In Re Del Monte Foods Co. Shareholders Litigation
2011 WL 1677458, 2011 Del. Ch. LEXIS 30, 25 A.3d 813 (2011)
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Rule of Law:
A board of directors breaches its fiduciary duties when it fails to adequately oversee a sale process tainted by the undisclosed, self-interested manipulations of its financial advisor. Even if the board is misled, it is ultimately responsible for the integrity of the process, and decisions made based on a conflicted advisor's tainted process are voidable.
Facts:
- Peter Moses of Barclays Capital, Del Monte's coverage officer, secretly pitched a leveraged buyout of Del Monte to several private equity firms, including KKR, before Del Monte was officially for sale.
- After Del Monte received an unsolicited bid, it formally hired Barclays as its financial advisor. Barclays did not disclose to the Del Monte Board its internal goal of providing buy-side financing to the eventual acquirer.
- During an initial, private solicitation of interest, Vestar Capital Partners submitted the highest bid range but needed a partner. Kohlberg, Kravis, Roberts & Co. (KKR) was another bidder. The Del Monte Board terminated this process.
- Months later, without Del Monte's knowledge or authorization, Barclays' Moses secretly encouraged Vestar to partner with KKR for a future joint bid, a violation of the "No Teaming Provision" in their prior confidentiality agreements.
- KKR submitted a new bid without disclosing Vestar's involvement. Barclays and KKR actively concealed the partnership from Del Monte's Board.
- While negotiations were ongoing and before a final price was agreed upon, Barclays asked for and received permission from the Board to provide buy-side financing to KKR, creating a direct conflict of interest.
- The Board, unaware of Barclays' role in pairing the bidders, approved the KKR-Vestar team-up and Barclays' dual role without seeking any price increase or other concessions.
- Del Monte and the sponsor group led by KKR ultimately entered into a merger agreement for $19 per share.
Procedural Posture:
- Shareholders of Del Monte Foods Company (plaintiffs) filed suit in the Delaware Court of Chancery against the Del Monte Board of Directors and the acquiring private equity group led by KKR.
- Plaintiffs alleged that the Board breached its fiduciary duties in the sale process and that KKR aided and abetted those breaches.
- Plaintiffs moved for a preliminary injunction to postpone the scheduled stockholder vote on the proposed merger.
- Prior to the court's ruling on the injunction, the defendants released a proxy supplement that mooted the plaintiffs' initial disclosure-related claims, leaving the fiduciary duty claims to be decided.
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Issue:
Does a board of directors breach its fiduciary duties under enhanced scrutiny when it fails to adequately oversee its financial advisor, whose undisclosed conflicts of interest and self-dealing manipulate the sale process to favor a specific bidder?
Opinions:
Majority - Laster, Vice Chancellor
Yes, the directors breached their fiduciary duties by failing to provide the serious oversight that would have checked their financial advisor's misconduct. A board is ultimately responsible for the integrity of a sale process, and that responsibility cannot be abdicated to advisors. Here, the financial advisor, Barclays, was tainted by a deal-specific, buy-side conflict from the outset. Barclays secretly manipulated the sale process by, among other things, pairing the highest initial bidder (Vestar) with its preferred client (KKR) to stifle competition and ensure Barclays would receive lucrative buy-side financing fees. The Board's failure to oversee Barclays, its passive acceptance of the anti-competitive bidder pairing, and its decision to permit Barclays' dual sell-side/buy-side role while price was still being negotiated were unreasonable actions under enhanced scrutiny. Citing Mills Acquisition Co. v. Macmillan, Inc., when a board is deceived by a self-interested advisor, the legal protections for its decisions vanish, rendering them voidable.
Analysis:
This decision serves as a significant warning to corporate boards about the critical importance of actively overseeing their financial advisors in a sale process. It demonstrates that a board cannot blindly rely on experts, especially when situational conflicts may arise, and that a failure of oversight can constitute a breach of fiduciary duty even if the board was acting in subjective good faith but was misled. For investment banks, the case highlights the severe risks of undisclosed conflicts, particularly regarding 'stapled financing,' and attempting to manipulate a sale process to favor one bidder over another for the bank's own financial gain. The court's willingness to enjoin a premium transaction based on a tainted process, rather than deferring to a post-closing damages remedy, reinforces the judiciary's role in policing the integrity of M&A transactions before they are consummated.
