Mon, Sep 28, 2015

Case In Point: What Flies in Fenway Park Doesn’t Fly in Delaware

One of the oldest tricks in sports is the hidden ball trick in baseball, in which a defensive player will “hide” the baseball in their glove with the intent of tagging out a baserunner. Although rarely employed, it’s a perfectly legal move, and when done successfully is worth it if only for the dumfounded look on the unsuspecting base runner. However, the tricks that may be legal in baseball are not so well accepted in business valuation.

A basic tenet of most business valuation engagements is that events occurring after the valuation date should be excluded from the valuation. That is, only what is “known or knowable” should be incorporated in the valuation analysis.  However, can events that occur after the valuation date be incorporated into the valuation if it is found that these events were deliberately delayed so as to not have been included in the valuation?  Delaware recently responded with a resounding “yes”.

The issue arose in a recent case regarding the 2013 tender offer of the remaining outstanding common shares of Dole Food Company (“Dole”) by Dole Chairman and CEO David Murdoch (“Murdoch”). (In re: Dole Food Co., Inc. Stockholder Litigation No. 8703-VCL (consol.) memo. Op. (Del. Ch. Aug. 27, 2015)).  In the Delaware Court’s decision, it ruled that post-transaction events could be retroactively incorporated in the valuation if a) those events were anticipated to occur as of the valuation date and b) information regarding these post-transaction events were concealed. Although the defendants in the case “argued vociferously-nigh desperately-that the court cannot consider anything that happened after the Merger,” the Court stated that “elements of future value… which are known or susceptible of proof as of the date of the merger and not the product of speculation, must be considered.”

In July 2013, Murdoch offered $12.00 per share to acquire all outstanding common shares of Dole, increasing his bid to $13.50 by August 2013.  Prior to this, Murdoch owned 40% of Dole common stock. This offer was evaluated and accepted by a committee made up of independent members of Dole’s Board of Directors (“Committee”). Acting in its role of financial advisor to the Committee, Lazard Freres (“Lazard”) had computed a “fairness range” of $11.40 to $14.08 in August 2013. As the offer price of $13.50 was at the high end of the range, the Committee and Lazard believed that Murdoch’s offer was reasonable. During the negotiations with Murdoch, the Committee had also contacted over 60 parties regarding the possibility of an outside bid for the Dole, but only two parties met with management and neither ultimately submitted a bid. Lacking any competing offers, and with Murdoch’s bid within the fairness range estimated by Lazard, the Committee believed that Murdoch’s bid was reasonable.  After a narrow majority of shareholders approved the offer, the transaction closed on November 1, 2013.

The Projections
However, unbeknownst to the Committee and to Lazard, Murdoch and Dole Chief Operating Officer Michael Carter (“Carter”) had intentionally provided the Committee and Lazard with “knowingly false” projections in the period leading up to the transaction as Carter “tried to mislead the Committee for Murdoch’s benefit.” On July 11th, 2013, Carter presented five year projections to Dole’s Board and the Committee that were surprisingly conservative relative to his forecasts presented early in 2013. These July 11th projections were the ones that Lazard was supposed to rely on for their assessment of the transaction price. Realizing that these projections were so low that they might not even support Murdoch’s initial offer of $12.00 per share, Lazard worked with the Committee to create “an aggressive, but reasonable and achievable” projection that could be used in the fairness opinion. These “Committee Projections” were completed in August 2013 and were used to support the fairness range of $11.40 to $14.08 per share.

However, on July 12th (only a day after meeting with the Committee and Lazard) Carter and other senior management met with Murdoch’s bankers and presented more aggressive forecasts than were given to the Committee and Lazard one day prior. No members of the Committee or Lazard were notified of this meeting despite specific instructions from the Committee that it be involved in any meetings Murdoch and Carter arranged. There were two value generating initiatives included in the meeting with Murdoch’s bankers but not included in the projections provided to the Committee: (1) one regarding cost cutting and (2) another entailing farm purchases in South America. In the following months, Carter repeatedly provided bankers and rating agencies with the more aggressive forecasts including these two initiatives while successfully keeping the Committee and Lazard in the dark about these activities.

Immediately following the transaction, Dole executed on both of these initiatives, and the cost savings were comparable to what Murdoch and Carter had anticipated in their meeting with Murdoch’s bankers. The Court ruled that had these two initiatives been included in the information presented to the Committee and Lazard, they would have increased the fairness range by a total of $2.74 per share ($1.87 from the cost cutting initiative and $0.87 from the farm purchases).

In its decision, the Court lauded the Committee and Lazard for their work and said that they “acted with integrity” and created “the most credible and reliable projection in the case… but [the Committee and Lazard] could not do so for areas where they did not receive full or accurate information.” Ultimately, Murdoch and Carter were ruled liable for damages of almost $150 million due to their attempts to conceal information about corporate initiatives from the Committee and Lazard. Clearly, the hidden ball trick doesn’t work in valuation in Delaware, even if it can be used successfully in hallowed Fenway Park.

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