In a Form 8-K filed with the SEC on October 6, 2011, Del Monte Corporation announced that it and Barclays Capital had settled for $89.4 million the stockholders' derivative lawsuit that arose out of its leveraged buyout by Kohlberg Kravis Roberts & Co. L.P., Vestar Capital Partners and Centerview Partners. The lawsuit had led to a preliminary injunction delaying the buyout and enjoining the buyer's deal protection devices in the merger agreement due to Barclays' improper activities when providing buy-side financing while advising Del Monte in the sale (see Legal Update, Delaware Chancery Court Grants Injunction Postponing Del Monte Foods Stockholder Vote and Enjoining Deal Protection Measures).

The Del Monte case, along with the previous Delaware Court of Chancery case In re Toys "R" Us, Inc. Shareholder Litigation (877 A.2d 975 (Del. Ch. 2005)), highlighted the inherent conflicts of interest and possible ethical breaches of buy-side financing, where one investment bank advises the seller while also providing acquisition financing for potential buyers (and earning fees for both services). This settlement, one of the biggest recorded in the Court of Chancery, is another reminder of the potential liability for sellers and their boards, sell-side bankers and even buyers when banks provide buy-side financing and may cause seller boards, banks and bidders to question, if not eschew, buy-side financing in many circumstances. This may particularly be the case when, as in the Del Monte transaction, the buy-side financing is offered without some deal-related justification reasonably related to advancing stockholder interests.

Whether and to what extent this settlement and existing Delaware case law will have a chilling effect on traditional stapled financing, pre-arranged buy-side financing that is offered to all potential bidders in an auction process, remains to be determined. Historically, stapled financing has been viewed as a way to advance stockholder interests by expediting the auction process and potentially increasing the sale price for the seller by making the financing available to all bidders. The inherent conflicts of interest and ethical breaches possible even with stapled financing may cause banks and seller boards to question the use of stapled financing. On the other hand, given the benefits of traditional stapled financing, including the lucrative fee income for banks, bankers and seller boards may choose to view this case as a lesson in best practices when using buy-side financing, including stapled financing.

The settlement is subject to customary conditions and requires the approval of the Delaware Chancery Court.

For more on acquisition finance, see the following Practice Notes: