In re IBP, Inc., Shareholders Litigation

• Decision Date: 15 June 2001
• Docket Number: Civil Action No. 18373.
• Citation: 789 A.2d 14
• Parties: In re IBP, INC. SHAREHOLDERS LITIGATION. IBP, Inc., Defendant and Cross-Claim Plaintiff, and Counterclaim Defendant, v. Tyson Foods, Inc. and Lasso Acquisition Corporation, Defendants, Cross-Claim Defendants and Counterclaim Plaintiffs.
• Court: Court of Chancery of Delaware

789 A.2d 14

In re IBP, INC. SHAREHOLDERS LITIGATION.

IBP, Inc., Defendant and Cross-Claim Plaintiff, and Counterclaim Defendant, v. Tyson Foods, Inc. and Lasso Acquisition Corporation, Defendants, Cross-Claim Defendants and Counterclaim Plaintiffs.

Civil Action No. 18373.

Court of Chancery of Delaware, New Castle County.

Submitted: June 3, 2001.

Decided: June 15, 2001.

Corrected: June 18, 2001.

Joseph A. Rosenthal, Esquire, of Rosenthal, Monhait, Gross & Goddess, Wilmington, Delaware; Of Counsel: Stanley D. Bernstein, Esquire, of Bernstein Liebhard & Lifshitz, New York, New York, Attorneys for Plaintiffs.

William D. Johnston, Christian Douglas Wright, Danielle B. Gibbs, Esquires, of Young Conaway Stargatt & Taylor, Wilmington, Delaware; Of Counsel: Bernard W. Nussbaum, Peter C. Hein, Kenneth B. Forrest, Eric M. Roth, Marc Wolinsky, George T. Conway, III, Elaine P. Golin, Don W. Cruse, Jr., Esquires, of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys for Defendants John J. Jacobson, Jr., Wendy L. Gramm, Martin A. Massengale, Michael L. Sanem and Jo Ann R. Smith, and Defendant and Cross-Claim Plaintiff and Counterclaim Defendant IBP, Inc.

Anthony W. Clark, Robert S. Saunders, Martina Bernstein, Julie A. Tostrup, Kara R. Yancey, Darryl A. Parson, Esquires, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Delaware; of Counsel: Matthew R. Kipp, Vincent P. Schmeltz III, Ryan J. Rohlfsen, Cyrus Amir-Mokri, Esquires, of Skadden, Arps, Slate, Meagher & Flom; James B. Blair, Esquire, of Law Offices of James B. Blair, Springdale, Arkansas; Jennifer Hendren, Esquire, of Hendren Law Firm, Fayetteville, Arkansas; Kenneth R. Shemin, Esquire, of Shemin Law Firm, Fayetteville, Arkansas; Ruth Ann Wisener, Esquire, of Conner & Winters, Fayetteville, Arkansas; Attorneys for Defendants and Counterclaim Plaintiffs Tyson Foods, Inc. and Lasso Acquisition Corporation.

OPINION

STRINE, Vice Chancellor.

This post-trial opinion addresses a demand for specific performance of a "Merger Agreement" by IBP, Inc., the nation's number one beef and number two pork distributor. By this action, IBP seeks to compel the "Merger" between itself and Tyson Foods, Inc., the nation's leading chicken distributor, in a transaction in which IBP stockholders will receive their choice of $30 a share in cash or Tyson stock, or a combination of the two.

The IBP-Tyson Merger Agreement resulted from a vigorous auction process that pitted Tyson against the nation's number one pork producer, Smithfield Foods. To say that Tyson was eager to win the auction is to slight its ardent desire to possess IBP. During the bidding process, Tyson was anxious to ensure that it would acquire IBP, and to make sure Smithfield did not. By succeeding, Tyson hoped to create the world's preeminent meat products company — a company that would dominate the meat cases of supermarkets in the United States and eventually throughout the globe.

During the auction process, Tyson was given a great deal of information that suggested that IBP was heading into a trough in the beef business. Even more, Tyson was alerted to serious problems at an IBP subsidiary, DFG, which had been victimized by accounting fraud to the tune of over $30 million in charges to earnings and which was the active subject of an asset impairment study. Not only that, Tyson knew that IBP was projected to fall seriously short of the fiscal year 2000 earnings predicted in projections prepared by IBP's Chief Financial Officer in August, 2000.

By the end of the auction process, Tyson had come to have great doubts about IBP's ability to project its future earnings, the credibility of IBP's management, and thought that the important business unit in which DFG was located — Foodbrands — was broken.

Yet, Tyson's ardor for IBP was such that Tyson raised its bid by a total of $4.00 a share after learning of these problems. Tyson also signed the Merger Agreement, which permitted IBP to recognize unlimited additional liabilities on account of the accounting improprieties at DFG. It did so without demanding any representation that IBP meet its projections for future earnings, or any escrow tied to those projections.

