Securities Law Alert
In This Edition:• Second Circuit: Dodd Frank’s Whistleblower Protection Provisions Extend to Allegations Reported
Internally Even If Not Reported to the SEC• Fifth Circuit: Damages Based on a “Materialization of the Risk” Theory Cannot Be Measured on a ClassWide Basis for Rule 23(b)(3) Purposes, as Required Under the Supreme Court’s Decision in Comcast• Southern District of New York: Insurers’ IBNR Reserves Are Opinions That Are Actionable Under
Omnicare Only If (1) the Speaker Did Not Believe the Statement at the Time It Was Made, or (2) theStatement Did Not Rest on Some Meaningful Inquiry• Delaware Chancery Court: Courts Must Carefully Scrutinize Disclosure-Only Settlements of Class Action
Merger Litigation to Ensure the Settlements Are in the Best Interests of the Class• Delaware Chancery Court: Adherence to MFW’s Safeguards for Controlling Stockholder Transactions
Does Not Protect the Controller from Liability for Breaching the Duty of Loyalty If the Controller Engaged
in Fraud in Connection with the Transaction
September 2015

SimpsonThacher’s securities
litigation team is“[a] standout choice forfinancial institutions, witha well-established reputation
for its handling of high-value
litigation.”– Chambers USA
2015

Second Circuit: Dodd
Frank’s Whistleblower
Protection Provisions Extend
to Allegations Reported
Internally Even If Not
Reported to the SEC
On September 10, 2015, the United States
Court of Appeals for the Second Circuit,
deferring to the interpretation of theSEC, held that the Dodd-Frank Act’s antiretaliation provision protects employees whoreported suspected wrongdoing internally,
but did not similarly report it to the SEC prior
to suffering retaliation.
In Berman v. Neo@Ogilvy LLC, 2015 WL
5254916 (2d Cir. Sept. 10, 2015), the Second
Circuit addressed the tension between two
provisions of Section 21F of the Securities
Exchange Act of 1934, as amended, which
was part of the Dodd-Frank Act. Subsection

Simpson Thacher & Bartlett LLP

21F(a)(6) defines a “whistleblower” as “anyindividual who provides … information
relating to a violation of the securities
laws to the Commission.” Subsection
21F(h)(1)(A) prohibits, in relevant part,all forms of discrimination against “awhistleblower in the terms and conditions of
employment because of any lawful act done by
the whistleblower” in providing information
regarding a securities law violation to the SEC
or “in making disclosures that are requiredor protected under the Sarbanes-Oxley Act
of 2002.” (Section 806 of the SarbanesOxley Act prohibits retaliation against
employees of publicly traded companies who
provide information concerning securities
law violations to, among others, a federal
regulatory or law enforcement agency, any
member or committee of Congress, or “aperson with supervisory authority overthe employee.”)
In attempting to resolve this statutory
tension, the Second Circuit first consulted1the legislative history of the subdivisioncontaining the cross-reference to the
Sarbanes-Oxley Act. Noting that such an
inquiry “yields nothing,” the court stated thatthe tension between subsection 21F(a)(6) andsubsection 21F(h)(1)(A) “renders section 21F
as a whole sufficiently ambiguous” to warrant
deference to “the reasonable interpretationof the agency charged with administering
the statute,” which, in this matter, was theSEC. Accordingly, without “definitively
constru[ing] the statute” itself, the Second
Circuit adopted the SEC’s position that the
Dodd-Frank Act’s anti-retaliation provisions
extend to individuals who report suspectedviolations to “persons or governmental
authorities other than the Commission” aswell as to the SEC itself.1

As the Second Circuit observed, its decision
in Berman creates a circuit split with regard
to the question of the scope of Dodd Frank’s
anti-retaliation provisions. In 2013, theUnited States Court of Appeals for the Fifth
Circuit, in Asadi v. G.E. Energy (USA),
LLC, 720 F.3d 620 (5th Cir. 2013), held thatwhistleblowers who face retaliation within
the meaning of Dodd-Frank are covered by
Dodd-Frank’s anti-retaliation provisions only
if they had reported the suspected violation to
the SEC.2
1. The Second Circuit cited “Securities Whistleblower Incentives
and Protections,” SEC Release No. 34-64545, 76 Fed. Reg.
34300-01 (June 13, 2011); see also “Interpretation of the
SEC’s Whistleblower Rules Under Section 21F of the Securities
Exchange Act of 1934,” Release No. 34-75592 (Aug. 4, 2015). Fora discussion of the SEC’s recent interpretive release regarding the
SEC’s whistleblower rules under Section 21F of the Exchange Act,
see Simpson Thacher Memorandum, “SEC Issues Interpretation
Regarding Definition of ‘Whistleblower’ Under the Dodd-Frank
Act’s Anti-Retaliation Provision” (Aug. 27, 2015).
2. Please click here to read our prior discussion of the Asadi
decision.

