In re Del Monte Foods Co. S’holders Litig.
Exposing Conflicts of Interest on Wall Street
On December 1, 2011, the Delaware Court of Chancery granted final settlement approval in the landmark case of In re Del Monte Foods Co. S’holders Litig., an action that challenged the 2011 leveraged buyout of Del Monte Foods Company by a consortium of private equity firms led by Kohlberg Kravis Roberts & Co. L.P. (“KKR”).
Prior to its acquisition, Del Monte was one of the country’s largest producers, distributors, and marketers of premium quality branded pet products and food products for the U.S. retail market, generating $3.7 billion in net sales in fiscal 2010. Through their litigation efforts, plaintiffs, led by NECA-IBEW Pension Fund (The Decatur Plan), uncovered evidence unknown not only to shareholders, but to the Del Monte board of directors itself.
As alleged by plaintiffs, Barclays Capital, Inc. – Del Monte’s financial advisor – embarked on a plan to arrange for Del Monte to be acquired by private equity interests, for which Barclays would not only receive tens of millions of dollars in fees for rendering sell-side advice to Del Monte, but would also receive tens of millions of dollars more for providing buyside loans to the buyout group. Thereafter, Barclays, without the knowledge of the Del Monte board, approached a number of private equity firms to generate interest in a possible acquisition of Del Monte, and then persuaded the Del Monte board of directors to entertain such offers. Participants in this initial sales process included Vestar Capital Partners, which submitted the highest indication of interest, and a consortium comprised of KKR and Centerview Partners, which submitted the second highest indication of interest. All participants, including Vestar, KKR and Centerview, were required to execute confidentiality agreements as part of the sales process that prohibited them from communicating with each other or banding together to make a joint bid without the prior written consent of the Del Monte board.
After the initial sales process fell apart, Barclays arranged – again without the knowledge or approval of the Del Monte board – for KKR, Centerview and Vestar to band together in contravention of the confidentiality agreements they signed and make a new bid to acquire Del Monte, and for Barclays to participate in financing the acquisition. Thereafter, the Del Monte board, advised by Barclays, approved a sale of the company to this private equity consortium for $19 per share in a transaction announced in November 2010.
Pursuant to its agreements with the Del Monte board and the buyout group, Barclays stood to reap approximately $50 million in advisory and lending fees. However, plaintiffs stepped in to challenge the transaction and halt this scheme. Through their litigation efforts, which ultimately included obtaining and reviewing over 650,000 pages of documents and taking numerous depositions, plaintiffs sought and were granted an unprecedented injunction order postponing the shareholder vote on the merger and invalidating the merger agreement’s termination fee, no solicitation clause and other so-called “deal protection devices.” Continued litigation efforts after the injunction resulted in a settlement payment by Barclays and the buyout group totaling $89.4 million, one of the largest post-merger common funds ever recovered in Delaware or anywhere else.
In approving the $89.4 million settlement, the court concluded that “this is a very significant settlement involving a lot of money for a deal case. . . . [It] provides excellent consideration for the class.” Commenting on the outcome, Randall J. Baron of Robbins Geller, one of the lead counsel for plaintiffs, said, “I am very proud of the tremendous results we achieved for shareholders here. We not only obtained one of the largest post-merger recoveries ever for shareholders, but we also exposed and put a halt to a long-standing pattern of misconduct by Wall Street bankers. I have been in conferences where people have said the entire director community knows it now has to ask questions of its financial advisors regarding financing-related conflicts of interest. This case very much changed the way investment banking is practiced.”
Noting that plaintiffs’ counsel “have an established track record of generating meaningful results in this Court,” the Chancery Court held that “it was only through the effective use of discovery that the plaintiffs were able to ‘disturb the patina of normalcy surrounding the transaction.’” The court elaborated: “Lead Counsel engaged in hard-nosed discovery to penetrate and expose problems with practices that Wall Street considered ‘typical.’” As one Wall Street banker noted, “Everybody does it, but Barclays is the one that got caught with their hand in the cookie jar. Now everybody has to rethink how we conduct ourselves in financing situations.”
In re Del Monte Foods Co. S'holders Litig., No. 6027-VCL (Del. Ch.).