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The Board and the Conflicted
Financial Adviser: A Cautionary Tale
Twitter Feed @DelBizCourt Barry M. Klayman and Mark E. Felger
Nortel U.S., Canadian Units Special to the Delaware Business Court
Battle European Affiliates Over
Klayman Felger Insider | May 11, 2011
$9.8 Billion - Bloomberg
http://t.co/dqSNmP2 via
@BloombergNow A Feb. 14 Delaware Court of Chancery Court decision, In re Del Monte Foods Co.
Shareholders Litigation, demonstrates that a financial adviser’s manipulation of
International Coal Sued by
Investor Over $3.4 Billion Arch
the sales process for its own benefit can lead to problems for an unwary board of
Takeover Bid - Bloomberg directors contemplating the sale of the company.
http://t.co/BXklqNc via
@BloombergNow The facts of the case make for an interesting tale of greed and deceit. The court
found that Barclays Capital, the financial adviser to Del Monte Foods, "secretly
How to Win (and Keep)
and selfishly manipulated the sale process to engineer a transaction that would THIS WEEK'S CASES
Business, 2 Credit CLE Course.
http://bit.ly/m7o5C4 permit Barclays to obtain lucrative buy-side financing fees. On multiple occasions,
Barclays protected its own interest by withholding information from [Del Monte’s] Delaware Court Of Chancery
Federal Judge Keeps Egyptian board that could have led Del Monte to retain a different bank, pursue a different
CIVIL PRACTICE
Litigation in Delaware alternative, or deny Barclays a buy-side role."
Whittington v. Dragon Group L.L.C.
http://t.co/pGTLajr via
@delbizcourt
Limitation of Action • Laches • Comparable
According to the court, Barclays worked behind the scenes to put Del Monte in Limitations Period • Prejudice
Chancery Court Sees Limits to play and outlined "with prophetic clarity" the process Del Monte would follow to Defendants were barred from asserting here that
Preferred Stockholders' Rights several private equity firms, including Kohlberg Kravis Roberts & Co. (KKR). When plaintiff was not a member of the defendant
http://bit.ly/kVnbEX Del Monte’s board sought Barclays' advice on an unsolicited offer to purchase the limited liability company where the court, in
company, Barclays recommended a "targeted, non-public process," precisely what previous litigation, had determined that plaintiff
In Key Opinions an Answer for it had outlined to KKR and the other private equity firms. While there are good was in fact a member. Judgment in part for
Answer.com, and a Greenlight business reasons for such an approach, the court noted that such a process "also plaintiff.
for a 'Make-Whole Premium' furthered Barclays’ goal of providing buy-side financing. Private equity firms are Read more >>
http://t.co/8eOtAQz
generally more likely than strategic buyers to require financing, and Barclays was
one of a limited group of institutions with sufficient resources to handle a
transaction as large as the Del Monte LBO." In March 2010, a number of LBO
Court Feeds firms were invited to submit expressions of interest. They had to sign
U.S. Bankruptcy Court Of Delaware
confidentiality agreements that included a two-year "No Teaming Provision" that BANKRUPTCY
Encite LLC v. Soni, et al. ensured that Del Monte would have the right to determine whether any bidders In re NEC Holdings
would be allowed to work together and thus control the competitive dynamics of Environmental Contamination • Recovery and
DFG Wine Company, LLC v. Contribution • Core v. Non-Core • Two-Step Test
the process, the court said.
Eight Estates Wine Holdings, Debtors’ arguments regarding their
LLC environmental claims did not involve any
After considering the expressions of interest, the Del Monte board decided not to substantive rights arising under the Bankruptcy
Murphy Marine Services Inc. proceed with any sale and specifically instructed Barclays to shut the process
v. Brittingham Code and the claims could have arisen outside of
down. the bankruptcy context and did not satisfy the
two-step test for core proceedings. The court
Six months later, the opinion said, Barclays suggested that Vestar, one of the granted defendants’ motion for a determination
Quick Links firms that had participated in the first go-around, and KKR partner together on an that their claims were non-core.
