Del Monte Foods Co. seemed to have struck an excellent deal when it agreed to a $5.3 billion sale to Kohlberg Kravis Roberts & Co., Vestar Capital Partners and Centerview Partners last fall. At $19 a share, the sale came at a higher price than Del Monte had ever reached in the stock market. News of the deal leaked in the U.K. press a few weeks before it was signed, so potential bidders had a reasonable chance to make a spoiler bid. Del Monte CEO Richard Wolford planned to retire after the deal closed, thus posing none of the potential conflicts that can occur when a target's CEO teams with private equity buyers.
However, that wasn't how Delaware Court of Chancery Vice Chancellor J. Travis Laster saw it. In a 55-page ruling issued Feb. 14, the judge held that Barclays Capital, Del Monte's investment banker, betrayed the company's board by orchestrating the sale in order to pocket not just $23.5 million in advisory fees but a further $21 million to $24 million for handling a piece of the acquisition financing. The bank ignored a directive from the board to stop shopping Del Monte and went so far as to pair KKR and Vestar, both of which had signed agreements in which they promised not to join with one of the other PE shops that had looked at the company earlier in 2010.
Laster found it suspicious that Barclays asked to work on the financing a few weeks before the merger agreement was signed, and he was incredulous that Barclays ran the post-signing market check for the company. His treatment of the bank and lead Del Monte coverage banker Peter Moses was withering.
KKR didn't fare much better. Laster found that KKR had helped Barclays deceive the Del Monte board by partnering with Vestar and then concealing that information from the board for several weeks. In Laster's telling, KKR also threw Goldman, Sachs & Co. a piece of the financing work on the deal to ensure that Goldman didn't run the post-signing market check for Del Monte.
The opinion came as a shock to many on Wall Street who thought that Barclays, far from betraying Del Monte, did a decent job. Vestar told Del Monte from the start that it would need to pair up with a bigger buyout shop. The board learned a few weeks before agreeing to the deal that KKR and Vestar had teamed up and approved the combination. Some lawyers agreed that Barclays' behavior as described by Laster was unacceptable, but others pointed out that the bank was not a party to the litigation at the time Laster wrote the opinion and had not had much chance to tell its side of the story. (The bank has since been joined as a defendant.)
Lawyers familiar with Laster's tenure on Delaware's Court of Chancery were less surprised by the decision. Since joining the court in October 2009, Laster, 41, has become its boldest -- and most censorious -- judge. In his first several months on the bench, Laster issued several decisions that demonstrated an impressive ability to interpret decades-old Delaware doctrine in ways that made it relevant to a contemporary environment in which the federal government is more deeply involved in corporate governance than ever before. (Laster declined a request for comment on this story.)
The judge has also shown a greater willingness to scrutinize, praise and excoriate lawyers than any other judge on Chancery. That tendency extended to Moses, Barclays and KKR in the Del Monte case and is one that many lawyers see as cause for concern.
How much does this matter? In the tight world of Delaware's corporate law, judges -- particularly young, ambitious judges -- can have a large impact, both on the corporate law itself and on the centrality of the Delaware courts to American corporations, a position that provides roughly 20% of the Delaware state budget through incorporation fees. The arrival of any new judge on the Court of Chancery stirs both anticipation and anxiety, no matter how well known he's been as an individual and as a practicing attorney. Laster was a much anticipated choice as judge, familiar to corporate lawyers around the country because of the thorough, nuanced memoranda he issued for several years on important Delaware decisions. But for all his talents, or perhaps because of them, he has not yet allayed the anxieties over where he might be going and where he might be taking the Delaware courts.
Much of Laster's focus on lawyer behavior has come in the context of shareholder litigation. Although company-side New York litigators and corporate lawyers have a healthy skepticism of such lawsuits, they also know how the system works and value its predictability. They find Laster's willingness to upset the system unsettling, and several say it risks encouraging companies to litigate in other jurisdictions, an outcome no Delaware lawyer or judge wants.
Laster clearly shares that preference. He believes that Delaware corporations should litigate in Delaware, and that the state's judges are the ones best able to resolve disputes that raise issues of Delaware law. But a desire to protect Delaware's incorporation market share doesn't permeate his judging; indeed, it clashes with his willingness to enforce his views of appropriate adviser behavior.
