In re Del Monte Foods Company Shareholders Litigation: Court of Chancery Enjoins Stockholder Vote and Enforcement of Deal Protection Provisions
February 15, 2011
In In re Del Monte Foods Company Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011), the Court of Chancery found on a preliminary record that a proposed $5.3 billion cash merger (including assumption of debt) with a group of private equity buyers was potentially tainted by alleged misconduct by the target banker, with the alleged knowing participation of the buyers. The Court preliminarily enjoined the defendants from proceeding with a stockholder vote on the proposed transaction for a period of twenty days and further enjoined the defendants from enforcing certain deal protection measures in the merger agreement (including no solicitation, termination fee and matching right provisions), pending the stockholder vote.
Under the terms of the merger agreement, a private equity group consisting of Kohlberg Kravis Roberts & Co., L.P. (“KKR”), Vestar Capital Partners (“Vestar”), and Centerview Partners would acquire all outstanding shares of Del Monte common stock for $19 per share. The Court expressed that, on the preliminary record, the Del Monte board appeared to have “sought in good faith to fulfill its fiduciary duties” and predominantly made decisions that ordinarily would be regarded as falling within the range of reasonableness for purposes of Revlon enhanced scrutiny. The Court found, however, that the Board “was misled by Barclays” Capital (“Barclays”), its financial advisor, and that Barclays “secretly and selfishly manipulated the sale process.” In particular, the Court noted that (1) Barclays “crossed the line” in seeking permission from Del Monte to provide buy-side financing before a price was agreed to between KKR and Del Monte while failing to disclose to the Board the fact that Barclays had intended to seek to provide buy-side financing since the beginning of the process; and (2) Barclays had paired Vestar with KKR in violation of existing confidentiality agreements and then concealed the fact of the pairing from the Board for several months. According to the Court, the pairing of KKR and Vestar materially reduced the prospect of price competition for Del Monte. Further, the Court found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that the Board, despite not knowing the extent of Barclays’ behavior, failed to act reasonably in ultimately acceding to Barclays’ request to provide buy-side financing and Barclays’ recommendation to permit Vestar to participate in KKR’s bid, and by then permitting Barclays to run the go-shop process. The Court also found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that KKR “knowingly participated” with Barclays in these self-interested activities.
The Court concluded that loss of “the opportunity to receive a pre-vote topping bid in a process free of taint from Barclays’ improper activities” constituted irreparable injury to the Del Monte stockholders. The Court held that the imprecision of a potential post-closing monetary remedy weighed in favor of injunctive relief, as did the powerful defenses available to the director defendants (including exculpation under Section 102(b)(7) and reliance on the advice of experts selected with reasonable care under Section 141(e) of the General Corporation Law of the State of Delaware).
Finally, regarding the balance of the hardships, the Court considered that an injunction could jeopardize the stockholders’ ability to receive a premium for their shares and pose difficult questions regarding the parties’ contract rights under the merger agreement. The Court also recognized that the deal had been subject to a 45-day go-shop period and to a continuing “passive market check” for several more weeks. Ultimately, however, the Court concluded that enjoining the deal protection devices was appropriate because “they are the product of a fiduciary breach that cannot be remedied post-closing after a full trial,” and a twenty-day injunction would “provide ample time for a serious and motivated bidder to emerge.” The Court conditioned the injunction on plaintiff posting a bond in the amount of $1.2 million.