It is important to bear in mind that after the conception of a going-private transaction, especially after documentation is created, each action taken may be viewed by the court against the backdrop of the possible self-interested motivations tied to the later transaction. It is prudent to identify and address the possible bad inferences that can be drawn before an action is taken, especially if the newly-proposed action is inconsistent with a prior corporate plan or practice. Independent validation, such as approval by independent directors or input from advisors, as well as contemporaneous documentation clarifying the specific reasons for actions taken after the initial conception of a sale process, can potentially reduce the risk of misinterpretation.

Financial projections: The dilemma of needing a knowledgeable fox to guard the hen house

Lazard, the financial advisor to Dole’s special committee, requested updated financial projections from Dole’s management to assist the committee in evaluating the going-private proposal. Carter took charge of the updating process and, contrary to historical practice, asked Dole’s management to create projections from the top down—starting with EBITDA level forecasts initially, with supporting budgets to be reverse engineered later. The updated projections were significantly lower than the prior iteration of projections provided to Dole’s special committee and, in particular (a) contained the same “lowball” cost savings figure Carter announced to the public and (b) failed to reflect incremental income that could be obtained from Murdock’s plans to purchase additional farms.

The court attributed the misleading and artificially depressed projections to Carter’s control of the updating process. However, in an MBO scenario it is often impossible to exclude the controlling stockholder or her representatives from participating in the generation of financial projections. After all, this person may have the best insight on the business and its future direction. That places the controlling stockholder between the unenviable rock and hard place of being perceived to be driven by conflicted motives while at the same time uniquely possessing information required for the special committee’s effective evaluation of an acquisition proposal. This risk may be mitigated if projections are produced in a manner consistent with historical practice, with any deviations from prior projections adequately documented with supporting “bridge” disclosure. In addition, contemporaneous financial projections generated for a different purpose, if consistent with the financial projections in question, could lend credibility to the validity of the latter. For example, when providing financial projections to its own financing sources, the controlling stockholder has an interest in depicting the business with a more optimistic level of cash flows in order to maximize the attractiveness of the debt terms. If those buyer projections supplied to potential lenders are consistent with the projections provided to the special committee, less suspicion may be cast on the controlling stockholder. Unfortunately, in the Dole case, the debt-side financial projections not only contradicted the projections provided to the special committee, but their existence also was actively concealed from the special committee.

Mandate controlled access to management to facilitate full disclosure

The Dole court cited approvingly the controlling stockholder’s expansive disclosure obligations set forth in Kahn v. Tremont (Tremont I) that required disclosure of all material information bearing on the value of the business (including “hidden value” of assets) except for information relating only to the maximum price that the controlling stockholder is willing to pay and how the controlling stockholder would finance the purchase. If the controlling stockholder has preferential access to the management team that the special committee does not have, an elevated risk exists (by virtue of the asymmetric access) that the controlling stockholder has not fully disclosed the information she is aware of. Unsurprisingly, Dole’s special committee imposed “rules of the road” requiring that Murdock’s communications with Dole management about the transaction be routed through the special committee. This rule, had it been respected by Murdock and Carter, would have made the special committee aware of a meeting arranged by the controlling stockholder between its prospective lenders and members of Dole’s management and to thereby access potentially material information bearing on Dole’s value (such as the more optimistic projections). Although a special committee may discount information received from the controlling stockholder, impeccable knowledge of all material information bearing on value is a legal right of the committee; failure by the controlling stockholder to respect this obligation lends itself to negative inferences about intentional concealment.

While designed primarily to benefit the special committee’s analysis of a going-private proposal, controlled access to the management team for transaction-related matters can help the buyer by preserving the appearance of process integrity and reducing the instances where information later viewed as material to the transaction is relayed only to the controlling stockholder.

Final words

As the court observed, a fair process carried out with integrity can influence the court’s determination of whether a going-private transaction met the fair price requirement. By shaping a proper process in a going-private transaction, legal advisors can meaningfully impact the court’s view on the fairness of both process and price in the inevitable shareholder litigation, and thereby reduce the potential financial exposure of the controlling stockholder. While the road to going private is littered with landmines, effective process management and contemporaneous sensitivity to a future courtroom review go a long way to neutralizing future claims that are often colored by the benefit of hindsight.


The author would like to thank Michael Brueck, a partner at Kirkland & Ellis LLP, for his guidance and feedback in preparing this article.

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