A recent decision by the Delaware Court of Chancery has provided a stark reminder that buyers, directors of target firms and financial advisors must be mindful that conflicts of interest affecting a target’s financial advisor will be closely scrutinized by the courts.
In In re Del Monte Foods Company Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011), the Court of Chancery issued a preliminary injunction delaying for 20 days the stockholder vote on the proposed leveraged buyout of Del Monte Foods by a private equity group consisting of Kohlberg Kravis Roberts & Co., L.P. (“KKR”), Vestar Capital Partners (“Vestar”), and Centerview Partners. The court also enjoined the buyers from enforcing the no solicitation, termination fee and matching right provisions in the merger agreement pending the stockholder vote.
Central to the court’s decision was the role played by Del Monte’s financial advisor, Barclays Capital (“Barclays”), which the court stated had “secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to provide buy-side financing to KKR.” The court concluded that the 45 day go-shop process managed by Barclay’s was tainted by Barclays’ interest in earning fees for providing buy-side financing to the buyers. The court stated that the blame for what took place appeared to lie with the with Barclays, but said that “the buck stops with the board.” The court found that the plaintiffs had established a reasonable likelihood of success on their claims that the director defendants failed to act reasonably in connection with the sale process, and that KKR had aided and abetted their breaches of fiduciary duty.
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