IN RE ZHONGPIN INC. STOCKHOLDERS LITIGATION
Submitted: July 24, 2014
Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire, and Gina M. Serra, Esquire of Rigrodsky & Long, P.A., Wilmington, Delaware; Donald J. Enright, Esquire of Levi & Korsinsky LLP, Washington, DC; and Gustavo F. Bruckner, Esquire and Ofer Ganot, Esquire of Pomerantz LLP, New York, New York, Attorneys for Plaintiffs.
Robert S. Saunders, Esquire, Nicole A. DiSalvo, Esquire, and Matthew P. Majarian, Esquire of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware; and Eric S. Waxman, Esquire of Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, Attorneys for Defendants Xianfu Zhu and Baoke Ben.
S. Mark Hurd, Esquire and Matthew R. Clark, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; and Robert H. Pees, Esquire of Akin Gump Strauss Hauer & Feld LLP, New York, New York, Attorneys for Defendants Raymond Leal, Yaoguo Pan, and Xiaosong Hu.
NOBLE, Vice Chancellor
Plaintiffs brought their Verified Amended Consolidated Class Action Complaint (the "Complaint") on behalf of themselves and all other similarly situated public stockholders of Zhongpin Inc. ("Zhongpin" or the "Company"), in connection with a going-private merger (the "Merger") that closed on June 27, 2013. The Merger represented the culmination of a sales process that commenced with a proposal (the "Proposal") from Xianfu Zhu ("Zhu"), Zhongpin's CEO and chairman of its board, to purchase the outstanding Company shares that he did not own for $13.50 per share in cash.
Plaintiffs contend that Zhu, who owned approximately 17.3% of Zhongpin's common stock, was a controlling stockholder under Delaware law, and therefore owed fiduciary duties to the Company. The Merger was negotiated and approved by a special committee (the "Special Committee"), and was ultimately approved by a slim majority of unaffiliated stockholders. Plaintiffs argue that although the Special Committee members were disinterested in the Merger, they were beholden to Zhu due to their financial interests. Therefore, the process of negotiating the Merger was allegedly flawed and Zhu's alleged power over Zhongpin rendered the Special Committee's authority illusory. Plaintiffs allege that the Merger consideration, which was identical to Zhu's initial offer in his Proposal, was unfair to Zhongpin's public stockholders. The Complaint asserts claims for breach of fiduciary duties against Zhu and all other members of Zhongpin's board of directors (the "Board" or the "Individual Defendants"). The Individual Defendants have filed two separate motions to dismiss pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim.
Before the Merger, Zhongpin was a publicly-traded Delaware corporation engaged in meat and food processing and headquartered in Changge City, Henan Province, People's Republic of China.
A. Zhu's Proposal
On March 27, 2012, Zhongpin announced that Zhu had submitted a preliminary, nonbinding Proposal to acquire all of the outstanding shares of Zhongpin's common stock not currently owned by him in a going-private transaction for $13.50 per share in cash. At this time, Zhu owned approximately 17.3% of Zhongpin's common stock. Zhu informed the Board that he was "interested only in acquiring the common stock of the Company that [he did] not already own, and that [he did] not intend to sell [his] stake in the Company to a third party." He intended to "immediately commence discussions with potential sources of financing (both debt and equity) and with certain stockholders of the Company, and [would possibly] make agreements with them relating to possible investments in the Acquisition."
B. The Special Committee and Zhongpin's Board
To respond to the Proposal, Zhongpin's Board established a three-member Special Committee to
(a) review, evaluate and negotiate the terms of the Proposal or any alternative transaction, including negotiating the definitive agreement or agreements; (b) advise the Board whether the Proposal or any alternative transaction was advisable and fair to, and in the best interests of, the Company and its unaffiliated stockholders; and (c) reject or approve the Proposal or any alternative transaction, or recommend rejection or approval of the Proposal or any alternative transaction to the Board.