LBO for Del Monte, in violation of the "No Teaming Provision." By matching the Read more >>
Delaware Corporate Law
Article Translated into Chinese
two previous highest bidders, Barclays reduced the prospect of real competition in
Francis G.X. Pileggi any renewed process and served its own interests in furthering a deal with KKR,
The Conference Board's which previously used Barclays for buy-side financing.
Delaware Court Of Chancery
Governance Center Blog
CIVIL PRACTICE
KKR then sent Del Monte another indication of interest and worked with Barclays Encite LLC v. Soni
Delaware's Laster Slashes
Plaintiffs Fee Request by 95
to conceal Vestar’s participation in the proposal, the court said. The Del Monte Discovery • Scheduling Order • Delayed Request
Percent in Sauer-Danfoss Case board decided to pursue discussions with KKR and authorized the company to re- for Modification • Excusable Neglect
AmLawDaily engage Barclays as its financial adviser. Barclays never told Del Monte that it had There was no good cause for plaintiff’s failure to
been talking with Vestar and KKR, had been instrumental in putting them submit its expert report in a timely manner and
Decision in DBSI Inc., Holds together, and had helped to engender the KKR bid. its failure to request an extension to do so before
that the "Particularity" the deadline had already passed. Plaintiff’s
Requirement of F.R.C.P. 12(b)
With momentum building toward a sale, KKR and Barclays approached Del motion to modify scheduling order denied.
(6) and 9(b) was Satisfied,
Notwithstanding the Number Monte’s board with, in the words of the court, two "unsavory requests." First, KKR Read more >>
of Alleged Fraudulent formally requested to include Vestar as an additional member of the sponsor
Transfers group. Second, Barclays requested the board to allow it to provide buy-side
Fox Rothschild Bankruptcy financing to the KKR group, as Barclays had been planning to do all along.
Blog
Delaware Court Of Chancery
Significantly, at this time, Del Monte and KKR had not yet agreed on a price. As
BUSINESS LAW
the court saw it, KKR did not need Barclays to finance the deal; Barclays simply
Mike Castle, Attorney At Law In re Answers Corporation Shareholders Litigation
wanted to "double-dip." Barclays could earn $21 million to $24 million in fees
Delaware Grapevine Shareholder Suit • Proposed Merger • Competing
through its buy-side role, in addition to as much as $23.5 million as Del Monte’s
Offer • Shareholder Vote • Continuance
sell-side adviser.
Because a competing offer made on the eve of a
Video Higlights vote on a proposed merger was so deficient, it
Del Monte’s board agreed to both requests. In an agreement approving the new could not fairly be considered material to the
Corporate Clients' Concerns role, Barclays insisted that Del Monte obtain a second fairness opinion from an stockholders’ decision and, thus, no further delay
With Social Media independent financial adviser. As a result, Del Monte paid an additional $3 million of the stockholders’ meeting was warranted.
to a second financial adviser, Perella Weinberg. Plaintiffs’ application for delay of shareholder
Lawyers Behind New Guinea meeting denied.
