How Dole’s ex-general counsel cost his boss (and himself) $148 million

August 28, 2015

(Reuters) – The 108-page opus issued Thursday by Vice Chancellor Travis Laster of Delaware Chancery Court – awarding Dole Food shareholders $148 million in their challenge to billionaire CEO David Murdock’s $1.2 billion buyout of the company – is as much a novella as a judicial decision. There’s a lot to be learned from the Dole case, including Chancery Court’s willingness to reward shareholder lawyers who investigate truly dubious deals and take misbehaving CEOs to trial. The decision, as my Reuters colleague Jon Stempel reported Thursday, may discourage management-led buyouts. At the very least, as lead plaintiffs’ lawyer Stuart Grant of Grant & Eisenhofer told Stempel, the ruling shows that corporate officers cannot unilaterally control going-private transactions.

I read Laster’s ruling as a corporate governance morality tale about a lawyer who should have known better.

The heroes of the Dole story, to the surprise of the vice chancellor, were the outside directors on Dole’s special board committee evaluating Murdock’s going-private offer. Laster said that before the nine-day trial in this case last month, he was skeptical about the committee’s independence. He even ruled before trial that Dole was not entitled to business-judgment deference, although the company ostensibly complied with the conditions established for such deference in Delaware’s 2013 decision in In re MFW Shareholder Litigation. But the trial convinced Laster that despite bullying by Murdock, a 40 percent shareholder who effectively controlled Dole, the special committee operated with integrity and faithfulness to the rest of Dole’s shareholders.

The judge also praised the special committee’s bankers from Lazard and its lead deal counsel, Alison Ressler of Sullivan & Cromwell. Ressler, whom Murdock referred to as “that woman lawyer,” and the Lazard bankers insisted on running a legitimate sale process after the committee pushed Murdock to raise his buyout offer from $12 to $13.50 a share. The outside directors and their advisers negotiated a $50 million equity commitment from Murdock to ensure the deal would close, as well as a 30-day period in which the special committee could solicit better offers. When the committee began to doubt the reliability of projections it received from Dole management, Lazard even crashed out an independent set of projections – a “heroic effort,” according to Vice Chancellor Laster, who lauded “the indisputably excellent work of the committee and its advisers.”

The story’s most obvious bad guy is the 92-year old Murdock, who emerges from Laster’s decision as haughty and imperious. “By dint of his prodigious wealth and power, he has grown accustomed to deference and fallen into the habit of characterizing events however he wants,” the judge wrote. Murdock had run Dole as a private company between 2003 and 2009, and, according to the judge, chafed at accountability to his board and shareholders. “Murdock was an old-school, my-way-or-the-highway controller, fixated on his authority and the power and privileges that came with it,” Vice Chancellor Laster wrote. “Murdock testified that he was ‘the boss’ at Dole, and ‘the boss does what he wants to do.'”

But that’s true of an awful lot of billionaire CEOs. So in my reading, the real black hat in Laster’s account of the Dole saga is Murdock’s henchman and enabler, former Dole president, COO and general counsel Michael Carter. Carter went to law school at George Washington University, was an associate at a Wall Street law firm and joined Dole as GC in 2000 after serving as an in-house lawyer at Nabisco, the Singer Company and Pinkerton’s. Carter was a trained and experienced corporate lawyer who undoubtedly understands that officers and directors have fiduciary obligations to shareholders. Yet according to Laster’s decision, instead of helping the Dole board fulfill those responsibilities, Carter subverted them.

The vice chancellor accused Carter of flat-out defrauding the special committee and Dole shareholders. According to Laster, his deception began in advance of Murdock’s buyout offer, when Carter acted to drive down Dole’s share price by deceiving the board about the savings the company could attain from selling off part of the business and cancelling a stock buyback under false pretenses. Those actions, the judge said, kept the price of the company low for Murdock.

Once Murdock made his bid, the judge wrote, Carter provided the special committee with dummy lowball projections from Dole management, reserving management’s real financial projections for a secret meeting with Murdock’s advisers and financiers. When the special committee found about the secret meeting, its lawyers at Sullivan & Cromwell demanded that Carter bar Murdock’s bankers from Dole’s data room. Carter refused, according to Laster’s ruling, and insisted he was nevertheless complying with the sale process strictures the board had laid out.

“But he wasn’t, and he hadn’t,” wrote Laster, who said Carter proceeded to help Murdock and his bankers plan a hostile tender offer for Dole. He also co-opted other Dole insiders, including the company’s associate general counsel, to advise Murdock during negotiations with the board’s special committee.

In all, Laster said, Carter’s actions (and Murdock’s) meant the sale process was not fair to Dole shareholders. Even if the $13.50 Murdock paid was within the range of a fair price for the company, he said, shareholders are entitled to a “fairer” price that does not reward Carter and Murdock for breaching their duties. The vice chancellor held both men liable for an additional $2.74 per shareholder, or $148 million. “Murdock and Carter’s conduct throughout the committee process, as well as their credibility problems at trial, demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith,” Vice Chancellor Laster wrote. “The award is conservative relative to what the evidence could support.”

I’m sure Carter was under a lot of pressure from his longtime boss Murdock. But at least according to Vice Chancellor Laster, in his service to Murdock, he breached his duty, as a corporate officer and a lawyer, to Dole shareholders. And now he and his boss are on the hook for $148 million.

I reached out to Carter’s defense lawyers at Gibson Dunn & Crutcher but didn’t hear back.

That should be a reminder to every lawyer tempted to put the interests of a commanding CEO before those of his real clients.

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