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In re Pilgrim's Pride Corp. Derivative Litigation

Court of Chancery of Delaware

March 15, 2019

IN RE PILGRIM'S PRIDE CORPORATION DERIVATIVE LITIGATION

          Date Submitted: December 21, 2018

          Kurt M. Heyman, Melissa N. Donimirski, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Jason M. Leviton, Joel A. Fleming, BLOCK & LEVITON LLP, Boston, Massachusetts; Mark Lebovitch, Edward G. Timlin, David MacIsaac, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Counsel for Plaintiffs.

          Kevin G. Abrams, Michael A. Barlow, Andrew J. Peach, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Michael B. Carlinsky, Adam M. Abensohn, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Counsel for Defendants JBS, S.A., JBS USA Holding Lux S.à r.l., William Lovette, Andre Nogueira De Souza, Gilberto Tomazoni, Tarek Farahat, and Denilson Molina.

          Kevin R. Shannon, Christopher N. Kelly, Jaclyn C. Levy, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Nominal Defendant Pilgrim's Pride Corporation.

          MEMORANDUM OPINION

          LASTER, V.C.

         The plaintiffs are minority stockholders in nominal defendant Pilgrim's Pride Corporation (the "Company"), which is a Delaware corporation. They sued the Company's controlling stockholder, JBS S.A. ("Parent"), which is an entity organized under Brazilian law.[1] They also sued five individuals whom Parent elected to the Company's board of directors (respectively, the "Director Defendants" and the "Board"). All five Director Defendants are executive officers of Parent or serve as executive officers of its controlled subsidiaries. One of the Director Defendants serves as the Company's CEO.

         The plaintiffs challenge a transaction in which the Company paid $1.3 billion to buy one of Parent's other subsidiaries: Moy Park, Ltd. (the "Acquisition"). The complaint alleges that Parent needed to raise cash quickly after its controlling stockholder agreed to pay a $3.2 billion fine to the Brazilian government. Because Parent controlled the Company and Moy Park, the plaintiffs assert that the governing standard of review for the Acquisition is entire fairness. The plaintiffs contend that as a self-dealing fiduciary, Parent is obviously interested in the Acquisition and must prove that it is entirely fair. Plaintiffs further allege that because of their affiliations with Parent, all five of the Director Defendants lack independence and likewise must prove that the Acquisition is entirely fair.

         The complaint alleges that the Company did not engage in true arm's-length bargaining with Parent. Among other things, the Company permitted its management team and its financial advisor to lead the negotiations, despite their lack of independence from Parent. As part of the pseudo-negotiations, the Company responded "in a constructive manner" when Parent breached its exclusivity agreement with the Company. As a result of a defective process, the Company ultimately agreed to pay what was effectively the same price that Parent demanded in its opening ask, even though that price was higher than what the Company's internal analyses supported and what strategic bidders were willing to pay. Based on these allegations, the plaintiffs contend that the complaint supports a reasonable inference that the defendants will not be able to prove that the Acquisition was entirely fair.

         Parent moved to dismiss the complaint for lack of personal jurisdiction, noting that the complaint does not allege that Parent has any ties to the State of Delaware other than its status as the controller of the Company. But on the same day that the Acquisition was approved, the Board voted unanimously to adopt a forum-selection bylaw, with the Director Defendants whom Parent controlled constituting a five-member majority of the nine-member Board. The bylaw made the Delaware courts the exclusive forum for breach of fiduciary litigation involving the Company. This decision holds that on the facts alleged, Parent implicitly consented to personal jurisdiction in this court for purposes of claims falling within the forum-selection bylaw.

         The Director Defendants also moved to dismiss the complaint, contending that it failed to allege any actionable involvement in the Acquisition. The Board formed a committee of independent directors (the "Committee") to consider the Acquisition, and the Board delegated to the Committee the exclusive authority to negotiate its terms and determine whether the Company would proceed. The Committee retained its own financial advisor and legal counsel, negotiated with Parent, and approved the Acquisition. The Director Defendants maintain that they approved the Acquisition solely to ensure that it did not violate a covenant in the Company's bond indenture.

         Two Director Defendants-William Lovette and Andre Nogueira De Souza- participated in the negotiation and approval of the Acquisition to a far greater degree, rendering them potentially liable for the allegedly unfair transaction. As to the other three Director Defendants, although their approval of the board resolution is a slim reed, it constitutes sufficient involvement by conflicted fiduciaries in the effectuation of a self-dealing transaction to warrant denying their efforts to obtain dismissal at the pleading stage.

