Delaware Court Enjoins Merger Vote Citing Financial Advisor’s Conflict of Interest
Insight March 11, 2011
On February 14, 2011, in In re Del Monte Foods company Shareholders Litigation, the Court of Chancery issued a preliminary injunction which delayed for 20 days a stockholder vote on the proposed leveraged buyout of Del Monte foods by a private equity group made up of Kolberg Kravis Roberts & Co. L.P. (KKR), Vestar Capital Partners (Vestar), and Centerview Partners.
In a move which further limits the actions of investment banks to pair buyers and sellers in acquisition transactions, the Delaware Court of Chancery provided a strong reminder that buyers, directors of target firms, and financial advisors must be aware that conflicts of interest affecting a target's financial advisor will be closely scrutinized by courts.
On February 14, 2011, in In re Del Monte Foods company Shareholders Litigation, the Court of Chancery issued a preliminary injunction which delayed for 20 days a stockholder vote on the proposed leveraged buyout of Del Monte foods by a private equity group made up of Kolberg Kravis Roberts & Co. L.P. (KKR), Vestar Capital Partners (Vestar), and Centerview Partners. The court also enjoined the buyers from enforcing the no solicitation, termination fee and matching right provisions in the parties' merger agreement pending the stockholder vote.
The court's decision to enjoin the shareholder vote was largely based on its finding that the parties' merger agreement was entered into as a result of the collusion of Barclay's Capital, Del Monte's sell-side investment bank, and certain private equity funds. Focusing on Barclays role in the transaction, the court stated Barclays had "secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to provide buy-side financing to KKR." The court concluded the 45 day go-shop process managed by Barclay's was tainted by Barclay's interest in earning fees for providing buy-side financing to buyers.
Based on the facts in the preliminary record, the court found Barclay's actions did not provide Del Monte shareholders with an open and fair sale process. Barclays had a long-standing relationship with both Del Monte and KKR, the primary private equity fund seeking to acquire Del Monte, and the court criticized Barclays for obtaining permission from Del Monte to provide buy-side financing without disclosing to Del Monte's board that it intended to provide buy-side financing from the start of the sale process. The court also found that Barclays acted improperly in paring KKR and Vestar as joint bidders while failing to disclose the pairing to the board. KKR and Vestar both signed agreements with Del Monte containing a "no teaming provision" that prohibited the pairing, and the court found the pairing materially reduced price competition for Del Monte.
While the court placed most of the blame on Barclays, it stated that "the buck stops with the board." On the preliminary record, the court found Del Monte's board appeared to have "sought in good faith to fulfill its fiduciary duties" and largely made decisions that fell within the range of reasonableness. In fact, the merger agreement provided for the buyers to acquire all of the common stock of Del Monte for $19 per share which the court acknowledged was a premium price. However, the court found the board was mislead by Barclays and the plaintiffs had shown a reasonable probability of success on their claim the board did not meet its fiduciary obligations to Del Monte shareholders because it did not attempt to actively seek additional buyers or hire a new sell-side advisor once they learned KKR and Vestar would be included in the acquisition.
While investment banks working both sides of a transaction can benefit both buyers and sellers by helping a deal get to market more quickly and effectively, this is not the first case to focus on investment banks in this position. Indeed, one court noted that stapled financing provided by sell-side advisors "tends to raise eyebrows by creating the appearance of impropriety." Therefore, the activities of sell-side advisors will face closer scrutiny by the courts and disclosures made to the seller, in addition to the sale strategy, should be fully vetted by the seller. While the facts of this case are extreme, it provides a cautionary tale to parties involved in transactions where one investment banks provides both sell-side advice and buy-side financing. Without setting specific standards or disclosure requirements, this case makes clear that investment banks must carefully balance the use of their contacts to structure a strategic transaction and maintaining client confidences. If you would like to learn more about this development, please contact Rimon's lawyer at firstname.lastname@example.org