Corporate Governance

Chiquita and the Costs of Doing Business

By J. Robert Brown

We have discussed on this Blog the plea deal by Chiquita Brands International made in connection with payments to an organization in Columbia designated by the US State Department as a terrorist organization.  The sentencing memorandum described the payments as a "business decision."

Anarticle in the WSJ noted that a suit has been filed against Chiquita by relatives of five missionaries killed in Columbia, alleging that the payments by the Company were a "contributing factor" in the deaths.  It is apparently the fifth suit of this type, with the requested damages reaching exorbitant levels.  As one pleading described:  "Chiquita has been sued civilly in four separate cases in four federal district courts by the families of the hundreds of victims of the AUC's murderous rampage in Columbia, with these plaintiffs collectively seeking nearly $8 billion in damages from Chiquita."

But Chiquita's troubles go beyond these suits.  The payments were known at the highest levels of the company, including the board of directors.  As theSentencing Memorandum noted:  "Defendant Chiquita continued to pay the AUC even after one of its directors acknowledged in an internal email, on December 22, 2003, that 'we appear [to] be committing a felony.'"

The payments, therefore, raise questions about the actions of the board.  No individuals were charged in the criminal action.  At least four derivative suites have, however, been filed in various jurisdictions.  Pursuant to an order of the Multi District Litigation Panel, the cases have all been transferred to the Southern District of Florida.  A motion to consolidate the cases is pending.   

We shall keep an eye on this case.  It raises serious questions about the board's fiduciary responsibilities.  The derivative action filed in Ohio alleges for example that the board violated the duty of loyalty by, among other things, "willfully and knowingly" making decisions "that caused the Company to engage in conduct that violated federal law."  Because the case is now pending in Florida and because Chiquita is incorporated in New Jersey, the case will be free of the biases of the Delaware courts and need not rely on the pro-management decisions emanating from that jurisdiction.  It may, therefore, provide a potentially useful vehicle for defining the duties of directors.  

We have included some of the filings in the case on theDU Corporate Governance web site, including several of the complaints and the motion to consolidate. 

Full post as published by The Race to the Bottom on March 21, 2008 (boomark / email).