Fifth Circuit: Damages
Based on a “Materializationof the Risk” Theory Cannot
Be Measured on a ClassWide Basis for Rule 23(b)(3)Purposes, as Required Under
the Supreme Court’s Decisionin Comcast
On September 8, 2015, the Fifth Circuit
affirmed a Southern District of Texas decision
denying certification to a proposed classof plaintiffs who alleged that BP had mademisrepresentations concerning the safety
procedures the company had in place prior
to the 2010 Deepwater Horizon oil spill (the“Pre-Spill Class”). Ludlow v. BP, P.L.C., 2015
WL 5235010 (5th Cir. 2015) (Higginbotham,J.). Plaintiffs contended that BP’s statements“creat[ed] an impression that the risk ofcatastrophic failure was lower than it actuallywas.” Plaintiffs claimed that when the riskmaterialized in the form of the Deepwater
spill, investors who were “defrauded into
taking on that heightened risk” were entitled
to recover their losses as damages. The Fifth
Circuit agreed with the district court thatdamages based on plaintiffs’ “materializationof the risk” theory could not be measured
on a class-wide basis, as required under theSupreme Court’s decision in Comcast Corp. v.
Behrend, 133 S. Ct. 1426 (2013), because themodel required an “individualized inquiry”
into whether each investor would havepurchased BP stock had that investor knownof the true risk of a major spill.
The Fifth Circuit also affirmed the district
court’s decision certifying a class of plaintiffs
who alleged that BP had misrepresented its
internal estimates of the Deepwater spill rate.

Comcast: Damages Must Be
Capable of Measurement on aClass-Wide Basis to Satisfy
Rule 23(b)(3)’s Requirements
Rule 23(b)(3) provides, in relevant part,that “questions of law or fact common toclass members [must] predominate over any
questions affecting only individual members.”
In Comcast, the Supreme Court held that“a model purporting to serve as evidence ofdamages in [a] class action must measure
only those damages attributable to that2

theory” and must “establish that damages
are susceptible of measurement across theentire class for purposes of Rule 23(b)(3).”133 S. Ct. 1426. The Comcast Court
emphasized that “any model supporting aplaintiff’s damages case must be consistent
with its liability case, particularly with respect
to the alleged … effect of the violation.” The
Comcast Court further directed that “courts
must conduct a rigorous analysis” to ensurethat Rule 23(b)(3)’s requirements are met
prior to certifying a class.

Fifth Circuit Finds the District
Court Properly Declined to Certify
the Pre-Spill Class Because the“Materialization of the Risk”
Damages Model Required
Individualized Inquiries as toWhether Each Plaintiff Would
Have Purchased BP Stock Had It
Known of the Allegedly Higher
Risk of a Spill
The Pre-Spill Class sought damages basedon a “materialization of the risk” theory.
Plaintiffs claimed that “BP [had] allegedly
misstated the efficacy of its safety procedures,
creating an impression that the risk ofa catastrophic failure was lower than it
actually was.” According to plaintiffs,“[t]hese statements resulted in an ‘investor
being defrauded into taking a greater risk
than disclosed.’”The Fifth Circuit found that the district court
had not “abuse[d] its discretion in holdingthat the Pre-Spill damages theory was notcapable of class-wide determination,” asrequired under Comcast. The Fifth Circuit
explained that plaintiffs’ “materialization of
the risk” “theory hinge[d] on a determinationthat each plaintiff would not have bought
BP stock at all were it not for the alleged
misrepresentations—a determination notderivable as a common question, but rather
one requiring individualized inquiry.”
The court offered the example of two
hypothetical pension fund investors, onethat only invests in companies with a riskof catastrophic events of less than 1%, andanother that has a higher 2% threshold forsuch risk. The court posited that if BP’s“true risk of a major spill was 2%, but BP’sstatements had improperly represented therisk as 0.5%,” then the low-risk pension fund“would not have bought BP stock at all” but“the high-risk fund still might have purchased
the stock.” The court explained that “[f]or thesecond type of plaintiff, full materializationof-the-risk damages would prove a windfall.”
Because plaintiffs’ damages model had
no “mechanism for separating these twoclasses of plaintiffs,” the Fifth Circuit
found that the model could not “provide anadequate measure of class-wide damages
under Comcast.”
The Fifth Circuit rejected plaintiffs’ claimthat under the fraud-on-the-market theory,the court had to “presume[ ] that the PreSpill Class relied on BP’s misrepresentations
in purchasing the [stock] and themisrepresentations were a cause-in-fact of
their losses.” The court explained that the
fraud-on-the-market theory set forth in Basic
Inc. v. Levinson, 485 U.S. 224 (1988), “doesnot provide any presumptions with regard
to loss causation—whether the misstatement
caused the loss.”Moreover, the court pointed out that“the fraud-on-the-market presumption isrebuttable,” and found that “plaintiffs’ own
model may well have rebutted it.” The court
explained that the fraud-on-the-market
theory “presume[s] reliance because (a) all
information in an efficient market is priced
into a security and (b) investors typicallymake investment decisions based on priceand price alone.” Here, however, “plaintiffs’
own model assert[ed] that they [had] reliedon something other than price: risk.” The
Fifth Circuit found that “[b]y claiming thatclass members may have divested themselvesof BP stock if they had known about thetrue risk of an accident in the Gulf—asdistinguished from that risk’s impact on
BP’s stock price,” plaintiffs were effectively“arguing that their investment decisions werebased substantially on factors other thanprice.” The Fifth Circuit determined that“plaintiffs’ argument thus undercut[ ] one of
the rationales for the Basic presumption ofreliance.”
The Fifth Circuit therefore affirmed the
district court’s decision denying certification
as to the Pre-Spill Class.

