Corporate Governance

In Delaware, Plaintiffs Lose Even When They Win: In re Del Monte (Part 1)

By J Robert Brown Jr.

We have noted this phenomena in Delaware before.  Plaintiffs demonstrate untoward behavior by management -- no small accomplishment in the Chancery Court -- yet end up with a remedy that effectively penalizes them rather than the established malefactors.  Cryo-Cell is a good example of this phenomena.  So is In re Del Monte. 

Shareholders sought to enjoin the buyout of Del Monte.  The buyout group was led by Kohlberg, Kravis, Roberts & Co. ('KKR').   As a result of discovery, shareholders obtained a more complete picture of the role played by Barclays Capital, the financial advisor for Del Monte.  The picture was not a pretty one.  As the court described:

• Barclays secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees. On multiple occasions, Barclays protected its own interests by withholding information from the Board that could have led Del Monte to retain a different bank, pursue a different alternative, or deny Barclays a buy-side role. Barclays did not disclose the behind-the-scenes efforts of its Del Monte coverage officer to put Del Monte into play. Barclays did not disclose its explicit goal, harbored from the outset, of providing buy-side financing to the acquirer. Barclays did not disclose that in September 2010, without Del Monte's authorization or approval, Barclays steered Vestar into a club bid with KKR, the potential bidder with whom Barclays had the strongest relationship, in violation of confidentiality agreements that prohibited Vestar and KKR from discussing a joint bid without written permission from Del Monte.

Barclays ultimate involvement in the buy-side financing, according to VC Laster, resulted in additional costs incurred by Del Monte. 

• Late in the process, at a time when Barclays was ostensibly negotiating the deal price with KKR, Barclays asked KKR for a third of the buy-side financing. Once KKR agreed, Barclays sought and obtained Del Monte's permission. Having Barclays as a co lead bank was not necessary to secure sufficient financing for the Merger, nor did it generate a higher price for the Company. It simply gave Barclays the additional fees it wanted from the outset. In fact, Barclays can expect to earn slightly more from providing buy-side financing to KKR than it will from serving as Del Monte's sell-side advisor.  Barclays' gain cost Del Monte an additional $3 million because Barclays told Del Monte that it now had to obtain a last-minute fairness opinion from a second bank.

Based upon the evidence presented by plaintiffs, the court agreed that shareholders deserved a preliminary injunction for breach of fiduciary duty by the board.  Shareholders had demonstrated a reasonable probability of showing that the board failed to provide the "serious oversight that would have checked Barclays misconduct." 

With the alleged wrongful behavior mostly committed by Barclays, the court viewed the likelihood of monetary damages against the directors of Del Monte as "vanishingly small."  Nonetheless, "while the directors may face little threat of liability, they cannot escape the ramifications of Barclays' misconduct. For purposes of equitable relief, the Board is responsible."  The court reasoned that shareholders should be granted an injunction preventing the closing of the merger for 20 days.  The extra time period would provide an opportunity for a "topping" bid, something that would largely cure any potential misbehavior by Barclays.

Thus, in this case, a victory for shareholders.  Moreover, the remedy preceded the merger, essentially cured any misbehavior, and eliminated the likely possibility of protracted litigation over damages.  It was, in short, the type of action that shareholders should bring.

But, in Delaware, things are never quite as clear as they seem and shareholder victories are rarely as complete as they should be, as we will see in the next post.

The primary materials are, as usual, posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 01, 2011 (boomark / email).