         I. FACTUAL BACKGROUND

         The facts are drawn from the plaintiffs' complaint and the documents it incorporates by reference, including documents that the plaintiffs obtained using Section 220 of the Delaware General Corporation Law (the "DGCL"), 8 Del. C. § 220. Despite relying on these documents, the plaintiffs did not attach them as exhibits to their complaint. The defendants have supplied some of the omitted documents, which the court can consider. See Winshall v. Viacom Int'l, Inc., 76 A.3d 808, 818 (Del. 2013) ("[A] plaintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents' actual terms." (alteration in original) (internal quotation marks omitted)). Citations in the form "Ex. - at -" refer to these documents, which the defendants attached to their initial briefs as exhibits. See Dkts. 23, 41. At this stage of the proceedings, the complaint's allegations are assumed to be true. The plaintiffs also receive the benefit of all reasonable inferences, including inferences drawn from documents.

         A. The Company, Parent, and Moy Park

         The Company sells chicken in the United States. Its stock trades on Nasdaq under the symbol "PPC."

         Parent is one the largest meat processors in the world. At the time of the Acquisition, Parent controlled the Company through its ownership of 78% of the Company's common stock. Parent also controlled the Company through its right to designate a majority of the Board.

         Under the Company's certificate of incorporation, the Board consists of nine seats. Six seats are designated for "JBS Directors," whom this decision calls "Parent Directors." Three seats are designated for "Equity Directors."[2] A nominating committee populated by Parent Directors nominates directors for the Parent Director seats, and a nominating committee populated by Equity Directors does the same for the Equity Director seats.[3] Parent has the right to veto the nomination of an Equity Director, but only if Parent "reasonably determines that such person (i) is unethical or lacks integrity or (ii) is a competitor or is affiliated with a competitor of the Corporation." Ex. 15 § 5.4(a).

         Parent can vote its shares as it pleases for the Parent Directors, meaning that Parent can determine who serves in those positions. See Ex. 3 § 3.04(b). For the Equity Directors, by contrast, Parent must vote its shares "in the same proportion as the shares held by the Minority Investors are voted for or against, not voted, or abstained." Id. § 3.04(a). As a practical matter, the Company's minority stockholders determine who serves as an Equity Director.

         At the time of the events giving rise to this litigation, the Equity Directors were David Bell, Michael Cooper, and Charles Macaluso. Each appears for pleading purposes to be an independent, outside director. Four of the Parent Directors served as executive officers of Parent or its subsidiaries-defendants Andre Nogueira De Souza, Tarek Farahat, Denilson Molina, and Gilberto Tomazoni. A fifth Parent Director was William Lovette, the Company's CEO and President. The final Parent Director was Wallim Cruz de Vasconcellos, Jr., who has no alleged affiliation with Parent or the Company other than his service as a Parent Director.

         Moy Park sells chicken in the United Kingdom. Before the Acquisition, it was a wholly owned subsidiary of Parent. Parent purchased Moy Park in 2015 for approximately $1.5 billion.

         B. Parent Needs To Raise Cash.

         The Batista family controls Parent through a holding company. In May 2017, the holding company agreed to pay a fine of $3.2 billion (R$10.3 billion) to the Brazilian government in response to a wide-ranging investigation into the bribery of government officials. Parent needed to raise cash quickly to help its controlling stockholder pay the fine.

         In June 2017, Parent announced that Moy Park was for sale. Wesley Mendonça Batista, who was serving as Parent's CEO and who himself had pled guilty to a bribery charge and agreed to pay a substantial fine, contacted Nogueira. Batista told Nogueira that Parent would be interested in selling Moy Park to the Company for £1.01 billion ($1.3 billion). Nogueira shared the overture with Lovette, who engaged in further discussions with Parent about the proposal.

         C. The Initial Meeting With The Equity Directors

         On June 28, 2017, Lovette met with the Equity Directors. Other attendees included bankers from Barclays Capital, Inc., who were acting as the Company's financial advisor despite having a longstanding relationship with Parent, and lawyers from Paul, Weiss, Rifkind, Wharton & Garrison LLP. Vasconcellos, one of the Parent Directors, also attended.

         Lovette pitched the Equity Directors on having the Company acquire Moy Park for £1.01 billion ($1.3 billion). He described the acquisition as a "compelling opportunity" with "a strong strategic rationale." Ex. 1 at 2. He argued that even though Moy Park's facilities already implemented "best practices," his management team could "increase[e] efficiencies in operations and headcount." Id.

         Barclays had already prepared a presentation that valued Moy Park at between £700 million and £1.415 billion. In arriving at this range, Barclays projected generous growth in Moy Park's revenue and EBITDA, even though Moy Park's revenue had been flat over the previous three years. Barclays also assumed £41.6 million in post-Acquisition synergies.

         Barclays presented four financing alternatives for purchasing Moy Park. In each case, Barclays assumed a purchase price of £1.05 billion. Ex. 4 at 16.

         D. The Committee

         On July 3, 2017, the Board formed a special committee consisting of the Equity Directors (the "Committee"). The Board delegated to the Committee its "exclusive power and full authority . . . to take all actions it considers necessary, appropriate or desirable in connection with evaluating, reviewing, negotiating and implementing the [Acquisition] and any alternative thereto." Ex. 2 at '012. The Board also resolved to "not approve or recommend the [Acquisition] unless the [Acquisition] was approved by the . . . Committee." Id.