3

Southern District of New
York: Insurers’ IBNR Reserves
Are Opinions That Are
Actionable Under Omnicare
Only If (1) the Speaker Did
Not Believe the Statement at
the Time It Was Made, or (2)the Statement Did Not Rest on
Some Meaningful Inquiry
On September 11, 2015, the Southern Districtof New York dismissed claims brought under
Section 10(b) and Rule 10b-5 alleging that
MetLife, Inc. had understated its reserves forincurred but not reported death benefit claims(“IBNR reserves”), which in turn allegedly
impacted the accuracy of the company’s
financial statements. City of Westland
Police and Fire Ret. Sys. v MetLife, Inc.,
2015 WL 5311196 (S.D.N.Y. 2015) (Kaplan,J.). The court determined that MetLife’s
representations regarding its IBNR reserves
were statements of opinion that were notactionable under the Supreme Court’s
decision in Omnicare, Inc. v. Laborers Dist.
Council Construction Indus. Pension Fund,
135 S. Ct. 1318 (2015).3 The court foundplaintiffs’ allegations insufficient to plead
either that “(1) MetLife did not actually
believe its IBNR reserves were adequate but
nevertheless said (or implied) they were,”or that “(2) MetLife’s (explicit or implicit)
representations regarding the adequacy of its
IBNR reserves did not rest on a meaningfulinquiry, rendering them misleading toa reasonable investor reading MetLife’s
financial statements in context.”

Background
Plaintiffs claimed, inter alia, that MetLife
had misrepresented the company’s financial
performance “because certain reserves
underlying its financial statements failed
adequately to take account of [IBNR] death
benefit claims with respect to group life
insurance policies.” Specifically, plaintiffs
contended that MetLife’s IBNR reserves
were insufficient because the company had
failed to cross-check the Social Security
Administration Death Master File (“SSADMF”), a database of recorded deaths in the
United States, against its roster of group life
3. Please click here to read our prior discussion of the Omnicare
decision.

insureds, even though a 2007 cross-check of
the SSA-DMF to MetLife’s roster of individuallife insureds had “allegedly uncovered $80
million in unclaimed individual life insurance
benefits.”
In 2011, MetLife conducted “its first-evercross-check of the SSA-DMF against its rosterof group life insureds” and subsequently
announced that it would take a $115-$135
million after-tax charge to adjust for increases
to its IBNR reserves. Shortly thereafter,
plaintiffs brought the instant securities
fraud action. Defendants moved to dismiss
plaintiffs’ IBNR reserve-related claims basedon the Supreme Court’s decision in Omnicare.

