November 13, 2014
Several months ago, the Honorable Leo B. Strine, Vice Chancellor of the Court of Chancery of Delaware, issued a decision ordering chicken producer Tyson Foods Inc., to go through with a merger with meat packer IBP Inc. The merger agreement between Tyson and IBP had resulted from a fierce auction for IBP between Tyson and Smithfield Foods, a pork producer. Judge Strine's decision shocked the business and legal communities because relations between Tyson and IBP had become acrimonious and distrustful.
Tyson sought to acquire IBP to complement its chicken processing business and create the world's "preeminent meat products company." In the years leading up to the merger agreement IBP had made a series of acquisitions of processed foods companies in support of its strategy to expand into the food processing business. IBP had hoped to build up its profit margins with these acquisitions and offset the cyclical beef and pork markets, which have tight profit margins. In October 2000, IBP discovered that DFG Foods, which it had purchased in 1998, apparently had significant problems with the integrity of its books and records. IBP made initial disclosures about the DFG problem on November 7, 2000, stating that it would have to take a $9 million reduction in previously announced pretax earnings of $83.9 million for the third quarter of fiscal year 2000. IBP made additional disclosures concerning the extent of the problems at DFG throughout December 2000.
The auction for IBP took place during December 2000, ending on December 31, 2000, with a Tyson bid of $30 per share in cash and stock. Prior to the final bidding, the parties negotiated the merger agreement and Tyson conducted due diligence. During the due diligence process Tyson raised a number of questions including questions about the DFG accounting problems. Prior to the final bid, IBP and Tyson representatives held due diligence calls that covered the DFG charges to earnings and issues concerning IBP earnings projections.
On January 1, 2001, Tyson and IBP signed their merger agreement, which was approved by the Tyson Board of Directors and shareholders on January 12, 2001. Tyson made public statements enthusiastically endorsing the merger and the anticipated synergies of the two companies. After extending its cash offer several times, Tyson terminated it at the end of February, referring to IBP's efforts to solve its accounting issues relating to DFG with the SEC. During the Winter, both IBP's and Tyson's earnings fell as a result of reduced beef and chicken supplies due to severe weather.
On March 13, 2001, IBP filed restatements to its financials reflecting a charge to earnings on account of the DFG fraud of approximately $50 million and resolving most of its issues with the SEC. At that time, Tyson indicated it was still proceeding with the merger. However, on March 29, 2001 Tyson sent a letter to IBP stating that it would discontinue the merger because IBP had not turned over comments from the SEC "raising important issues concerning IBP's financial statements and reports filed with the SEC"; IEP had restated its financials making prior financials misleading; and delays had created "breaches of IBP representations, warranties, covenants and agreements contained in the Merger Agreement which cannot be cured." That same day Tyson sued IBP in Arkansas; the next day IBP sued Tyson in Delaware Chancery Court to enforce the Merger Agreement.
Judge Strine's Conclusions
In his nearly 150-page opinion, Judge Strine examined every factual and legal issue in exceptional detail. First, Judge Strine concluded that the merger agreement and related contracts "were valid and enforceable contracts that were not induced by any material misrepresentation or omission." He rejected Tyson's arguments that ISP had failed to disclose sufficient information concerning the DFG fraud, meticulously setting forth the extent of disclosure provided to Tyson over the course of due diligence. He pointed out that Tyson had declined some requested due diligence because the information also would have to be provided to Smithfield and that IBP had not withheld any information requested by Tyson. He concluded that Tyson's late receipt of an SEC comment letter was inadvertent and, in all events, not material. Finally, he found absurd Tyson's argument that IBP's filing of restated financials with the SEC was a breach of the merger agreement, because the agreement itself contemplated future adjustments to the financials. Instead, Judge Strine concluded that Tyson's desire to discontinue the merger resulted from "buyer's regret" brought on by poor business performances by both IBP and Tyson.
Second, Judge Strine concluded that the merger agreement specifically allocated certain risks to Tyson, including risks arising from the accounting improprieties at DFG. Thus, the adjustments and charges resulting from the investigation into the DFG books and accounts could not serve as the basis for Tyson to terminate the merger agreement.
Third, none of the non-DFG related issues raised by the SEC were material. Indeed, the court found these issues to be typical SEC nits that did not provide a contractually permissible basis for Tyson to abandon the merger.
Fourth, Judge Strine determined that IBP had not suffered a "material adverse effect" excusing Tyson's failure to close the merger. The court examined the financial performance of IBP during the first quarter of 2001 and determined that, although it did not meet the projections, it was within the range of performance of IBP. Indeed, the beef industry as a whole had erratic performance patterns reflected in the IBP performance for the past five years. Thus, IBP's lower performance, while disappointing, was not unexpected, Judge Strine added.
Finally, Judge Strine held that specific performance "is the decisively preferable remedy for Tyson's breach, as it is the only method by which to adequately redress the harm threatened to IBP and its stockholders." In Judge Strine's opinion the determination of cash damages would be difficult and the amount of any award "staggering huge."
In granting IBP's claim for specific performance, Judge Strine directed the parties to "collaborate and present a conforming partial final order no later than June 27." Tyson decided not to appeal Judge Strine's decision and sat down with IBP and worked out a deal. Tyson's new offer commenced on Tuesday, July 3. The offer was the same as the prior one, but was worth approximately $500,000 less because of the decreased value of Tyson shares. The parties agreed to a break-up fee of $59 million, in contrast to the break-up fee of $l5 million for the original deal. Tyson expects to complete the merger by November 15, 2001. The deal will affect approximately 120,000 employees: 50,000 IBP employees and 68,000 Tyson employees. Consumers will find more pre-packaged beef, and fewer butchers.
Bennette Deacy Kramer is a partner at Schlam Stone & Dolan.
[This article is reprinted with permission from the October 2001 issue of the Federal Bar Council News. Copyright © 2001 Federal Bar Council. All rights reserved. Further duplication without permission is prohibited.]