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Donoghue v. Murdock

United States District Court, Second Circuit

August 6, 2013

DEBORAH DONOGHUE, Plaintiff,
v.
DAVID H. MURDOCK and DOLE FOOD COMPANY, INC., Defendants.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge.

Plaintiff Deborah Donoghue, a security owner of Dole Food Company, Inc. ("Dole"), brings this complaint in the right and for the benefit of Dole pursuant to § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) ("§ 16(b)"), against defendants David H. Murdock and, nominally, Dole. Donoghue alleges that Murdock, a fiduciary of Dole at all relevant times, realized short-swing profits in violation of § 16(b) when Murdock purchased 4, 967, 344 shares of Dole within a six-month window of the Settlement Date-November 1, 2012-of a Forward Purchase Agreement for Dole common stock entered into in October 2009 by Murdock and an unrelated third party. Defendants move to dismiss the Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons that follow, defendants' motion to dismiss is granted.

I. Background

A. The Parties

Dole Food Company, Inc. is a Delaware corporation. First Amended Complaint (Dkt. 16) ("FAC") ¶ 2. Its common stock was registered under § 12(g) of the Securities Exchange Act and is traded on the NASDAQ Exchange. Id. ¶ 3. At all relevant times, Murdock was the chief executive officer of Dole, chairman of its board of directors, and a beneficial owner of more than 10% of its equity. Id. ¶¶ 5, 39. His shareholdings are owned both directly and indirectly through the David H. Murdock Living Trust, of which Murdock is Trustee and Beneficiary. Id. ¶ 5. Donoghue is a shareholder of Dole. Id. ¶ 2.

B. The Forward Purchase Agreement

On October 22, 2009, Murdock entered into a Forward Purchase Agreement (the "FPA") with the Dole Food Automatic Common Exchange Security Trust (the "Trust"). Id. ¶ 11; see Declaration of James Worthington in Support of Defendants' Motion to Dismiss (Dkt. 18) ("Worthington Decl."), Ex. A (the "FPA"). Under the FPA, on November 1, 2012 (the "Settlement Date"), Murdock was required to deliver to the Trust up to 24 million shares of Dole common stock or, at Murdock's election, the appropriate cash equivalent, with the exact amount determined by an agreed-upon "Exchange Rate" formula described in the FPA. FAC ¶¶ 11, 12; see FPA § 2.1(c). On October 28, 2009, Murdock received from the Trust a payment of $227, 937, 302.77 as compensation. FAC ¶ 13. Murdock then delivered his maximum possible obligation under the FPA of 24 million shares to U.S. Bank National Association (the "Collateral Agent"), and authorized the Collateral Agent to deliver those shares to the Trust on his behalf on the Settlement Date. Id. ¶ 14. Despite the Collateral Agent holding Murdock's shares in escrow, Murdock retained his right to vote those shares and to receive dividends from those shares. Id. ¶¶ 16-17. Murdock also claimed the sale of those shares-for tax purposes-to have taken place on the Settlement Date. Id. ¶ 18.

The FPA obliged Murdock to deliver on the Settlement Date-in exchange for the prepayment Murdock received on October 28, 2009-a disbursement that would be determined by a pre-set method: multiplying the 24 million shares held by the Collateral Agent by the "Exchange Rate." Id. ¶ 20. The Exchange Rate was an agreed-upon formula keyed to the "Average Market Price" of Dole stock, which consisted of "the open market prices for shares of common stock of Dole over a period of twenty trading days ending three days prior to but not including the" Settlement Date. Id. ¶ 12. That formula was defined in the agreement as follows:

(i) if the Average Market Price is less than $15.00 (the "Appreciation Threshold Price") but equal to or greater than $12.50 (the "Initial Price"), the Exchange Rate will be a fraction... equal to the Initial Price divided by the Average Market Price.
(ii) if the Average Market Price is equal to or greater than the Appreciation Threshold, the Exchange Rate will be 0.8333; and
(iii) if the Average Market Price is less than the Initial Price, the Exchange Rate will be 1.000.

Id. ¶ 21; see FPA § 2.1(c).

Put in simpler terms, the FPA contemplated three possibilities. First, if the Average Market Price for Dole common stock was below the floor price of $12.50, then Murdock was obliged to forfeit all 24 million shares held by the Collateral Agent. FAC ¶ 23. Second, if the Average Market Price was at or above the ceiling price of $15.00, then Murdock was obliged to forfeit 24 million shares multiplied by.8333, or approximately 19, 999, 200 shares. Id. ¶ 24. Third, if the Average Market Price was between $12.50 and $15.00, Murdock was obliged to forfeit a number of shares equal to 24 million multiplied by a ratio set by dividing $12.50 by the Average Market Price. Id. ¶ 25. Regardless of the Average Market Price, Murdock could opt, at a point 60-90 days before the settlement date, to provide the cash equivalent value of the shares owed and thus retain the shares of Dole held by the Collateral Agent. Id. ¶ 19; see FPA § 2.3(d).

On August 31, 2012, Murdock decided to forgo his option of providing cash payment to the Trust and instead deliver on the Settlement Date whatever number of shares the agreed-upon formula would require. FAC ¶ 34. On the Settlement Date, the Average Market Price was determined to be $12.866. Accordingly, pursuant to the formula, the Collateral Agent delivered only 23, ...


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