A recent Delaware Chancery Court opinion emphasises the need to choose an impartial investment adviser when a firm is engaged in a deal, writes Tami Kamin-Meyer.
Issued when vice chancellor J Travis Laster decided to temporarily halt a stockholders’ vote on the proposed acquisition of Del Monte Foods by a group of private equity bidders, the opinion, In re Del Monte Foods Co Shareholders Litigation, reminds corporate boards that ‘there is a huge check and balance on directors to determine whether a bid to buy a company is sufficient,’ says Brian Burns, a partner in the Columbus, Ohio, law firm Bricker & Eckler.
The case concerned the $5.3 billion proposed acquisition by a group comprising Kohlberg Kravis Roberts & Co (KKR), Vestar Capital Partners and Centerview Partners. The Del Monte directors did nothing improper during the negotiation process, Judge Laster holds, but their oversight of Del Monte’s financial adviser, Barclays Capital, was lax.
Barclays took advantage of Del Monte’s blind trust by ‘secretly and selfishly’ manipulating the sales process, Judge Laster says. Barclays began to peddle a Del Monte buyout, without the company’s knowledge or approval, by contacting several private equity firms in January 2010. Among them was KKR, a long-time Barclays client.
Next, Barclays persuaded the board to explore a potential sale of the firm, recommending that it limit its search for potential buyers to specific private equity groups, including ones with which Barclays had already negotiated.
Although Del Monte soon decided to remain independent, Barclays continued to pursue its payday. Vestar and KKR signed confidentiality agreements with Barclays precluding them from jointly bidding for Del Monte without that company’s approval. Nevertheless, Barclays then arranged for Vestar and KKR to issue a joint bid but didn’t inform Del Monte it knew the two had partnered for the venture.
That was a violation of the private equity firms’ agreements with Del Monte. Unaware of Barclays’ back room dealings, Del Monte permitted it to advise KKR and the buyout group on financing, from which Barclays stood to profit by as much as $24 million, in addition to the $23.5 million it earned from advising Del Monte about its potential sale. As Barclays’ dual representation was not impartial, Del Monte secured a second, independent fairness opinion at an additional $3 million.
The Del Monte opinion holds several lessons for corporate boards. It ‘underscores the need for companies and their boards to actively monitor the activities of a financial adviser in the context of a sale of the company,’ says Pran Jha, a partner with Sidley Austin in Chicago. ‘Where a company’s financial adviser proposes to provide acquisition financing to a buyer in connection with a sale transaction, the board must evaluate the benefits of providing such financing against any potential conflicts of interest.’
Doug Morgan, a partner in the Columbus, Ohio, office of Hahn Loeser & Parks, says Del Monte is also an excellent reminder that boards should require full disclosures of actual or potential conflicts of interest, including prior dealings between the financial adviser and the buying group. If the target’s financial adviser is participating in the buyer’s financing group, the board should consider using another adviser to manage the ‘go-shop’ process.
Although the Del Monte board was not accused of any wrongdoing, it could have protected shareholder interests more proactively, says Burns: ‘It is important to remind directors they can’t be naive about relying on financial advisers, because some advisers have conflicts they wish to hide.’ The bottom line is simple, he concludes: ‘Do your due diligence.’