"Food for Thought: In re Del Monte Foods Co. Shareholders Litigation"

On February 14, 2011, the Delaware Chancery Court preliminarily enjoined stockholders of Del Monte Foods Company from voting on the proposed acquisition of the company by a group of private equity firms.  The basis of the Court's opinion was a preliminary finding that, despite the good faith effort of Del Monte's board (the "Board") to fulfill its fiduciary duties, the Board nonetheless breached its duties by failing to provide "serious oversight" of its financial advisor during the sale process.

Delaware law has long required boards of directors to take an "active and direct role in the sale process."  The Delaware Chancery Court's decision in In re Del Monte Foods Company Shareholders Litigation, underscores that principle.  In addition, the Court warned potential acquirers that they must not interfere with boards' fulfillment of their fiduciary duties by facilitating financial advisors' self-interest, lest they risk aider and abettor liability for a board's breach of its fiduciary duties.

Del Monte has critical take-aways for all transaction participants.  Specifically, Del Monte compels boards to (1) recognize and reconcile financial advisors' interests in the sale process, (2) scrutinize the source of acquisition financing, and (3) strengthen confidentiality agreements and engagement letters.  In addition, Del Monte urges bidders and other acquirers to be aware of the implications of their own conduct prior to and throughout the acquisition process in order to avoid exposure to liability for misconduct.

This Stroock Special Bulletin summarizes the Del Monte case and the implications that boards of directors, financial advisors, bidders and others must contemplate in order to conform its consequences.