"Those of us who practice before the Court of Chancery continue to be impressed by his intellect and work ethic," says John Reed, a partner in the Delaware office of DLA Piper LLP (US) who's known Laster for many years. "Everyone who wanted to see him get on the bench and worked with him over the years expected that. I think what some people did not expect was how proactive he would be in trying to address issues and concerns that he confronted as a practitioner. Some believe he's pushing an agenda largely driven by his real-world experience, and a few practitioners who have been impacted by that don't quite know how to take it."
Adds Daniel Wolf, a partner at Kirkland & Ellis LLP in New York, "Laster does not always accept as an answer that this is how things are always done. If it bothers him, he's going to say something about it."
Laster has spent virtually his entire career in Wilmington. A 1991 graduate of Princeton University, he was first in his 1995 class at the University of Virginia School of Law and clerked for Judge Jane Roth of the U.S. 3rd Circuit Court of Appeals before joining Wilmington's Richards, Layton & Finger PA as an associate. He made partner at Richards Layton in 2002, then struck out on his own with fellow Richards Layton partner Kevin Abrams to found Abrams & Laster LLP, which represented both shareholders and corporate clients and thus gave Laster a broader perspective than he would have gotten at Richards Layton. Few of Delaware's Chancery or Supreme Court judges have Laster's experience as a plaintiffs lawyer in high-level corporate litigation, and none has experience as recent.
As Stephen Lamb's 12-year term on the Court of Chancery neared its end in July 2009, Laster emerged as the leading candidate to take his spot on the bench. Delaware Gov. Jack Markell nominated him to the court the next month, the Senate confirmed, and he took his oath of office in October. He seemed a worthy successor to Lamb and a judge who could join Chancellor William B. Chandler III and Vice Chancellor Leo E. Strine Jr. as leading voices on the court.
In a matter of months, Laster issued several opinions that showed a keen intellect and willingness to revisit settled areas of law. Coincidentally or not, that aspect of Laster's jurisprudence has become less pronounced since last summer. In one hearing, he urged the Supreme Court to resolve an issue that Chancery has wrestled with for at least a decade, the appropriate standard of review for a controlling shareholder's buyout of a public subsidiary. "The Supreme Court needs to weigh in and decide [the issue]," he said. "We don't know what the Supreme Court thinks about this, and they are the final arbiter." The final arbiter, perhaps pointedly, decided not to decide. If there was a hint, Laster got it.
The threat of reversal by the Supreme Court acts as a brake on jurisprudential innovation in the Court of Chancery, but the high court by definition does not hear appeals in cases that settle and rarely involves itself in a lower-court judge's oversight of his courtroom. Thus the Delaware Supreme Court has been largely silent on the topic of shareholder litigation, which comprises a significant chunk of Chancery's workload.
At least one of Laster's Chancery colleagues has long viewed most shareholder suits with open disdain. In a 2005 case where public shareholders challenged the $8.3 billion buyout of Cox Communications Inc. by the Cox family, Strine awarded a plaintiffs' lawyer only $1.28 million of the $4.95 million the lawyers had requested and the plaintiffs had agreed to pay. Strine aired his disgust in a written opinion where he complained that plaintiffs' lawyers race to the courthouse to file poorly drafted complaints within hours of a deal's announcement. The cases follow "the ritualistic nature of a process" that results in a quick settlement. Strine was commenting specifically on shareholder litigation challenging minority buyouts, but his critique applied more broadly.
Cox motivated plaintiffs' lawyers to bring more suits in venues other than Delaware. Company-side lawyers said in response that judges in state courts outside of Delaware were far less likely to be expert in corporate law and that their reaction to shareholder suits was far harder to predict -- never a good thing.
The five judges on the Court of Chancery thus faced a dilemma with no good answer. They could scrutinize fee requests closely and risk further loss of litigation market share, or they could reflexively bless requests even in matters whose settlement created little value for shareholders and thereby encourage even more strike suits.
Laster brought a unique perspective to the issue. He had been trained at an elite Wilmington law firm that for decades has been the Delaware counsel of choice to many top New York firms and the large companies they represent. He then spent five years at a Wilmington litigation boutique where he built a successful practice representing companies and shareholders.
