In re Del Monte Foods Co. Shareholders Litig..

• Decision Date: 14 February 2011
• Docket Number: C.A. No. 6027–VCL.
• Citation: 25 A.3d 813
• Parties: In re DEL MONTE FOODS COMPANY SHAREHOLDERS LITIGATION.
• Court: Court of Chancery of Delaware

25 A.3d 813

In re DEL MONTE FOODS COMPANY SHAREHOLDERS LITIGATION.

C.A. No. 6027–VCL.

Court of Chancery of Delaware.

Submitted: Feb. 11, 2011.Decided: Feb. 14, 2011.

Stuart M. Grant, Michael J. Barry, Diane Zilka, Christine M. Mackintosh, Grant & Eisenhofer P.A., Wilmington, Delaware; Hung G. Ta, Brenda F. Szydlo, Michele S. Carino, Grant & Eisenhofer P.A., New York, New York; Randall J. Baron, A. Rick Atwood, Jr., David T. Wissbroecker, Edward M. Gergosian, David A. Knotts, Robbins Geller Rudman & Dowd LLP, San Diego, California; Plaintiffs' Co–Lead Counsel.Raymond J. DiCamillo, Rudolf Koch, Susan M. Hannigan, Richards, Layton & Finger P.A., Wilmington, Delaware; Mark A. Kirsch, Diana M. Feinstein, Gibson, Dunn & Crutcher LLP, New York, New York; Paul J. Collins, Joseph W. Guzzetta, Gibson, Dunn & Crutcher LLP, Palo Alto, California; Attorneys for Defendants Samuel H. Armacost, Timothy G. Bruer, Mary R. Henderson, Victor L. Lund, Terence D. Martin, Sharon L. McCollam, Joe L. Morgan, David R. Williams, and Richard G. Wolford.Kenneth J. Nachbar, John P. DiTomo, S. Michael Sirkin, Morris Nichols Arsht & Tunnell LLP, Wilmington, Delaware; Peter E. Kazanoff, Paul C. Gluckow, Simpson Thacher & Bartlett LLP, New York, New York; Attorney for Defendants Blue Acquisition Group, Inc., Blue Merger Sub Inc., Centerview Partners, Kohlberg Kravis Roberts & Company LP, and Vestar Capital Partners.

OPINION

LASTER, Vice Chancellor.

On November 24, 2010, Del Monte Foods Company (“Del Monte” or the “Company”) entered into an agreement and plan of merger with Blue Acquisition Group, Inc. and its wholly owned acquisition subsidiary, Blue Merger Sub Inc. (the “Merger Agreement” or “MA”). Blue Acquisition Group is owned by three private equity firms: Kohlberg, Kravis, Roberts & Co. (“KKR”), Centerview Partners (“Centerview”), and Vestar Capital Partners (“Vestar”). Because KKR is the lead firm, I generally refer to the sponsor group as “KKR.” The Merger Agreement contemplates a $5.3 billion leveraged buyout of Del Monte (the “Merger”). If approved by stockholders, each share of Del Monte common stock will be converted into the right to receive $19 in cash. The consideration represents a premium of approximately 40% over the average closing price of Del Monte's common stock for the three-month period ended on November 8, 2010. The $19 price is higher than Del Monte's common stock has ever traded.

The stockholders of Del Monte are scheduled to vote on the Merger on February 15, 2011. The plaintiffs seek a preliminary injunction postponing the vote. They originally asserted that the individual defendants, who comprise the Del Monte board of directors (the “Board”), breached their fiduciary duties in two separate ways: first by failing to act reasonably to pursue the best transaction reasonably available, and second by disseminating false and misleading information and omitting material facts in connection with the stockholder vote. The defendants mooted the disclosure claims through an extensive proxy supplement released during the afternoon of February 4, 2011 (the “Proxy Supplement”).

This case is difficult because the Board predominantly made decisions that ordinarily would be regarded as falling within the range of reasonableness for purposes of enhanced scrutiny. Until discovery disturbed the patina of normalcy surrounding the transaction, there were only two Board decisions that invited serious challenge: first, allowing KKR to team up with Vestar, the high bidder in a previous solicitation of interest, and second, authorizing Barclays Capital, the financial advisor to Del Monte, to provide buy-side financing to KKR.

Discovery revealed a deeper problem. 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.

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.

On the preliminary record presented in connection with the injunction application, the plaintiffs have established a reasonable probability of success on the merits of a claim for breach of fiduciary duty against the individual defendants, aided and abetted by KKR. By failing to provide the serious oversight that would have checked Barclays' misconduct, the directors breached their fiduciary duties in a manner reminiscent of Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del.1989). In that decision, the Delaware Supreme Court enjoined a transaction—ironically a leveraged buyout sponsored by KKR—when self-interested management and their financial advisor concealed information from the board. Like management's deal-specific, buy-side conflict in Mills, Barclays' deal-specific, buy-side conflict tainted the advice it gave and the actions it took.

To hold that the Del Monte directors breached their fiduciary duties for purposes of granting injunctive relief does not suggest, much less pre-ordain, that the directors face a meaningful threat of monetary liability. On this preliminary record, it appears that the Board sought in good faith to fulfill its fiduciary duties, but failed because it was misled by Barclays. Unless further discovery reveals different facts, the one-two punch of exculpation under Section 102(b)(7) and full protection under Section 141(e) makes the chances of a judgment for money damages vanishingly small. The same cannot be said for the self-interested aiders and abetters. But 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.

To remedy (at least partially) the taint from Barclays' activities, the plaintiffs ask that the vote on the Merger be enjoined for a meaningful period (30 to 45 days) and that the parties to the Merger Agreement be enjoined from enforcing the deal protections during that time. They have not sought (nor would I grant) a decree enjoining the Merger pending a post-trial adjudication. The plaintiffs argue that this limited injunctive relief will restore (albeit incompletely) the stockholders' unique opportunity to receive a topping bid free of fiduciary misconduct. Such an injunction would deprive KKR temporarily of the advantages it obtained by securing a deal through collusion with Barclays, while at the same time preserving the stockholders' ability to determine for themselves whether to accept the $19 per share Merger price. The plaintiffs analogize this limited relief to an injunction conditioned on the making of corrective disclosures, which similarly imposes a temporary transactional delay and then allows stockholders to decide for themselves whether to accept a deal.

For the reasons that follow, I grant the relief plaintiffs seek, although for a shorter time period that takes into account the transaction's exposure to the market. The defendants are enjoined preliminarily from proceeding with the vote on the Merger for a period of 20 days. Pending the vote on the Merger, the parties to the Merger Agreement are enjoined from enforcing the no-solicitation and match-right provisions in Section 6.5(b), (c) and (h), and the termination fee provisions relating to topping bids and changes of recommendation in Section 8.5(b). The injunction is conditioned on the plaintiffs posting a bond in the amount of $1.2 million.

I. FACTUAL BACKGROUND

The facts are drawn from the record developed in connection with the plaintiffs' application for a preliminary injunction. The parties have submitted numerous documentary exhibits and the deposition testimony of seven fact witnesses. With their answering briefs, the defendants lobbed in four affidavits from witnesses who were deposed. Each of these lawyer-drafted submissions sought to replace the witnesses' sworn deposition testimony with a revised and frequently contradictory version. Had the differing averments been elicited by defense counsel during deposition, as they readily could have been, then plaintiffs' counsel could have tested the witnesses' assertions through cross-examination. Except on routine or undisputed matters, I have discounted these “non-adversarial proffers” ¹ and relied on the deposition testimony and contemporaneous documents. What follows are the facts as they are likely to be found after trial, based on the current record.

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