Special Litigation Committee Report Supports Chiquita Motion to Dismiss

The Special Litigation Committee (“SLC’) for the Chiquita Brands International, Inc. (“Chiquita”) submitted its Report on September 25, 2008 along with its motion for dismissal (“Motion”).  The Motion is based on the Report’s factual allegations and argues, in essence, that the SLC has investigated the facts and determined in the exercise of its independent business judgment that dismissal of the claims in the derivative action is in the best interests of Chiquita.

The Report covers the SLC investigation into the claims alleged in the Verified Consolidated Shareholder Derivative Complaint (“Amended Complaint”).  The Amended Complaint alleges generally that the defendants committed corporate waste and breached their fiduciary duties, beginning as early as 1989 to the present.  The defendants consist of several former and current directors and officers of Chiquita.  Seven specific instances of such alleged actions are listed in the Report.

1. Causing Chiquita to make payments to Colombian terrorist organizations the FARC and the ELN from 1989 to 1997, or failing to be aware of those payments (Am. Compl. ¶ 100);
2. Causing Chiquita to make payments to Colombian terrorist organization the AUC, from approximately 1997 through February 2004, or failing to be aware of those payments (Am. Compl. ¶ 100);
3. Conducting an alleged “fire sale” of Chiquita’s Colombian operations (a subsidiary known as Banadex), in June 2004 in response to a pending Department of Justice (“DOJ”) investigation (Am. Compl. ¶ 127);
4. Causing Chiquita to enter a guilty plea and pay a $25 million fine in March 2007 in order to protect individual officers and directors from prosecution (Am. Compl. ¶ 118);
5. Acquiring Atlanta AG, a German fruit distribution business, in 2003, which allegedly turned out to be an unprofitable transaction, to offset the financial effect of a potential sale of Banadex (Am. Compl. ¶ 129);
6. Causing or allowing Chiquita to make false or misleading statements in its public filings regarding (i) the nature of the payments to the AUC, and, (ii) Chiquita’s efforts to comply with the law in general (Am. Compl. ¶ 60-99); and
7. Paying severance to departing executives who allegedly engaged in wrongdoing, failing to pursue claims against executives who allegedly engaged in wrongdoing, and allowing executives who allegedly engaged in wrongdoing to remain at the Company and to receive excessive compensation (Am. Compl. ¶ 119).

In summary, the factual allegations in the SLC Report are as follows. 

From the mid-1970s, Chiquita developed detailed internal reporting and monitoring practices designed to satisfy the requirements of the Foreign Corrupt Practices Act of 1977 (“FCPA”). The FCPA compliance program, beginning in the early 1990s, captured the payments to the FARC and ELN and later the payments to the AUC.  The payments made to the FARC and ELN from 1989 to 1997 were legal under Columbian law because they were the product of extortion from the guerilla groups.  The payments ended around the same time that the FARC and ELN were listed as Foreign Terrorist Organizations (“FTO”) by the U.S. Department of State. 

The payments to the AUC included four payments made by Banadex employees outside the knowledge of Chiquita management or board.  The other payments made through 2004 were paid to a “convivir,” a government-licensed and promoted security organization.  Accordingly, these payments were legal under Colombian law.  In 2000, a Chiquita employee became aware of a potential connection between the “convivir” and AUC.  The employee’s investigation revealed that at least some part of the payments went to the AUC. Chiquita sought guidance from Colombian attorneys, who again advised Chiquita that the payments were legal because they were a product of extortion. 

On September 10, 2001, the U.S. Department of State designated the AUC as an FTO.  According to the Report, Chiquita was unaware of the designation until late February 2003.  After seeking legal advice from outside counsel, Chiquita’s Audit Committee took over the matter and fully disclosed the payments to the DOJ on April 24, 2003.  The meeting between the DOJ and Chiquita concluded with Chiquita believing it had a safe harbor to make payments to the AUC, in order to protect its employees and infrastructure, until the DOJ could resolve the related policy issues.  Chiquita made its final payment to the AUC in late January 2004, and sold Banadex to a Colombian-based fruit producer in May 2004.  The Report finds the Banadex sale to have been under official negotiation for eleven months, not in the nature of a “fire sale." 

In March 2004, the DOJ notified Chiquita for the first time that it was a subject of investigations.  The nature of the investigations changed from a favorable outcome for Chiquita in early 2005 to discussion of a potential plea agreement in November 2006.  The DOJ investigation focused narrowly on whether the payments to the AUC by Chiquita were illegal under federal statutes.  In contrast, the SLC investigated and analyzed the alleged facts to determine whether the individual defendants had breached their duty to the company.  The Report alleges that the defendants continued to make payments motivated by a desire to protect Chiquita’s employees and infrastructure in Colombia, and based on assurances from DOJ officials. 

The final plea agreement resulted in Chiquita pleading guilty to one count of knowingly Engaging in Transactions with a Specially-Designated Global Terrorist on March 19, 2007, and agreeing to pay a fine of $25 million, payable over five years.  According to the Report, Chiquita’s board agreed to the plea agreement in order to prevent further reputational harm and substantial costs.  The plea included Chiquita’s promise to cooperate in any continuing investigations of individual officers and directors, extinguishing concerns of breach of duty of loyalty. 

The SLC Report concludes that the final three allegations are also unjustified based on the facts uncovered. The Report states Chiquita’s board approved the Atlanta AG acquisition six months prior to the discovery of the AUC designation as an FTO, and the acquisition was made for good faith business reasons on an informed basis after several months of consideration.  Also, the Report alleges that there was nothing improper in Chiquita’s disclosures or that any of the defendants knew, or should have known, that any disclosures were false or misleading.  Finally, the Report finds Chiquita’s compensation of executives to be informed, with the advice of an outside consultant, and not excessive under the circumstances. 

According to the Motion, in exercising its business judgment, the SLC took into consideration five other factors that strongly support dismissal:

1. No defendant, at any time, acted in bad faith or was motivated by self interest;
2. The reputational harm associated with prolonging what has already been six continuous years of investigation and litigation, with continued emphasis on Chiquita’s action in Colombia, would inflict substantial further damage on Chiquita;
3. The costs that will be incurred in connection with these claims outweigh any potential recovery that may be obtained in the future, especially given the weaknesses of the claims;
4. Management and the Board appropriately focused on the adequacy of Chiquita’s compliance measures and remedial actions following this episode; and
5. Continuing with this litigation would serve to further divert management from its core mission, which is to increase shareholder value by expanding Chiquita’s profits through the sale of bananas, tropical fruit, and other value-added produce.

The primary materials for this post are available on the DU Corporate Governance Website.