As a result, says Reed, Laster the judge "knows where some of the bodies are buried. Now that he is on the bench, it appears his view is that just because some things went unchallenged or were considered customary, it doesn't mean they shouldn't be revisited."
Says one lawyer familiar with the Delaware bench, "His theme to plaintiffs' lawyers is play hard or don't play at all. And I understand that theme. It's his way of combating the cynicism in the system. It has a certain 'let the chips fall where they may' quality. You don't know who it's good for and who it's not good for."
Three months after Laster joined the bench, he approvingly cited Strine's decision in Cox in another case where shareholders challenged a controlling shareholder's bid to acquire the remaining stake in a subsidiary. Laster praised the lawyers who represented shareholders of Teppco Partners LP who, he wrote, "engaged in real work, took on real risk, and created a litigation asset that I regard as having prompted [controlling shareholder Enterprise Products Partners LP] to pursue the merger."
From then on, plaintiffs' counsel Joseph Rosenthal and Jessica Zeldin of Rosenthal, Monhait & Goddess PA in Wilmington and Jeffrey Squire, Lawrence Eagel and Paul Wexler of Bragar Wexler Eagel & Squire PC in New York "fell easily into Cox Communications mode," Laster wrote. In response, he awarded them $10 million of the $19.5 million they sought, a fee that represented 10% of the $100 million or so in benefits allegedly conferred by the litigation.
"I select this percentage," Laster wrote, "to reflect the plaintiffs' substantial litigation effort while recognizing that the bulk of the litigation remained. Like Vice Chancellor Strine, I believe that higher percentages are warranted when cases progress further or go the distance to a post-trial adjudication."
At least Rosenthal Monhait got something in Teppco. Two months later, Laster deposed that firm, Rigrodsky & Long PA and Wolf Popper LLP as lead counsel for minority shareholders of Revlon Inc., whose controlling shareholder MacAndrews & Forbes Holdings Inc. bought out the cosmetics company's public float. The judge replaced them with four other firms and selected as lead Wilmington's Smith, Katzenstein & Furlow LLP.
Laster criticized the initial counsel for pursing the Revlon case with no "vigor, ardor, or any other form of vibrant activity." Instead of zealously representing their clients, the law firms "settled on terms that would be easy [concessions] for the defendants while still arguably sufficient to support a fee." And, he continued, "When handed a chance to stand up for the class, old counsel lay down."
The judge chose Smith Katzenstein as the lead because it "frequently represents paying clients and does not appear to litigate plaintiffs' cases using a portfolio strategy. The members of that firm, including the lead lawyer in this case [David Jenkins], have built up reputational capital with the court and have proven willing to engage in the hard work of actual litigation."
Actual litigation, Laster emphasized, is what he wants. Shareholder suits "serve as a valuable check on managerial conflicts of interest," he wrote in Revlon, and therefore should be treated seriously by both lawyers and courts.
"Traditional plaintiffs' law firms who bring lawsuits on behalf of stockholders without meaningful economic stakes can best be viewed as entrepreneurial litigators who manage a portfolio of cases to maximize their returns through attorneys' fees," he wrote. "A systemic problem emerges when entrepreneurial litigators pursue a strategy of filing a large number of actions, investing relatively little time or energy in any single case, and settling the cases early to minimize case-specific investment and maximize net profit." Replacing counsel who engage in such practices should encourage other lawyers to bring more meritorious cases.
Laster admitted that such an approach risks driving plaintiffs' lawyers to other jurisdictions. But, he wrote in response, "While in the short run policing frequent filers may cost some members of the bar financially, in the long run it enhances the legitimacy of our state and its law." In this view, stingy fee awards to lawyers who are generally looking to turn a quick profit for opportunistic strike suits will drive that less desirable work to other courts, while generous fee awards for good work will only make Delaware a more appealing venue for meritorious suits.