         The Committee retained Evercore as its financial advisor. Evercore informed Barclays that the Committee and its advisors expected to lead the negotiations with Parent, rather than having Company management and Barclays take the lead. Notwithstanding the Committee's instruction, Company management and Barclays continued to take the lead in the negotiations with Parent.

          The Committee retained Paul Weiss as its legal counsel. Recall that Paul Weiss had attended Lovette's meeting with the Equity Directors on July 28, 2017, six days before the formation of the Committee that ultimately became Paul Weiss's client. At the pleading stage, this sequence supports a reasonable inference that management had some degree of involvement in the selection of the Committee's counsel.

         E. Evercore's Initial Valuation

         On July 6, 2017, Evercore provided the Committee with its initial reactions to Barclays' valuation analyses. Evercore told the Committee that it planned to work with Barclays to conduct due diligence but would perform its own valuation work. Evercore also informed the Committee that it would analyze any efficiencies that the Company could achieve on a stand-alone basis, independent of the Acquisition, as distinct from synergies that could only be generated as a result of the Acquisition.

         On July 18, 2017, Evercore provided the Committee with its preliminary valuation analysis. In its presentation, Evercore relied on management's projections and synergy estimates, which yielded results nearly identical to Barclays' calculations. Evercore expressed 80% confidence in the Company's ability to realize the synergies. Without synergies, Evercore valued Moy Park in the range of £700 million to £1.038 billion ($905 million to $1.132 billion). The complaint does not describe Evercore's with-synergies valuation, and neither side provided copies of the underlying materials.

         Evercore told the Committee that Parent hoped to sell Moy Park within three weeks and that other suitors had executed non-disclosure agreements. The Committee discussed whether Parent "might be willing to accept a lower price from the Company . . . than from third parties" because Parent "would retain Moy Park's earnings in such a transaction." Ex. 5 at 4.

         After Evercore's presentation, Lovette and Sandri joined the meeting. Lovette endorsed the deal and expressed confidence in the estimated synergies. Lovette then disclosed the conversation he had with Nogueira in June 2017 about Parent's interest in the Company. Lovette did not disclose Nogueira's earlier conversation with Batista.

         F. The Committee Offers £925 Million.

         On July 27, 2017, the Committee met with Barclays and members of Company management. Barclays presented an updated valuation of Moy Park. Sandri updated the Committee on "exchanges between Parent and the Company." Ex. 7 at 1-2.

         After excusing Barclays and the members of management, Evercore presented an updated valuation. It closely resembled the firm's analysis from July 18, 2017, except this time Evercore did not provide an analysis of Moy Park's value without synergies. Evercore reported that nine strategic bidders had signed non-disclosure agreements. The Committee decided to submit an indication of interest "at a cash-free, debt-free value of £925 million." Ex. 7 at 4.

         On July 31, 2017, news outlets reported that multiple parties were interested in acquiring Moy Park. Later that day, the Committee directed Evercore to submit the Company's indication of interest and to ask for exclusivity.

         G. Parent Counters at £1.05 Billion.

         On August 4, 2017, Russ Colaco, Parent's Chief Financial Officer, asked the Company to pay £1.05 billion for Moy Park. He also conveyed that Parent wanted to sign and close the deal simultaneously before August 15. To give the Committee the first chance at the deal, he proposed to delay seeking third-party bids until August 17.

         When the Committee met later that day, Barclays and Evercore reported that financing a simultaneous sign-and-close structure would be more expensive than a traditional deal. The Committee discussed making a counteroffer in a range of £925 to £950 million, but deferred making a decision on a specific figure.

         On August 5, 2017, the Committee met with Barclays and members of Company management. They advised the Committee that a simultaneous signing and closing would result in $15 million of additional financing costs compared to the alternative. The Committee decided to counter at "£955 million for a transaction with a bifurcated signing and closing that include[d] a customary marketing period" or "£940 million for a transaction with a simultaneous signing and closing." Compl. ¶ 72 (alteration in original).

         That afternoon, Parent responded that it had received another offer at approximately the same valuation. Parent declined to commit to exclusivity.

         H. The Company Bids £975 Million.

         During the following week, Parent's counsel informed Paul Weiss about Batista's original conversation with Nogueira. This was the first time that Paul Weiss learned about the conversation. Parent's counsel told Paul Weiss that Batista's references to pricing were not intended as a formal offer.

         In a separate call, Colaco told Barclays that Parent had received a bid of £1.05 billion and that they expected that amount to increase to £1.1 billion. Colaco subsequently told Barclays that Plukon Food Group was the high bidder. With Plukon's offer in hand, Parent made a revised demand: "a purchase price of £1 billion (~$1.3 ...


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