Court Finds MetLife’s Statements
Concerning Its IBNR Reserves
Were (1) Statements of Opinion(2) That Were Not Actionable
Under the Supreme Court’s
Decision in Omnicare
At the outset of its analysis, the court notedthat “the accuracy of a company’s loss
reserves—that is, the degree to which theloss reserves correspond to, or vary from,the insurance obligations that ultimately
will be paid out in relation to the claims,
known and unknown, covered by the reservein question—implicates the accuracy of its
financial statements.” The court explainedthat “[i]f loss reserves are too low and latermust be increased,” then “earnings will havebeen overstated in SEC filings.”
The court stated that while loss reserves for
known claims are “relatively easy to predict,”
IBNR reserves are “extremely conjectural
because they are set aside to cover losses forwhich claims have not been reported but mustbe estimated.” The court found that although
IBNR “estimates involve some factual inputs,
they necessarily require judgment and thus
are statements of opinion or belief, notof fact.”
The court noted that “the securities laws
do not impose an absolute bar to liability
for statements of opinion or belief” (citing
Virginia Bankshares v. Sandberg, 501 U.S.
1083 (1991)). However, the court foundthat under the Supreme Court’s decision in
Omnicare, “it is substantially more difficult
for a securities plaintiff to allege adequately(or ultimately, to prove) that [a statement of
opinion] is false than it is to allege adequately
4(or prove) that a statement of pure fact isfalse.” The court explained that “[t]o allege
adequately that a statement of fact … [was]false within the meaning of the securities
laws, a plaintiff need plead only facts that, if
true, would be sufficient to show, assuming
materiality, that the statement [was], in fact,
false.” A misstatement of fact is “‘untrue’
for purposes of Rule 10b-5 regardless ofwhether the speaker knew it was false or
thought, mistakenly, that it was correct.”
However, “[t]o allege adequately that astatement of opinion or belief … [was] false
within the meaning of the securities laws,”
a plaintiff must allege facts sufficient toshow either that “(1) the opinion or belief‘constitute[d] a factual misstatement’ in itself,or (2) the opinion or belief [was] ‘rendered
misleading by the omission of discrete
factual representations’” (quoting Omnicare,
135 S. Ct. 1318). The court explained that“while there are two ways for a plaintiff whochallenges a statement of opinion or belief
to state a legally sufficient claim under Rule10b-5, … each of these methods is tied to a
separate and distinct provision of the Rule.”

court noted that plaintiffs did not allege,
for example, “facts concerning the size of
MetLife’s IBNR reserves; the size of thosereserves relative to MetLife’s existing
liabilities; [or] the relative sizes of MetLife’sgroup and individual life insurance pools andhow the $80 million in unpaid individuallife insurance benefits revealed as a result of
the 2007 SSA-DMF cross-check might haveaffected what estimated reserves should havebeen preceding the 2011 SSA-DMF crosscheck.” While the court found it “possiblethat the 2007 discovery of $80 million in
unpaid benefits perhaps might have rendered
MetLIfe’s IBNR reserves insufficient, or atleast alerted MetLife to the fact that it might
be under-reserved in the future,” the court
determined that “it equally would be possiblethat the discovery had no such impact” basedon the facts alleged.

Applying the First Prong of the Omnicare Test,
Court Finds Plaintiffs Failed to Allege That
MetLife’s Statements Concerning Its IBNR
Reserves Were Untrue Statements of Material
Fact

Under the first provision of the Omnicare
test, the court explained that a plaintiff
alleging that a statement of opinion was itself
an “untrue statement of a material fact” “mustdo more than allege that the underlying fact[was] false.” The plaintiff must also “plead
facts that, if true, would be sufficient to showthat the speaker did not ‘actually hold[ ] thestated belief’” (quoting Omnicare, 135 S. Ct.
1318).
Here, the court found “the fact that MetLife’s
IBNR reserves ultimately proved insufficient[was] not determinative” of actionability
under Rule 10b-5. Rather, the court
determined that the “critical question[ ]” waswhether plaintiffs had adequately alleged that
“MetLife did not actually believe its IBNR
reserves were adequate but nevertheless said
(or implied) they were.”
The court held that plaintiffs had “failed toallege facts sufficient to make out a plausible
claim that MetLife did not believe, in
advance of the 2011 SSA-DMF cross-check,that its IBNR reserves were adequate.” The

Under the Second Prong of the Omnicare Test,
Court Finds Plaintiffs Failed to Allege That
MetLife’s Statements Concerning Its IBNR
Reserves Did Not Rest on a Meaningful Inquiry

