Posted on 07 Oct 2011
Barclays Capital and Del Monte Corp. agreed to pay the food company's shareholders nearly $90 million to settle a case that raised conflict-of-interest questions about deal-financing practices once common across Wall Street.
According to legal experts, the settlement amount, $89.4 million, counts as one of the largest in a shareholder lawsuit challenging a merger-and-acquisition transaction. The case also marks the rare instance in which a bank advising a company, rather than just the company itself, ended up named as a defendant in a deal-related shareholder suit.
The large settlement amount is likely to further discourage investment banks from offering financing to buyers when they are advising the seller, industry observers said. Wall Street deal makers had already grown more cautious after a February ruling on the Del Monte case that criticized the practice of "staple financing" in which the seller's bank "staples" potential financing terms on its sales pitch to buyers.
The suit alleged that Barclays Capital, the investment-banking unit of British bank Barclays PLC that was advising Del Monte on a sale last year, was conflicted because it also arranged financing for a group of buyers and didn't disclose certain efforts to arrange a buyout of the food company to its board.
Delaware Chancery Court Judge J. Travis Laster in February said Barclays "secretly and selfishly" kept the number of potential bidders for Del Monte small and "steered" one private-equity firm into a group of buyers to increase the chances of landing the lucrative financing fees on the deal.
Winnowing buyers, the judge said, could prevent a fair and fully competitive auction and yield less for shareholders.
Del Monte, Barclays Capital and the other defendants, which include the buyers, "deny any and all allegations of wrongdoing, fault, liability or damage" and they settled the case to end the uncertainty and expenses of further litigation, according to a court filing Thursday.
Although the Delaware court said Barclays acted beyond standard practices by failing to disclose some of its actions to Del Monte, the ruling sent chills through the investment-banking community. Large banks often play both sides of takeover deals, hoping to earn fees by simultaneously advising sellers and financing buyers. Bankers have looked at the decision as a broader comment on the practice of staple financing.
Del Monte agreed to sell itself in November to the buyout group for about $4 billion, or $19 a share, a 40% premium above Del Monte's stock price before sale rumors boosted the shares. Barclays was one of several banks arranging financing for the buyer group consisting of private-equity firms KKR & Co., Vestar Capital Partners and Centerview Partners.
The settlement requires court approval. Representatives for Del Monte and KKR, which led the buyout group that now owns Del Monte, declined to comment.
Barclays Capital said: "We are pleased that the parties have agreed to settle the litigation to avoid the expense, distraction and uncertainty of litigation." It said the sale process got "the best price reasonably available for Del Monte stockholders."
Financing arrangements are usually more profitable than fees for investment-banking advice, creating an incentive for a bank on the seller's side to offer financing to the buyer's side.
In some cases, staple financing can be attractive for a seller because it can put a floor on the offer price, while providing potential buyers with committed funds, making it easier to participate in an auction.
Staple financing was especially popular during the 2005-2007 boom in debt-laden deals pursued by private-equity firms before the 2008 financial crisis shut off the supply of cheap debt.
Since the judge lashed out, bankers at major Wall Street banks say their firms are being cautious and reviewing their practices around staple financing. For the most part, they say, they have declined to participate in assisting buyers on paying for an acquisition if they also advised the seller.
When KKR agreed to buy Pfizer Inc.'s Capsugel business for $2.4 billion in April, Pfizer's banker Morgan Stanley offered KKR staple financing, according to a person familiar with the matter. But KKR decided to use other banks, amid the heightened scrutiny around staple financing in the wake of the Del Monte case, the person said.
Large banks, such as J.P. Morgan Chase & Co., Citigroup Inc. and others have implemented stricter review processes for staple-financing situations since the February ruling, people familiar with the matter said. Some attorneys also have advised clients in M&A transactions that if staple financing was used, they could face a shareholder suit, other people familiar with the matter said.
Del Monte will pay $65.7 million of the settlement, while Barclays Capital will provide the remaining $23.7 million, according to court filings.
People familiar with the matter said Del Monte is withholding about $21 million in fees that was to go to Barclays, using those funds for its portion of the settlement.
Law firms Grant & Eisenhofer PA and Robbins Geller Rudman & Dowd LLP, the co-lead counselors for the plaintiffs in the suit, brought by Del Monte shareholders, have applied for a fee of $22.3 million. The suit already has resulted in an interim fee for the plaintiffs' lawyers of $2.75 million in July. Settlement funds are for Del Monte shareholders, including lead plaintiff NECA-IBEW Pension Trust Fund, a Decatur, Ill., pension fund.