The Special Committee consisted of Raymond Leal ("Leal"), Yaoguo Pan ("Pan"), and Xiaosong Hu ("Hu, " and with Leal and Pan, the "Special Committee Directors"). Leal, a former professor in the fields of mathematics, finance, and accounting, had served on Zhongpin's Board since June 2007. His professional experiences included providing financial advice to clients of regional investment banks, managing the mergers and acquisitions practice for Sun Trust Banks, and holding management positions in New York Stock Exchange-listed energy and power companies. He was chairman of the Audit Committee, and a member of the Compensation and Nominating Committees. Leal was paid $45, 000 annually for his Board-related services.
Pan had also served as a Company director since 2007, and was a member of the Audit and Nominating Committees, and chaired the Compensation Committee. He received $30, 000 annually for his service. Professionally, Pan has been a researcher for Chinese government institutions since the 1980s. His research focuses on the meat industry, food nutrition, and rural policy.
Hu joined Zhongpin's Board in June 2011. For over two decades, he has taught and researched at the Food Science and Engineering College of the China Agricultural University. He also serves in an array of academic and governmental organizations, mostly related to agriculture and food science. Hu chaired Zhongpin's Nominating Committee and sat on its Audit and Compensation Committees. Like Pan, Hu was paid $30, 000 annually.
The Special Committee Directors were compensated for their work in connection with the Merger. As the Special Committee's chair, Leal received a one-time fee of $30, 000 and $5, 000 per month until either a transaction was completed or his total fees equaled $100, 000. Pan and Hu received one-time payments of $25, 000 and $3, 000 each per month until a transaction was completed or they had received $70, 000 in fees. This compensation was not contingent on completion of the Merger or the Special Committee's recommendation of the Merger to the Board.
Zhongpin's full five-member Board included the Special Committee Directors, as well as Zhu and Baoke Ben ("Ben"). Zhu was the Chairman of the Board and Zhongpin's CEO from January 2006 until at least the completion of the Merger, and was paid $180, 000 annually. He was also Zhongpin's largest stockholder. Ben had served as a Company director since June 2007, and as the Executive Vice President and Secretary of the Company since January 2002. His annual compensation was $120, 000. Before the Merger, Ben owned approximately 2.4% of Zhongpin's outstanding common stock. After the Merger, he remained a Zhongpin director.
C. The Special Committee's Process
On May 10, 2012, the Special Committee retained Barclays Bank PLC ("Barclays") as its independent financial advisor in connection with evaluating the Proposal and potential alternative transactions. On September 12, 2012, Zhongpin provided Barclays with management forecasts covering 2012 through 2016 (the "May Management Projections"), along with a draft merger agreement from Zhu. Zhongpin's management had prepared its forecasts in May 2012, and Zhu had reviewed them.
On September 28, after consulting with its advisors, the Special Committee decided to conduct a pre-signing market check before executing any merger agreement. The Special Committee also decided to meet with Zhu to learn more about the Proposal's financing and Zhu's plans for Zhongpin.
When the Special Committee met with Zhu and Ben on October 11, 2012, it asked Zhu whether he would be interested in selling his shares to a third-party acquirer. Zhu reaffirmed the position he took in his Proposal that he was unwilling to sell his shares to any third party; he was a buyer but not a seller.
The following week, Zhu's financial advisor, Credit Suisse (Hong Kong) Limited ("Credit Suisse"), informed Barclays that Zhongpin's management had revised the May Management Projections to reflect decreases in the Company's projected revenues, profits, and gross margins based on the Company's preliminary third quarter financial reports. Zhongpin's management provided the revised projections (the "October Management Projections") to Barclays. Like the May Management Projections, Zhu had reviewed the new forecasts during their preparation. After receiving the October Management Projections, the Special Committee met telephonically with Feng Wang ("Wang"), Zhongpin's Chief Financial Officer, to discuss the process undertaken and ...