Pursuant to the second provision of Omnicare
test, the court explained that a plaintiff
alleging “that the speaker omitted to statea material fact necessary in order to makeits opinion or belief not misleading cannot
state a claim by alleging only that theopinion was wrong” (quoting Omnicare, 135
S. Ct. 1318) (internal quotation marks andalterations omitted). Rather, the plaintiff
must allege that “the statement did not ‘rest
on some meaningful … inquiry,’ rendering it‘misleading to a reasonable person reading
the statement fairly and in context’” (quoting
Omnicare, 135 S. Ct. 1318). To overcome
this hurdle, a “plaintiff ‘cannot just say thatthe issuer failed to reveal [the] basis’ for theopinion,” “[n]or may the plaintiff merely‘recit[e] … the statutory language’ or offer
bare ‘conclusory allegation[s]’ that the issuer
5‘lacked reasonable grounds for the belief itstated.’” Instead, a plaintiff “‘must identify
particular (and material) facts going to thebasis for the issuer’s opinion—facts about theinquiry the issuer did or did not conduct or
the knowledge it did or did not have—whose
omission makes the opinion statement at
issue misleading to a reasonable person
reading the statement fairly and in context.’”
The court found that this was “no small task
for an investor.”
The court determined that the “criticalquestion[ ]” for purposes of Omnicare’s
second prong was whether plaintiffs had
adequately alleged that “MetLife’s (explicit
or implicit) representations regarding theadequacy of its IBNR reserves did not rest on
a meaningful inquiry.” Here, the court foundthat plaintiffs had “provided no indicationthat the stated basis for MetLife’s IBNR
reserve estimates—namely, ‘actuarial analysesof historical patterns of claims and claims
development’—ran afoul of the customs andpractices of the life insurance industry.” Infact, plaintiffs had “not alleged any facts
suggesting that there is a particular custom
or practice in the life insurance industry for
fixing IBNR reserves.” The court further
found that plaintiffs had not “allege[d]adequately that either (1) it was a custom orpractice among life insurers to estimate IBNR
reserves by conducting a cross-check of the
SSA-DMF against all life insureds, or (2) the‘foundation’ upon which MetLife did rest
its IBNR reserve estimates did not comportwith what a reasonable person reading the[c]ompany’s financial statements fairly andin context would have expected.” Finally, thecourt found that plaintiffs had not alleged any
facts “tending to show that MetLife’s IBNR
reserves did not fairly align with information
it possessed at the time.”
Given “all the circumstances,” the court
concluded that plaintiffs had “failed
adequately to allege that MetLife [had]omitted to state a fact (or facts) necessary
to prevent its representations regarding
the sufficiency of its IBNR reserves frommisleading reasonable investors reading the[c]ompany’s financial statements fairly andin context.”
The court therefore dismissed plaintiffs’
Section 10(b) and Rule 10b-5 claims based on
MetLife’s alleged misstatements of opinion
concerning its IBNR reserves.

Delaware Chancery Court:
Courts Must Carefully
Scrutinize Disclosure-OnlySettlements of Class Action
Merger Litigation to Ensure
the Settlements Are in theBest Interests of the ClassOn September 17, 2015, the Delaware
Chancery Court indicated that parties todisclosure-only settlements of merger
litigation should no longer expect that the
court will automatically approve settlements
pursuant to which plaintiffs obtain marginal
additional disclosures and counsel fees inexchange for a broad release of future claims.
In re Riverbed Technology Inc. S’holdrs.
Litig., 2015 WL 5458041 (Del. Ch. 2015)(Glasscock, V.C.). The court reasoned that“[t]he interests of the individual litigants andtheir counsel may not be fully aligned withthe class.” In the typical class action merger
suit, “the individual plaintiff may have little
actual stake in the outcome, her counsel may
rationally believe a quick settlement andmodest fee is in his best financial interest, andthe defendants may be happy to ‘purchase,’ atthe bargain price of disclosures of marginal
benefit to the class and payment of theplaintiffs’ attorney fees, a broad release fromliability.” The court found that this “agency
problem” “mandates [judicial] scrutiny of[disclosure-only settlements] … in [mergerrelated] class actions.”

BackgroundAt issue before the court was a proposed
settlement of litigation brought inconnection with the acquisition of Riverbed
Technology, Inc. by Thoma Bravo, LLC andTeachers’ Private Capital, an affiliate ofOntario Teachers’ Pension Plan. Riverbed
stockholders initially sought to enjoin themerger, and also asserted disclosure claims.
Plaintiffs eventually agreed to settle the suitin exchange for supplemental disclosures in
an SEC filing prior to the stockholder vote,as well as attorneys’ fees (the “Settlement”).
As consideration, plaintiffs agreed to “forgo
the substantive process claims alleged in thecomplaint and to release all claims arisingfrom the merger.”6

Following the announcement of the merger,
Professor Sean J. Griffith of Fordham Law
School purchased Riverbed stock “for the
specific purpose of making an objection” tothe proposed settlement. The Chancery Court
rejected plaintiffs’ contention “that a party
taking exception to a potential settlement
must be a stockholder before the underlying
transaction is announced.” The court foundthat Professor Griffith was “clearly a memberof the Class who [would] be affected by the
Settlement” and was therefore “entitled to
oppose the Settlement.”

