On the Dole

The Delaware Chancery Court recently issued its opinion in the Dole Food Stockholder litigation (.pdf), and it’s a doozy.

The précis, as has been reported extensively, is that according to the court, Dole’s Chair, CEO, and 40% controlling shareholder David Murdock conspired with C. Michael Carter, another Dole officer, to make Dole look less profitable than it actually was, so that Murdock could buy out the public stockholders at a bargain price.

The opinion is well worth reading if only for the entertainment value – the machinations involved, and the court’s commentary, make for a riveting tale – but I can’t help but read this and wonder, can we expect to see a follow on Section 10(b) complaint?  And what would that look like?

[tl;dr analysis under the cut]

Until recently, Dole was a private company, owned by Murdock.   After Murdock ran into financial trouble during the mortgage crisis, he was forced to sell a part of the company to the public, leaving him with a 40% controlling stake.

Murdock never wanted Dole to be public, however, and he looked for an opportunity to repurchase Dole’s outstanding shares.  That opportunity arose in 2013, when he began discussions with the Board regarding a take-private transaction.  Ultimately, the Board accepted his offer of $13.50 per share, and the deal closed on November 1.

According to Vice Chanceller Laster, that $13.50 figure was skewed by Murdock and Carter’s fraudulent and manipulative conduct designed to trick the Board into undervaluing the company.  The scheme had a couple of different components.

First, Dole had previously calculated that it could achieve $50 million in cost savings, and those figures had been publicly announced.  Nonetheless, in January 2013, Carter publicly announced that Dole could only achieve $20 million in cost savings in future years.  Dole’s stock price dropped 13% in response.

According to Laster, Carter lied.  Dole’s internal projections still adhered to the $50 million figure, and in fact, after the company went private, that goal was achieved.

Second, Dole had previously decided it would engage in a share buyback.  Nonetheless, Carter announced to the market in May 2013 that Dole had canceled all share repurchases.  When Carter announced the cancelation, Dole’s stock price fell again.

Finally, Carter schemed to prevent the Board’s special committee from obtaining accurate internal projections from Dole managers; instead, Carter provided the Board with intentionally “lowballed” figures that, among other things, failed to take into account Dole’s intention to purchase certain farms.  The Board recognized that Carter’s figures were untrustworthy and tried to generate their own projections, but they were hobbled by a lack of access to information.

Laster thus concluded that the purchase price of $13.50 per share was, if not unfair, at least not as fair as it would have been had the process proceeded properly, and the court awarded damages of $2.74 per share, or $148 million.

But when I hear a story about a corporate executive publicly making false statements in order to manipulate stock prices, I immediately think – Section 10(b)!  And this is a particularly interesting case because there aren’t many downward manipulation cases out there.  Ironically, doctrinally speaking, two of the most important Section 10(b) cases ever litigated – Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) and Basic Inc. v. Levinson, 485 U.S. 224 (1988) – were downward/lowball manipulation cases, but we rarely see these kinds of cases roaming free in the wild, outside the confines of a securities textbook.

So I can't help running through how Section 10(b) might play out here.

First, I note that as far as I can tell, there’s still time for a plaintiff to file a lawsuit – and I’m kind of surprised that nothing’s been reported yet at the Stanford Clearinghouse.  The 10(b) limitations period runs 2 years from the time plaintiffs could have pled a complaint; Carter's first announcement was in January 2013 (more than 2 years ago), but I assume there weren't enough facts in the public domain at that time to create an inference of fraud.  Assuming evidence of fraud didn't exist until much later, plaintiffs may still have time on the clock.