Laster shifted his focus to company-side lawyers in a case that immediately got their attention. In a piece of shareholder litigation last fall, Laster focused his ire on David Berger, a litigation partner at Wilson Sonsini Goodrich & Rosati PC in Palo Alto, Calif. Laster threatened to bar Berger from litigating in Delaware by removing his pro hac vice status because of how Berger represented NightHawk Radiology Holdings Inc. in settling shareholder litigation arising from the company's merger with Virtual Radiologic Corp. (Pro hac vice allows lawyers not admitted in a jurisdiction to appear before its courts.) Shareholders initially sued NightHawk in Chancery, and in oral argument Laster found "there were meaningful, litigable" issues in the deal that the plaintiffs opted not to pursue. Instead, they focused on weak disclosure claims.
"So imagine my surprise," Laster told lawyers at a Dec. 17 hearing in the case, upon learning that NightHawk and its shareholders had agreed to a disclosure-based settlement approved by an Arizona state court that probably didn't know about Laster's view of the case. The parties settled the claims that Laster rejected and passed over those he'd told them might have merit.
In the judge's view, the settlement raised the specter of "collusive forum shopping." Once a public company announces a sale, different shareholders often sue for alleged breaches of fiduciary duty in different jurisdictions. Defense lawyers complain about the resulting inefficiency and expense, but the multiple forums may allow defendants "to force plaintiffs to reverse-bid for the lowest possible settlement," Laster said at the hearing. In other words, the company settles with the plaintiffs' lawyer who often accepts the smallest settlement -- and, possibly, the smallest fee, but one that on an hourly basis may be quite lucrative. "Defense lawyers benefit from this game, too," Laster said. "They get to bill hours without any meaningful reputational risk from a loss. They then get a cheap settlement for their client. Disclosures are cheap."
Most lawyers believe they should strike the best deal they can for their client, but Laster offered a different, less conventional, view. Plaintiffs' lawyers are fiduciaries for the class of shareholders they represent, Laster said, and when defense lawyers induce them to breach their duties by accepting a weak settlement, the defense lawyers become aiders and abettors rather than negotiators. In Laster's view, because plaintiffs' lawyers and company-side litigators sit across the table from one another frequently, they can in essence trade favors.
Laster acknowledged that the behavior he found disturbing in NightHawk extends beyond that case, and on Dec. 22, the judge appointed Gregory Williams, a partner at Richards Layton, as special counsel in the case. "The phenomenon of parallel multi-forum litigation naturally incentivizes party behavior that is individually rational but systematically irrational," Laster wrote in the letter where he gave Williams the mandate.
Laster is also willing to praise lawyers. His most generous comments in his time on the bench have gone to Wilmington plaintiffs' lawyer Stuart Grant, the co-founder and managing director of Wilmington-based Grant & Eisenhofer PA, when Laster selected the firm as lead counsel in Del Monte in December. Grant's client, NECA-IBEW Pension Trust Fund, owned a comparatively modest 25,000 Del Monte shares, worth $475,000. Union Asset Management Holding AG owned 1.9 million Del Monte shares worth $36 million -- a stake 76 times greater than that of NECA-IBEW. Its counsel, Rosenthal Monhait -- the firm Laster deposed as lead counsel in Revlon -- and Motley Rice LLC of Mt. Pleasant, S.C., sought to be lead counsel in the case, as did two other firms.
Laster accorded no importance to Union's much greater stake even though Delaware law directs that judges should accord "great weight" to "the relative economic stakes of the competing litigants in the outcome of the lawsuit," as Laster wrote in the December opinion where he chose the lead counsel in the case. Not only had Grant & Eisenhofer submitted the strongest pleading in the case, Laster wrote, the firm's "track record stands out," he added, citing seven cases since 1998 in which the firm has achieved impressive results for clients.
Grant is a tough, smart lawyer, say several lawyers not involved in Del Monte, so Laster's view of him does not differ greatly from the consensus in Wilmington. But taken as a group, Revlon, Teppco, NightHawk and Del Monte suggest Laster's willingness to bring his knowledge of the personalities in the Wilmington bar to bear in individual cases.
Says one lawyer of Laster, "He seems to focus a lot on lawyer conduct. I think that comes from his experience as a practitioner. He's very personality-driven. You can tell from some of the things he does that it depends on the quality of the lawyer and not on the quality of the lawyer's case. And that can be potentially disturbing."