Chancery Court Finds DisclosureOnly Settlements Warrant
Particular Judicial Scrutiny
Because the Incentives of Plaintiffs’
Counsel and Individual Plaintiffs
May Be at Odds with the Interests of
the Class
The Chancery Court stated at the outsetthat when considering whether to approve a
proposed settlement of class action litigation,
it must “balance the policy preference forsettlement against the need to ensure thatthe interests of the class have been fairly
represented.” Because class action litigation
is “particularly fraught with questions ofagency,” the court found that it must “ensurethat divided loyalties have not influenced
the actions of the [c]lass representative andcounsel, and that the settlement reached isreasonable in light of the facts alleged and therecord developed, and in light of the proposed
release of claims.”
The court explained that “[a] plaintiff’s
attorney may favor a quick settlement where
the additional effort required to fully develop
valuable claims on behalf of the class may
not generate an additional fee as lucrative
to the plaintiffs’ attorney as accepting aquick and moderate fee, then pursuing otherinterests.” Defendants, on other hand, aretypically focused on “the consummation of
the deal and the termination of any further
litigation threat.” If defendants can negotiate“a broad release” in exchange for “inexpensive
disclosures and a modest … fee award,”
defendants have “little incentive … to engage
in further litigation even if the claims are
weak.”
The court found that “[i]n combination, theincentives of the litigants may be inimical tothe class.” Although “the aggregate interest of

the class in pursuing litigation may be great,”“the individual plaintiff may have little actual
stake in the outcome.” The court explainedthat this “well-known agency problem”“mandates [judicial] scrutiny of settlements… in class actions.” Before approving a
proposed settlement, a court “must scrutinize
the claims being given up, the value ofthe settlement, and, in the case of a broad
release, the potential value of unknown
claims being surrendered in connection withthe settlement.”

Chancery Court Approves
Disclosure-Only Settlement ofRiverbed Merger Litigation Basedon the “Minor” But “Tangible”
Nature of the Supplemental
Disclosures and the Parties’“Reasonable Expectation” of
Court Approval
Turning to the proposed disclosure-only
settlement at hand, the court found that theadditional disclosures negotiated by plaintiffs’
counsel “had tangible, although minor,
value to the [c]lass.” The court determinedthat these additional disclosures wereeffectively “a peppercorn, a positive resultof small therapeutic value to the [c]lass.”
Given this “rather meager benefit achievedby the Settlement for the [c]lass,” the court
found that Professor Griffith had raised a
meritorious objection to the “broad release”
of “valuable unknown claims” set forth in the
proposed settlement. The court agreed withProfessor Griffith that “the breadth of therelease [was] troubling” and stated that“[i]n another factual scenario, it might wellcarry the day.”Based on “the specific facts here,” however,the court concluded that the Settlement was“appropriate.” The court noted that plaintiffs’
counsel had “carefully considered” the federal
claims and found them “not viable,” andfurther observed that no other class member
besides Professor Griffith had objected to
the Settlement. The court also reasoned that“the parties [had] in good faith negotiated aremedy—additional disclosures—that [had]been consummated, with the reasonable
expectation that the very broad, but hardly
unprecedented, release negotiated in returnwould be approved by this [c]ourt.” Whilethe court found that the parties “reasonable
expectation[s]” of settlement approval bore7

“some equitable weight” in this case, thecourt cautioned that “this factor … will bediminished or eliminated going forward.”
Although the court approved the proposed
settlement, the court reduced plaintiffs’
counsel fees from $500,000 to approximately$330,000. The court found that the result
plaintiffs’ counsel achieved was “too modest abenefit to justify the fee sought here.”

Delaware Chancery Court:
Adherence to MFW’s
Safeguards for Controlling
Stockholder Transactions
Does Not Protect theController from Liability for
Breaching the Duty of Loyalty
If the Controller Engaged in
Fraud in Connection with theTransaction
On August 27, 2015, the Delaware Chancery
Court held that stockholders of Dole Food
Company, Inc. were “not limited to a fair
price” in connection with a going-private
merger in which David H. Murdock, Dole’s
Chairman and CEO, acquired all of Dole’scommon stock that he did not alreadyown (the “Merger”). In re Dole Food Co.,
Inc. Stockholder Litig., 2015 WL 5052214(Del. Ch. 2015) (Laster, V.C.). Prior to thetransaction, “Murdock owned approximately
40% of Dole’s common stock … and wasits de facto controller.” Although Murdock
had ostensibly followed the safeguards forcontrolling stockholder transactions laidout in MFW,4 the court found that Murdock
had not “adhere[d] to [MFW’s] substance.”
The court determined that both Murdock
and C. Michael Carter, Dole’s former Chief
Operating Officer, had “breached their dutyof loyalty” to Dole’s stockholders by “driving
down Dole’s stock price” prior to the merger
negotiations and “provid[ing] the [Special]Committee with lowball management
projections,” among other actions. The court
held that this “fraud tainted the approval of
4. In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013) (MFW
I), aff’d sub nom., Kahn v. M&F Worldwide Corp., 88 A.3d635 (Del. 2014) (MFW II). Please click here to read our priordiscussion of the MFW I decision; please click here to read ourprior discussion of the MFW II decision