Liquefied Natural Gas Project Read more >>
Barclays then continued to negotiate on behalf of Del Monte with KKR on the
terms of the merger. The final merger agreement included match-rights and
termination fee provisions, as well as a 45-day "go-shop" period for Del Monte to
Archives
Delaware Court Of Chancery
http://www.delbizcourt.com/story.php?story_id=3681 5/12/2011

2. Delaware Business Court Insider - The Board and the Conflicted Financial Adviser: A Ca... Page 2 of 3
solicit other offers. After the agreement was signed, Del Monte’s board let BUSINESS LAW
Barclays run the go-shop process, even though Barclays had a direct financial Meso Scale Diagnostics, LLC. v. Roche
May 11, 2011
May 4, 2011 conflict and Del Monte had retained Perella Weinberg, which could have handled Diagnostics GMBH
April 27, 2011 the process. Barclays found no additional bidders for the company. Mergers and Acquisitions • Reverse Triangular
April 20, 2011 Merger • Consent • Contract Ambiguity
April 13, 2011 The subject provision in the parties' contract was
April 6, 2011 Multiple putative shareholder class actions were filed in the Delaware Court of fairly susceptible to more than one reasonable
March 30, 2011 Chancery against Del Monte, the members of its board of directors and the construction where the court was not convinced
March 23, 2011 members of the buy-out group, and consolidated in a single action. The that plaintiffs' construction of the provision as
March 16, 2011 complaints alleged that the directors had breached their fiduciary duties to requiring their consent in the circumstances of
March 2, 2011 stockholders by failing to obtain the best transaction reasonably available and by this case, involving a reverse triangular merger,
January 19, 2011 disseminating false and misleading information and omitting material facts in was unreasonable. Motion to dismiss denied.
connection with the shareholder vote. The complaints also alleged that the Read more >>
members of the buy-out group aided and abetted in the directors’ breach of their
fiduciary duty. The resulting discovery uncovered the tale of the conflicted
adviser. The plaintiffs then sought and won an injunction to postpone the
shareholder vote on the merger.
The court applied the enhanced scrutiny test to the directors’ action and
concluded that the plaintiffs had established a reasonable likelihood of success on
the merits of their claim. While the court found that the blame for what took place
appeared (at the preliminary stage) to lie with Barclays, "the buck stops with the
board." The directors failed to act reasonably by failing to adequately oversee the
process and in relying upon a conflicted financial adviser. The court also found
that plaintiffs had established a reasonable likelihood of success on the merits of
their claim that KKR aided and abetted the breaches of fiduciary duty that
resulted from Barclays’ misconduct.
The court concluded that without an injunction, the Del Monte stockholders would
be deprived forever of the opportunity to receive a pre-vote topping bid in a
process free from taint from Barclay’s improper activities. However, the court was
reluctant to enjoin the merger pending a final hearing on the merits, since doing
so might jeopardize the transaction and thus the stockholders’ ability to receive a
premium for their shares. The court chose to preliminarily enjoin the defendants
from proceeding with the vote on the merger for a period of 20 days. Pending the
vote on the merger, the parties to the merger agreement were enjoined from
enforcing the no-solicitation and match-right provisions and the termination fee
provisions relating to topping bids and changes of recommendation.
What are the lessons to be learned from this tale? First, target boards must take
an "active and direct role in the sale process." The directors must take appropriate
steps to require disclosure of existing and potential conflicts on the part of their
financial advisers and give clear instructions to their financial advisers concerning
what they can and cannot do without authorization from the board.
Second, target boards should be reluctant to permit their financial advisers to
participate on the buy-side of the transaction, and should consider it only when it
is crucial to the transaction and in return for concessions from the adviser or the
acquiring company. Third, if the target board consents to its financial adviser
participating on the buy-side of the transaction, it needs to take other steps to
counter the resulting conflict, including retention of another, independent financial
adviser to give a final fairness opinion and to manage the sales process, including
conducting the go-shop process or dealing with any late topping bids.
To conclude this tale, following the decision by the Court of Chancery, Del Monte’s
board engaged Perella Weinberg to solicit other suiters who might be interested in
acquiring the company. Perella Weinberg was paid a retainer of $1 million and
promised an additional fee of $4 million if an alternate transaction closed at a
price higher than $19 per share, which KKR had agreed to pay in the merger
agreement. Perella Weinberg contacted a total of 70 parties, including both
strategic parties and financial parties. None of them made a proposal to acquire
the company. On March 7, the shareholders of Del Monte approved the $5.3
billion takeover led by KKR at $19 a share.
Barry M. Klayman is a member in the commercial litigation department, and
Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring
practice group, at Cozen O’Connor.
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3. Delaware Business Court Insider - The Board and the Conflicted Financial Adviser: A Ca... Page 3 of 3
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