Any day now, David Murdock, the 92-year-old owner of Dole Food Co, will find out whether his decision to go to trial to defend the terms of his 2013 buyout of the company was heroic or foolish.
It was certainly unusual, and could lead to one of the biggest judgments ever in Delaware’s Court of Chancery, a leading venue for corporate disputes.
Dole faces two kinds of legal actions that have been combined because they both allege the buyout price was too low. A small group of hedge funds have brought a so-called appraisal action, which is being tried alongside a shareholder class action lawsuit.
While appraisal actions sometimes go all the way to trial, shareholder class actions almost never do, usually ending with quick settlements.
Increasingly, companies see the lawsuits simply as part of the cost of corporate dealmaking.
But Murdock, a high school dropout and self-made billionaire, is having none of that. He fought the actions all the way through a two-week trial that began in February in Delaware, where California-based Dole is incorporated. During the proceeding, Murdock even took the stand to face two days of aggressive questioning, despite his age and poor hearing.
The shareholders have not backed down either. They are led by plaintiffs’ attorney Stuart Grant, who has wrested multimillion dollar settlements from News Corp and Goldman Sachs, among others, in some of the few cases that have actually generated big wins for shareholders.
In the Dole case, investors are seeking to nearly double the $13.50 a share Murdock paid for the company, one of the world’s largest producers of fresh fruit and vegetables. If they prevail, Dole and Murdock could have to put up as much as $1 billion — on top of the $1.2 billion already spent on the buyout. That possibility has prompted Moody’s to warn that it could cut Dole’s already junk credit rating, just as the company needs cash to pay for new ships and investments in plantations.
A ruling from Vice Chancellor Travis Laster is expected imminently.
AMERICA’S OLDEST CEO
At the time of the November 2103 buyout, which shareholders approved by a slim margin, Murdock was chairman and CEO of the fruit importer and owned 40 percent of its stock. In court, Grant painted Murdock – America’s oldest CEO, according to information service FactSet – as scheming to drive down the stock price to the point where he could take the company private on the cheap, then bullying his board to accept the deal.
Murdock has denied the allegations.
“We did a fair and honest transaction that is being made to look now like I was a dirty skunk that did all of this damage,” he testified.
Murdock told the court he paid generously for Dole, and that he pursued the deal not for personal gain but to combine the food producer with a North Carolina research center he established to unlock the secrets of nutrition and longevity.
During the trial Murdock testified about his unusual memory, saying he could recite dozens of poems, and claimed he could still run as fast as ever.
The appraisal action part of the case was brought by funds affiliated with Merion Capital, Hudson Bay Capital, Magnetar Capital and Fortress Investment Group. Together the funds scooped up nearly 20 percent of Dole stock just before the deal closed, with an eye to pursuing legal action. Kevin Abrams of Wilmington-based Abrams & Bayliss is representing a majority of the appraisal petitioners, and Grant represents some as well.
Appraisal actions were to protect long-term investors who had merger deals forced upon them. However, Delaware court rulings have allowed short-term investors to seek appraisals even if they purchased the stock after the deadline to vote on a deal. In recent years, investors have bought stock in companies being acquired just prior to deals closing, specifically so they can bring appraisal actions.
The cases can bring generous settlements or judgments. And even if the deal price is found to be fair, interest on the stock being appraised nevertheless accrues at 5.75 percent, generating a relatively good return whether or not the action has merit.
In recent years appraisal cases have boomed. Hedge funds focused on “appraisal arbitrage” have generated up to 20 percent annual returns, often through private letters and quick settlements that never reach the court.
Critics deride the suits as a get-rich-quick ploy by “M&A pirates.”
BATTLING THE LAWS
Dole has also taken the fight outside the courtroom, lobbying Delaware officials to amend laws that Murdock believes incentivize shareholder actions – even if the changes come too late to help Dole.
In December 2013, hours after Dole signed a 15-year lease deal with the Port of Wilmington, assuring steady revenues for Delaware and some 850 jobs in the state, Andrew Lippstone, the governor’s general counsel, wrote to Dole’s general counsel Genevieve Kelly. According to documents obtained from an open records request, he passed along a list of Delaware legal experts who proposed changes to the state’s corporate law. “Happy to discuss next steps at your convenience.”
Soon after that, the company began pushing for changes to Delaware’s corporate laws. Dole wanted to discourage the hedge funds from “buying lawsuits,” as the company saw it, by limiting appraisal to long-term investors and cutting the interest incentive.
Kelly threatened to retaliate if Dole did not get the changes it wanted. In a September email to the governor’s chief of staff, she wrote that hedge funds pursuing appraisal “show companies why there is a need to re-incorporate in more business friendly states.”
Kelly got more specific in an email to Reuters: “we have communicated that Dole will incorporate elsewhere if changes are not made.”
Lawmakers have said they anticipate action next year, most likely aimed at modifying the appraisal interest. The change will come too late to benefit Dole, but it would likely undercut the “appraisal arbitrage” that has attracted so many hedge funds.
Meanwhile, Murdock is optimistic he will prevail in court. “I’ve been in a lot of fights,” he testified during the case. “You’d be the first one I ever lost, if I lose.”