the Merger by the [Special] Committee, as
well as the stockholder vote.” While the court
found that the merger price “fell within arange of fairness,” the court determined that
Dole stockholders were “entitled to a fairer
price designed to eliminate the ability of the
defendants to profit from their breaches of the
duty of loyalty.”

Court Finds the Merger Was
Not Entirely Fair in Light ofDefendants’ Fraud
At the outset of its analysis, the court
explained that “[w]hen a transaction involving
self-dealing by a controlling stockholder ischallenged, the applicable standard of judicial
review is entire fairness.” The court foundthat in the case before it, “defendants had notmade the showing necessary” under MFW
to change the standard of review from entire
fairness to the business judgment rule. The
court also rejected defendants’ contention
that “the burden had shifted to the plaintiffs
to prove unfairness.”
The court stated that “[o]nce entire fairness
applies, the defendants must establish to
the court’s satisfaction that the transaction
was the product of both fair dealing andfair price.” Under the Delaware Supreme
Court’s decision in Weinberger v. UOP,
Inc., 457 A.2d 701 (Del. 1983), the conceptof “[f]air dealing ‘embraces questions ofwhen the transaction was timed, how it was
initiated, structured, negotiated, disclosed
to the directors, and how the approvals of
the directors and the stockholders wereobtained’” (quoting Weinberger, 457 A.2d701). “Fair price ‘relates to the economic
and financial considerations of the proposed
merger, including all relevant factors: assets,market value, earnings, future prospects, andany other elements that affect the intrinsic or
inherent value of a company’s stock.’”
Court Finds the Merger Was Not a Product ofFair Dealing

The court first considered “how the [Dolegoing-private] transaction was timed andinitiated.” The court found that Carter had“primed the market” for Murdock’s goingprivate merger “by pushing down the stock”
price. Specifically, the court determined that
Carter had “intentionally given the market asubterranean estimate of Dole’s anticipatedcost savings” in connection with ITOCHU
8

Corporation of Japan’s acquisition of Dole
Asia (the “ITOCHU Transaction”). The court
also found that Carter had canceled Dole’s
stock repurchase program for no legitimate
business reason (other than to drive down
Dole’s stock price). The court explainedthat “a calculated effort to depress the[market] price of a stock until the minority
stockholders are eliminated by merger orsome other form of acquisition constitutes
unfair dealing.” (internal quotations andalterations omitted).
The court then addressed the merger
negotiation process. The court explainedthat “in order to make a special committee
structure work it is necessary that acontrolling stockholder … disclose fully all thematerial facts and circumstances surrounding
the transaction.” Specifically, a controller
must disclose (1) “all of the material terms of
the proposed transaction;” (2) “all material
facts relating to the use or value of the assets
in question to the beneficiary itself”; and(3) “all material facts which it knows relating
to the market value of the subject matter ofthe proposed transaction.” The court statedthat “[t]hese categories are intended toencompass all material information known
to the fiduciary except that information that
relates only to its consideration of the priceat which it will buy or sell and how it would
finance a purchase or invest the proceeds ofa sale.” The court underscored that“[i]mplicit in the expectation that thecontroller disclose this information is therequirement that the controller disclose it
accurately and completely.”
Here, however, the court found that Carterhad provided the Committee with “a setof projections that contained falsely low
numbers.” The court determined that these“knowingly false” projections were designed“to mislead the Committee for Murdock’s
benefit.” The court concluded “[b]y providing
the Committee with false information, Carterensured that the process could not be fair.”
The court further found that Carter had
also “interfered with and obstructed theCommittee’s efforts to manage the process
and negotiate with Murdock in other ways
as well.” For example, Carter had restricted
the Committee’s “ability to consider andexplore the viability of potentially superioralternatives” to Murdock’s offer. The court
concluded that “[g]iven Carter’s activities, thenegotiation of the Merger was the antithesisof a fair process.”
Finally, the court determined that “Carter’s
fraud tainted the approval of the Merger by
the Committee, as well as the stockholder
vote” because neither the Committee nor
the stockholders had “the benefit of full
information” regarding the Merger.
The court concluded that “[t]he evidence
at trial established that the Merger was
not a product of fair dealing.” The courtemphasized that “fraud vitiates everything.”
Here, the court found that the fraud“rendered useless and ineffective the highly
commendable efforts of the Committee andits advisors to negotiate a fair transactionthat they subjectively believed was in the bestinterests of Dole’s stockholders.”
Court Finds the Merger Price May Not Have
Been Fair