After the Merger Agreement was signed on January 1, 2001, Tyson trumpeted the value of the merger to its stockholders and the financial community, and indicated that it was fully aware of the risks that attended the cyclical nature of IBP's business. In early January, Tyson's stockholders ratified the merger agreement and authorized its management to take whatever action was needed to effectuate it.

During the winter and spring of 2001, Tyson's own business performance was dismal. Meanwhile, IBP was struggling through a poor first quarter. Both companies' problems were due in large measure to a severe winter, which adversely affected livestock supplies and vitality. As these struggles deepened, Tyson's desire to buy IBP weakened.

This cooling of affections first resulted in a slow-down by Tyson in the process of consummating a transaction, a slow-down that was attributed to IBP's on-going efforts to resolve issues that had been raised about its financial statements by the Securities and Exchange Commission ("SEC"). The most important of these issues was how to report the problems at DFG, which Tyson had been aware of at the time it signed the Merger Agreement. Indeed, all the key issues that the SEC raised with IBP were known by Tyson at the time it signed the Merger Agreement. The SEC first raised these issues in a faxed letter on December 29, 2000 to IBP's outside counsel. Neither IBP management nor Tyson learned of the letter until the second week of January, 2001. After learning of the letter, Tyson management put the Merger Agreement to a successful board and stockholder vote.

But the most important reason that Tyson slowed down the Merger process was different: it was having buyer's regret. Tyson wished it had paid less especially in view of its own compromised 2001 performance and IBP's slow 2001 results.

By March, Tyson's founder and controlling stockholder, Don Tyson, no longer wanted to go through with the Merger Agreement. He made the decision to abandon the Merger. His son, John Tyson, Tyson's Chief Executive Officer, and the other Tyson managers followed his instructions. Don Tyson abandoned the Merger because of IBP's and Tyson's poor results in 2001, and not because of DFG or the SEC issues IBP was dealing with. Indeed, Don Tyson told IBP management that he would blow DFG up if he were them.

After the business decision was made to terminate, Tyson's legal team swung into action. They fired off a letter terminating the Agreement at the same time as they filed suit accusing IBP of fraudulently inducing the Merger that Tyson had once so desperately desired.

This expedited litigation ensued, which involved massive amounts of discovery and two weeks of trial.¹

In this opinion, I address IBP's claim that Tyson had no legal basis to avoid its obligation to consummate the Merger Agreement, as well as Tyson's contrary arguments. The parties' extensive claims are too numerous to summarize adequately, as are the court's rulings.

At bottom, however, I conclude as follows:

• The Merger Agreement and related contracts were valid and enforceable contracts that were not induced by any material misrepresentation or omission;

• The Merger Agreement specifically allocated certain risks to Tyson, including the risk of any losses or financial effects from the accounting improprieties at DFG, and these risks cannot serve as a basis for Tyson to terminate the Agreement;

• None of the non-DFG related issues that the SEC raised constitute a contractually permissible basis for Tyson to walk away from the Merger;

• IBP has not suffered a Material Adverse Effect within the meaning of the Agreement that excused Tyson's failure to close the Merger; and

• Specific performance is the decisively preferable remedy for Tyson's breach, as it is the only method by which to adequately redress the harm threatened to IBP and its stockholders.

I. Factual Background

IBP's Key Managers

IBP was first incorporated in 1960. Its current Chairman of the Board and Chief Executive Officer, Robert Peterson, has been with the company from the beginning. Having started in the cattle business as a cattle driver, Peterson learned the business from the ground up and has been the strategic catalyst behind IBP's growth from a relatively small fresh beef business to a diversified food company with sales of over $15 billion annually.

Peterson is a strong and committed CEO, who loves the business he has helped build and the people who work for it. By the late 1990s, however, Peterson was in his late sixties and cognizant that it would soon be time to turn the reins over to a new CEO. Peterson's heir apparent was IBP's President and Chief Operating Officer, Richard "Dick" Bond. By 2000, Peterson had also installed one of his top aides, Larry Shipley, as IBP's Chief Financial Officer. Sheila Hagen was IBP's General Counsel, having joined the company from one of its beef industry rivals.

Although this quartet all have important roles in the company, it is clear that Peterson remains the dominant manager at IBP, and that Bond is the next most important. Shipley and Hagen, however, each have important duties regarding financial and legal functions at issue in this case. As in any organization, the roles of the four overlapped, but imperfectly so. Put less obliquely, it is common for "big picture" executives to view and speak about issues from a larger strategic perspective that is less specific and technically precise than executives like CFOs and General Counsels who are charged with getting the details precisely right.

IBP's Business

The traditional business of IBP is being a meat processor that acts as the middleman between ranchers and retail supermarkets and food processors. This is the so-called "fresh meats"...