The second issue might be, who’s the class in this scenario? I assume it would be anyone who bought prior to Carter's statements, and who experienced losses as a result (i.e., who sold afterwards when the stock was still depressed).  It would likely not include investors who held through the merger, because those investors will be compensated via the Delaware action.  So, the class would be defined to include all investors who bought prior to Carter's statements, and sold at a loss after them.  That would mean transaction causation and loss causation occurred at the same time - the class both relied upon his statements, and experienced losses because of them, at the moment of sale.  I don't have any problem with that conceptually, but in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the Supreme Court - imagining 10(b) claims based on inflationary statements - held that "at the moment the transaction takes place, the plaintiff has suffered no loss."  Halliburton I - which also envisioned a more typical 10(b) scenario - similarly described transaction causation and loss causation as occurring at different time points.  See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) ("loss causation, by contrast [to transaction causation], requires a plaintiff to show that a misrepresentation that affected the integrity of the market price also caused a subsequent economic loss").  I do wonder whether the conflation of transaction causation and loss causation in this kind of case might give a court pause - especially since the market was never really "cured"; the stock simply ceased public trading.  Certainly, I'd expect the defendants to argue strenuously that Dura and Halliburton I do not permit loss causation and transaction causation to be treated as the same.

Another question might be, can the company itself be liable?  After all, Laster held that Murdock and Carter stopped working on behalf of Dole, and instead were working for themselves, suggesting there should not be vicarious liability. 

On that score, I presume Dole Food could be liable on an apparent authority theory, i.e., that Carter was apparently authorized to speak on the company’s behalf.  If that’s true, regardless of Murdock’s and Carter’s personal motives, stockholders might still be able to name Dole itself as a defendant.  See In re Atlantic Financial Management, Inc., 784 F.2d 29 (1st Cir. 1986).

If a claim was brought, would insurance pay it?  That’s intriguing; a court now has found they committed intentional fraud, and usually intentional fraud is excluded from insurance policies.  And the company cannot indemnify Murdock and Carter for intentional fraud, either.

With that cleared out of the way, what could trigger liability here?

Carter’s first statement was a false projection of future performance.  But projections of future performance are protected by the PSLRA’s safe harbor; they are only actionable if knowingly false (according to Laster, likely satisfied in this case), and if the company did not include sufficient “cautionary language” to warn of the risks inherent in the projection.

Well, Dole, like most companies, tends to warn of bad things – risks of labor disruptions, global downturns, price competition.  An (admittedly brief) skim of their 10-K did not reveal any warnings that maybe things will be better than expected, so it would be interesting to see that scenario play out in court.

Carter’s second statement was a cancelation of share repurchases.  That might have been manipulative - i.e., intended to drive down the stock price – but it doesn’t seem actionable under Section 10(b).  After all, it wasn’t false – Dole did cancel the share repurchases.  And sabotaging the company in that way would seem to be the classic kind of fiduciary breach deemed inactionable in Santa Fe Indus. v. Green, 430 U.S. 462 (1977).

Finally, Carter may have misled the Board about Dole’s projected performance, but those projections were never made public, and therefore it doesn’t seem there could be a claim based on his actions.

So.  Carter’s January projections.  If Carter is liable for them, and Dole is liable under an apparent authority theory – what about Murdock?  What about other managers within Dole?

Some courts have held that a company has a duty to correct its own false statements.  See, e.g., Gallagher v. Abbott Labs., 269 F.3d 806 (7th Cir. 2001).  But it’s always been uncertain as to how that duty translates into a duty on any particular company official.  The Third Circuit has held false corporate statements do not create a duty to speak that runs against a particular corporate official, United States v. Schiff, 602 F.3d 152 (3d Cir. 2010); the Fifth Circuit possibly disagrees, at least in some circumstances, Barrie v Intervoice-Brite, 409 F.3d 653 (5th Cir. 2005), and the whole thing is in doubt again after the Supreme Court’s Janus decision, see Hoi Ming Michael Ho v. Duoyuan Global Water, Inc., 887 F. Supp. 2d 547 (S.D.N.Y. 2012).  If random Dole officers were aware that Carter was falsely describing Dole’s expectations, did they have personal duties to correct him?

And what about Murdock?  As a co-conspirator, could he be liable for failing to correct Carter?  Or maybe Carter was acting as Murdock’s agent – allowing Murdock to be liable vicariously.  Or maybe we could even say that Murdock is liable for Dole’s or Carter’s conduct under a controlling person theory.

Anyway, that’s as far as my thinking takes me.  But mostly, I’m really interested to see if a case gets filed; Laster’s opinion is practically an invitation.