In re Dole Food Co., Inc.: Merger Breaches Duty of Loyalty

In In re Dole Food Co. Stockholder Litig., No. 8703-VCL CONSOLIDATED C.A. No. 9079-VCL, 2015 BL 276794 (Del. Ch. Aug. 27, 2015), shareholders (the “Plaintiffs”) brought action against David H. Murdock, C. Michael Carter, and David A. DeLorenzo (collectively, “Defendants”) for breach of their duty of loyalty and against Deutsche Bank for aiding and abetting. The Court of Chancery found Murdock and Carter jointly and severally liable, without imposing liability on DeLorenzo and Deutsche Bank.

According to the allegations, Murdock, the CEO and controlling stockholder of Dole Food Company, Inc. (“Dole”), owned 40% of Dole’s common stock. In November 2013, Murdock bought all remaining shares of Dole’s common stock for $13.50 per share as a single-step merger (the “Merger”). A committee of disinterested and independent directors of Dole’s board of directors (the “Committee”) formed to negotiate the transaction.

Although a majority of unaffiliated shareholders approved the Merger, Defendants allegedly made false disclosures and withheld material information from the Committee and shareholders during the process. Specifically, Plaintiffs alleged that the Committee received erroneous information about Dole increasing its income through cutting costs and purchasing farms. Shareholders filed suit, alleging the Defendants breached the duty of loyalty through fraudulent self-dealing.

In transactions involving self-dealing by a controlling shareholder, the applicable standard is entire fairness. Entire fairness depends upon fair dealing and fair price. After examining these two aspects separately, the court considered the issue as a whole to determine entire fairness.

First, the court found the Merger did not involve fair dealing. In reaching this conclusion, the court considered the timing, initiation, negotiation, structure, and approval of the transaction. The court found Carter provided inaccurate information to the Committee. For example, the due diligence of DeLorenzo and Deutsche Bank revealed Dole’s “cost-cutting plan” could achieve $50 million cost savings per year. Although Carter knew this, he claimed in a press release that Dole could only achieve a $20 million cost savings, which caused stock prices to fall 13%.

The court also held that while the price may have been within the range of fairness, Plaintiffs were entitled to a “fairer” price. Id. (“This is because by engaging in fraud, Carter deprived the Committee of its 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.”).

Having found violations of fair price and fair dealing, and thus entire fairness, the court next examined each Defendant separately to determine who was liable. The court found Murdock liable for breaches of the duty of loyalty both as a director and a controlling shareholder. The court also determined DFC Holdings, LLC, an entity controlled by Murdock, was an “acquisition vehicle” for the Merger and aided and abetted the violation.

The court further found Carter liable for damages both as an officer and director. Lastly, the court found that, while a “close call,” DeLorenzo was entitled to rely on the Committee's recommendation of the Merger and was not liable. With regard to Plaintiffs’ suit for aiding and abetting against Deutsche Bank, the court found Plaintiffs failed to meet the third element of the claim, “knowing participation in the breach,” because Deutsche Bank did not knowingly assist in the Defendants’ breach of duty.

Accordingly, the court found Murdock, his entity DFC Holdings, LLC and Carter liable for breach of duty of loyalty in the amount of $148,190,590.18.

The primary materials for this case are available on the DU Corporate Governance website.

Aren Sharifi