A HOUSE DIVIDED
Plaintiffs say conflict of interest cannot be waived
Dan Case represented his son while his firm was representing Grove Farm
When Grove Farm Co. Inc.'s board of directors was told by Honolulu lawyer Dan Case that Case's son Steve might be willing to buy the company in September 2000, directors spent little time discussing a significant issue: the conflict of interest posed by Dan Case representing his son while Case's law firm represented the company.
The board at the time summarily waived the conflict and invited Steve Case to make an offer. Directors never sought outside counsel, or discussed precisely what the conflict of interest was, one board member says. The only lawyer present was Dan Case's law partner, Grove Farm General Counsel Jim Cribley.
"There was a conflict of interest," director Donn "Curly" Carswell said in a deposition. "We didn't discuss the definition of it or anything. We all know what a conflict of interest is."
Five years after Case acquired the company for $26 million, the waiver has surfaced as a point of controversy. Some former shareholders allege that the former board violated its duties to shareholders by waiving the conflict. The shareholders' expert witness, Cornell University law professor Chuck Wolfram, asserts that the board and its lawyer failed to follow Hawaii laws governing such waivers.
"I have never heard of joint representation of buyer and seller in a corporate-auction situation," Wolfram wrote in a memo. "In fact, I have never even heard the possibility seriously discussed by lawyers."
Corey Park, an attorney for the former board of directors, said the board would have been remiss if it hadn't explored the possibility of an offer from Case.
"From the directors' point of view, waiving the conflict of interest to determine if Steve Case was interested was obvious," he said. "Steve Case was clearly financially qualified and, if interested, could have closed the deal on the company's timetable."
After the waiver was granted, Steve Case took the driver's seat in the bidding, receiving repeated advice from Grove Farm management on how much to bid. In one instance, Case was advised on how to isolate Guy Combs, an outspoken shareholder who was threatening to block the sale.
"Hugh Klebahn suggests that a purchase price a little higher that $23.9 million would leave Guy without support and then we would merge him out," Dan Case wrote to Agee. "Jim Cribley thinks Guy is enough of a maverick to try and stop any sale" that would not let shareholders take land instead of cash.
Later, Agee suggested that Steve Case offer $26 million based on guidance from management. Although that would be $1 million more than envisioned, Agee said it was prudent because "we learned from the current CEO, Hugh Klebahn, that there is a credible offer on the table from a competing group for $25.0 million.
"Hugh has been very forthcoming with us and it is clear that he prefers to have you as the buyer," Agee added. "At the same time, he needs to fulfill his fiduciary responsibilities to shareholders. Hugh feels an offer of $26.0 million will close out the competition and win the day for us."
Plaintiffs argue that these sorts of e-mails demonstrate that management favored Steve Case. But defense lawyers say there was nothing wrong with providing the information.
Gary Grimmer, an attorney for Dan Case, said that providing the information was simply a way to get the best price.
"It's naive to think that the chairman of the board would not be telling Agee and Dan that this is what it's going to take" to buy the company, Grimmer said.
(Dan Case is a director of Oahu Publications Inc., publisher of the Star-Bulletin.)
In any event, on Oct. 17, 2000, the Grove Farm board accepted Case's offer to buy the company.
As a shareholder vote loomed on Dec. 1, management again expressed concerns about the conflict of interest.
On Nov. 18, Klebahn informed several directors that Grove Farm had retained the firm of Morrison & Foerster LLP to assist with the sale and provide "the appearance of a greater sense of independence to the Case firm."
"The issue of conflict of interest has been raised by interested parties and at least one shareholder," Klebahn wrote, "so this should provide some additional cover to that charge."
Park said the firm was hired to deal with specialized issues under the merger agreement with Steve Case. As Grove Farm and Case approached closing the deal, there was the potential that board would have to quickly address issues that could be raised by additional interested bidders, Park said.
"While the question of the possible conflict may have been raised by a shareholder, that was not the reason for hiring the Morrison & Foerster law firm," Park said.