Brandon Harper
In an August 27, 2015 Chancery Court opinion, Vice Chancellor Laster awarded shareholders of Dole Food Company damages upwards of $148 million for CEO David Murdock’s and President and COO C. Michael Carter’s fraudulent violation of their fiduciary duties. The Vice Chancellor came to the particular damage amount of $148,190,590.18 by no arbitrary means. In fact, an evaluation of the shareholders’ deserved “fair price,” when determined in light of fraud and unfair dealing, entitled shareholders to what the court declared a “fairer price.” Vice Chancellor Laster’s standard of review and determination of remedy are both noteworthy of exploration as they seek to right the wrongs of Murdock and Carter’s breaches of their fiduciary duty.
CEO Murdock’s goal was to buy Dole, and in order to do so at a discount, he and Carter misled the Board and defrauded shareholders by understating the company’s profitability.
On June 10, 2013, Murdock proposed a $12.00/share buyout to the board of directors (the “Board”) of all remaining common stock in Dole. Carter conducted two key meetings where Dole’s performance and profitability were presented. In a July 11, 2013 meeting with the Board and a committee of independent directors (the “Committee”), Carter provided falsified projections for the coming month where he showed a 20% decrease from that year’s first half numbers. The following day, unbeknownst to the Board and the Committee, Carter held a lender meeting with Murdock’s bankers where much more positive, promising, and true figures were offered. Amid this collective and on-going fraudulent dealing, the Board agreed with Murdock on a merger price of $13.50/share in November 2013. These inaccurate meeting projections represented a share price discrepancy as large as $6.84, but Vice Chancellor Laster, upon his discretion and operation under the doctrine of “entire fairness,” settled on a $2.74/share award to shareholders.
Under the entire fairness doctrine, both fair dealing and fair price are evaluated to determine if the business practice was, overall, conducted devoid of any fraud. Fair dealing considers the following factors: timing of the transaction; how it began; how it was structured, negotiated, and disclosed to the board; and how the board and stockholders gave approval. Vice Chancellor Laster quickly concluded that there was no fair dealing on the parts of Murdock or Carter because they both acted with fraud and misrepresentation to the Board and the Committee in communicating suppressed profit projections. “[A] calculated effort to depress the [market] price” of Dole’s share price “until the minority stockholders [were] eliminated by merger or some other form of acquisition” is a clear indication of unfair dealing.
Fair price is comprised of: “assets, market value, earnings, future prospects,” and any other factors that affect the value of the company. Vice Chancellor Laster indicated that a “fair price” is not identified as a “point on a line” but rather shown as a “range of reasonable values.” The court found that Murdock’s agreed upon $13.50 price was within the “range of fairness,” but after accounting for Carter’s fraud in the July 11 Board meeting, the price slipped below the range of fairness.
The specific areas in which Carter undercut Dole’s value and misled the Board and Committee were in cost-cutting initiatives and planned farm purchases. First, Dole’s cost-cutting plan – which was delayed by Murdock and Carter – reached $30 million in savings, which the plaintiffs calculated as an increase in share price of $3.80. Second, Carter presented the lender banks with a prediction of Dole’s ability to spend $100 million to purchase new farms. The plaintiffs’ expert calculated a more reasonable expectation of future farm purchases in the amount of $28.6 million in Ecuadorian farms, which would increase the share price by $1.22/share. Adjusting for Carter’s projection of the $100 million in farm purchases, the share price yielded would have been $3.04.
Where shareholders could have seen an adjusted share value of (at most) an additional $6.84 per share, the Vice Chancellor tapered the damages back to $2.74/share. He came to this value by assessing that plaintiffs’ adjustments for defendants’ activity and misrepresentations in cost-cutting ($3.80) and farm purchases ($3.04) were overvalued. He commented that the cost-saving initiative was less certain than Dole’s established business and the incremental cash flows from it were overvalued. He therefore adopted the $1.87 cost-cutting number from the defendants’ expert as a more modest award. For farm purchases, he fairly utilized the plaintiffs’ request as they had only accounted for $28.6 million for farms, equaling an additional $0.87/share. Through these tweaks, the court arrived at $2.74 to be paid to shareholders.
The fiduciary breach here is evident. From his influential seat as CEO, Murdock orchestrated the diminution of Dole’s share price in order to leverage a more attractive purchase price for his own takeover. What is not entirely evident is how the court arrived at the remedy.
Vice Chancellor Laster explained that by engaging in fraud, Murdock and Carter deprived the Board and the Committee of their “ability to obtain a better result on behalf of the stockholders, prevented the committee from having the knowledge it needed to potentially say ‘no,’ and foreclosed the ability of the stockholders to protect themselves by voting down the deal.” Thus, because of their fraud, they prevented Dole’s shareholders from obtaining a better price. Therein lies the remedial issue. Perhaps the Vice Chancellor is answering the question “how much better?” when he says the plaintiffs are entitled to a “fairer price.”
Because the agreed upon merger price of $13.50 was tainted by fraud, Vice Chancellor Laster determined that plaintiffs were entitled to a “fairer price.” It seems that the goal in reaching a remedy was for the court to analyze what merger price could have been obtained, had Murdock’s fraud never occurred. If Carter had not fraudulently undervalued profit projections, Dole could have negotiated a better price than $13.50. In fact, Murdock’s fraud reduced the price by 16.9%.
The Vice Chancellor awarded the remedy by taking into account the fraud exhibited by Murdock and Carter. In assessing the original merger price range, plaintiffs’ financial advisors Lazard Frères & Co. LLC calculated a range of $11.40 to $14.08 (midpoint $13.50 agreed upon by Murdoch and the Board). Instead of adding the $2.74 damages to the midpoint of this prior range to reach a new share price of $15.48 (only $1.98 more than original $13.50 midpoint value), Laster determined that the plaintiffs were entitled to the full incremental $2.74 value and awards plaintiffs $16.24 fairer value price. That incremental adjustment of $2.74 more per share represents the consequential damages the shareholders deserve.
Interestingly, the court commented that the full $6.84 damage award would be “harsh, except as a form of rescissory damages,” which is elaborated in footnote 40, but muted in the body of the opinion. The footnote explains that, due to the fraud, rescissory damages of $6.84 per share could have been appropriate. This begs the question: Why not award rescissory damages? One answer may be the $2.74 value better exemplified the consequential value of the effect of Murdock’s fraud.
Had the fraud never occurred, shareholders would have achieved a better price than $13.50. That is the meaning of “fairer price.” Based on its findings, the court believes the plaintiffs would have received higher value for their Dole shares had Murdock and Carter never committed fraud. It seems that by pushing the award from the $15.48 fairness midpoint to $16.24, the court is awarding consequential damages due to the fraud. Even though $13.50 may have been within the range of fair value, a price beyond the midpoint – a fairer price – is deserved because of Murdock’s fraud.
Brandon Harper is a second year student at Widener University Delaware Law School and a Staff Member on the Delaware Journal of Corporate Law. Brandon has experience working in the private sector in banking at JP Morgan and regulatory compliance with Freeh Group International. He has also worked in the public sector with the Delaware Department of Justice and is a current judicial intern with the Honorable Vivian Medinilla in the Delaware Superior Court.
Suggested Citation: Brandon Harper, Chancery Court Issues Discretionary Remedy to Dole Shareholders in Fraud, Del. J. Corp. L (October 4, 2015), www.djcl.org/blog.