The court then turned to “[t]he second aspectof the entire fairness inquiry”: fair price. The
court found the evidence at trial “indicate[d]that without accounting for Carter’s fraud, the$13.50 per share [Merger] price fell withina range of fairness.” The court explainedthat “[i]f the Committee and [its financial
advisor, Lazard] had not been misled, thenthe Committee’s negotiations and Lazard’s
analysis would have provided powerfulevidence of fairness.” Here, however, thecourt determined that “Carter’s actions
tainted both the negotiation process andLazard’s work product.”
The court found that “[m]odifying Lazard’s
discounted cash flow (‘DCF’) analysis to take
into account the information that Carter
misrepresented or withheld suggest[ed]that the $13.50 per share price may havebeen below the range of fairness.” The court
determined that “the first issue [was] costcutting” in connection with the ITOCHU
Transaction. The court found that “Murdock
and Carter [had] delayed Dole’s costcutting program until after the [Merger],then achieved more than $30 million inincremental savings.” The second issue wasthe additional income that Dole would later
receive from purchasing farms as part of avertical integration initiative. While the court
found that some adjustment to fair value wasnecessary to account for both issues, the court
explained that there was “uncertainty” at thetime of the Merger as to “how much Dole9

actually could achieve in cost savings, as wellas the number of farms that Dole could buy
and the value they would generate.” The court
determined that “it would [have] overvalue[d]the incremental cash flows available fromthese sources to treat them for valuation
purposes as being just as certain as the cash
generated by Dole’s core operations.”
Notably, the court rejected defendants’contention that it could not “consider
anything that happened after the Merger
closed and must ignore both the cost savings
that Dole actually achieved, as well as its farm
purchases.” The court found Delaware law“clear” that when “the company’s businessplan as of the merger included specificexpansion plans or changes in strategy, thoseare corporate opportunities that must be
considered part of the firm’s value.”
Based on the court’s own modified DCF
analysis, which took into account Dole’s
cost-saving plans and its expected farmacquisitions, the court found that the merger
price was not necessarily fair. However, thecourt acknowledged that even if it had thebenefit of complete information concerning
Dole, Lazard “may have concluded that theprice was still fair, albeit at towards the lower
end of fairness.”
Court Finds Fraud Rendered the Merger
Unfair, and Entitled Dole Stockholders to a
“Fairer” Price

The court concluded that “Carter’s conduct
rendered the Merger unfair” in its entirety.

Even if the Merger price “fell within arange of fairness,” the court held that Dolestockholders were “entitled under thecircumstances to a ‘fairer’ price.” The court
reasoned that “by engaging in fraud, Carter[had] deprived the Committee of its ability
to obtain a better result on behalf of thestockholders, prevented the Committee fromhaving the knowledge it needed to potentiallysay ‘no,’ and foreclosed the ability of thestockholders to protect themselves by voting
down the deal.”

Court Awards Damages to Prevent
Defendants from Profiting from
Their Breaches of Fiduciary Duty
The court found that both Murdock andCarter had breached their duty of loyalty to
the Dole corporation and its shareholders,
and were consequently “personally liablefor damages resulting from the Merger.”
The court explained that “[o]nce disloyalty
has been established,” then Delaware
law “require[s] that a fiduciary not profit
personally from his conduct.”
Based on “modest estimates,” the court
calculated a fair value for Dole of $16.24
per share. The court stated that “[t]he $2.74[additional] per share figure suggest[ed] that
Murdock and Carter’s pre-proposal efforts todrive down the market price and their fraud
during the negotiations reduced the ultimate
deal price by 16.9%.” The court awarded
damages based on this difference in fair value,amounting to a total of $148,190,590.18.

The Securities Law Alertis edited by Paul C. Gluckow(pgluckow@stblaw.com/+1-212-455-2653), Peter E. Kazanoff(pkazanoff@stblaw.com /+1-212-4553525) and Jonathan K. Youngwood(jyoungwood@stblaw.com /+1-212-455-3539).

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