Laster's respect for Grant's considerable legal skills weighed heavily in his decision to appoint him lead counsel in Del Monte, but the judge took much of the factual background in the case -- including facts Barclays disputes -- from a Securities and Exchange Commission filing that Del Monte made Feb. 4. The filing reflects tensions between the bank and its client that had been brewing for months.
Del Monte first began to explore a potential sale in January 2010 and hired Barclays. The bank invited five private equity shops including KKR to bid, and both Vestar and Campbell Soup Co. got wind of the auction and were invited to participate. But when the highest bids came in at $17 to $17.50 per share, the Del Monte board decided to shut down the auction. According to the deposition of Del Monte director Terence Martin, Laster wrote, "The directors concluded that Barclays had pushed too far, too fast, and that Barclays had not been hired to actually sell the company." The board specifically instructed Barclays "to shut the process down and let the buyers know the company is not for sale."
The opinion can also be read to suggest that the board and 67-year-old company chief executive Wolford had different views about the best outcome for Del Monte. Wolford was set to retire in 2012 and stood to receive a $24 million severance payment if the company were sold by then. Even when the board asked Wolford for a succession plan, Laster wrote, the CEO resisted and "said he would rather sell the company than remake his team."
But Barclays banker Moses didn't see Wolford as an ally even though he had significant incentive to want to sell the company. Instead, Laster wrote, Moses thought that in March 2010 "Wolford turned against the LBO at the last minute, spoke privately with the directors, and allowed Moses to walk into a hostile meeting unaware. KKR thought that 'Barclays didn't do such a good job here with Wolford and the board.' "
So the Del Monte situation was dysfunctional in a number of respects even before the occurrence of the conduct that Laster found so objectionable: Moses' teaming KKR and Vestar without the Del Monte board's consent; KKR's not being candid with the board about its agreement to join with Vestar; Barclays' request to provide buy-side financing on the deal before it was signed; and Barclays' running the post-signing market check for Del Monte while doing financing work for KKR and Vestar.
Just as Laster had a solid basis for his finding of facts in the case, his decision did not break new legal ground. At the very least, lawyers not involved in the deal say, the Del Monte board shouldn't have let Barclays run the go-shop or provide financing. After all, Delaware courts have been skeptical of stapled financing at least as far back as 2005, when Strine turned a dubious eye on the practice in a decision involving the buyout of Toys 'R' Us Inc., a decision Laster discussed at length in Del Monte.
And while M&A professionals have different opinions of Barclays' conduct in putting the deal together, with some viewing it as completely unacceptable and others seeing it as totally typical, Del Monte said in its Feb. 4 SEC filing that Barclays continued to try to sell the company after being told to desist. However common it is for private equity firms to communicate about teaming up in contravention of a confidentiality agreement, those agreements are both standard and standardized, and Laster's reading of the confi in Del Monte stirred no controversy.
The debate about the case -- and about Laster's handling of shareholder litigation -- centers not on his treatment of the law but on his refusal to accept practices that are common, if perhaps dubious, and his willingness to come down hard on those who engage in them. It's more about judicial temperament than intellectual capacity. At the moment -- and Laster has only been on the bench for a year and a half -- lawyers aren't sure how to read him, which is a problem in a jurisdiction that places a high value on predictability.
Strine once wrote that he sees the world in shades of gray, though he's not afraid to dress down a bad guy when he sees one. Laster seems to have a more Manichaean cast of mind. That perspective may moderate with time on the bench, but right now no lawyers or party appearing before Laster wants to be that bad guy.
With regard to shareholder litigation, Laster's decision to ask Richards Layton's Williams for an independent report is at the very least an olive branch to the corporate bar and a signal that the judge recognizes that lashing out at individual lawyers isn't a solution to a complicated problem that is "inherent in our system of federalism," as Williams wrote in his March 11 report to Laster.
Williams concluded his brief by acknowledging, "Both plaintiffs and defense counsel" are "very much aware of the recent rulings and statements of the Court expressing dissatisfaction with settlements and the processes leading to them." And, Williams added, "much self-policing among the bar has already occurred and will continue to occur." In other words, all of the lawyers who litigate regularly in Delaware are aware of Laster's perspective and are adjusting to it. That doesn't mean they're all happy about it.