Judge Approves $4.5M Settlement Against Tyson Foods Directors

April 10, 2008

A Delaware Chancery Court judge has approved the settlement of a shareholder lawsuit against directors and executives of Tyson Foods but reserved judgment in a dispute over attorney’s fees.

The settlement approved by Chancellor William Chandler III calls for Don Tyson and Tyson Limited Partnership, the company’s largest shareholder, to pay the company $4.5 million.

The company also agreed to implement or continue a variety of corporate governance measures in response to the lawsuit, which alleged that Tyson officials were granted stock options timed in advance of favorable news likely to boost the company’s stock price.

The lawsuit also alleged that Tyson failed to adequately disclose certain “related party” transactions under which Tyson officials received millions of dollars from the company for farm and aircraft leases, livestock operations and other services.

In approving the settlement, Chandler said it would have been a hard-fought case had it gone to trial, and that the settlement was in the best interest of the company, the shareholders and the defendants.

“It’s not clear how that litigation would have ultimately ended,” said the judge, who twice rejected defense efforts to have the claims dismissed. “There were risks, pretty substantial risks, I think, to each side.”

“I think there are some good corporate government improvements here for the company,” added Chandler, who indicated that he was going to approve “by and large” the $3 million fee request by the plaintiffs’ attorneys but wanted time to think it over.

Chandler said he would issue a ruling Wednesday on the attorney fees and expenses, which would come from the amount to be paid to the company. Arkansas-based Tyson, the world’s largest meat processor, has said the requested fees are excessive.

Stuart Grant, an attorney representing the plaintiffs, said the $4.5 million represents about 20 percent of what the plaintiffs would have been able to recover in money damages had they won the lawsuit. The proposed $3 million in fees and expenses is based not on actual hours worked or the monetary relief that might have been won, he said, but on the value of the corporate changes the plaintiffs brought about.

“We are seeking to recover based on what we produced,” he said.

Grant said the plaintiffs would have been able to prove that Tyson engaged in springloading on at least two occasions, in 2001 and 2003, and that they also would have been able to present strong evidence challenging the related party transactions.

The plaintiffs instead agreed to trade “dollars for governance” by entering into a settlement aimed at forcing improvements to Tyson’s corporate governance. The real way to increase shareholder value, Grant said, was to eliminate the “Tyson family discount” going forward.

“The corporation is known as a governance nightmare,” he said.

Among other things, Tyson agreed not engage in any new related party transactions without the consent and prior disclosure of the board’s governance committee, and to retain a consultant to evaluate its internal audit and control processes. The company also agreed to boost the role of independent directors on its board, and said all grants of stock options to employees under its 2000 incentive plan will be priced at the closing price on a date set at least six months in advance.

Kurt Heyman, an attorney representing Tyson, downplayed the reforms, describing them as “therapeutic benefits.”

“We are saying it is modest benefit achieved here … based on what we think were fairly weak claims,” Heyman said, adding that the governance provisions in the settlement largely confirm existing practices.

David Graham, an attorney representing individual Tyson directors and executives, stressed that the defendants did not admit any wrongdoing.

“It was a very, very real dispute,” he said.

Most of Tuesday’s hearing involved arguments over how much money the two law firms representing the plaintiffs will receive. The plaintiffs attorneys are asking for $2.8 million in fees and $280,000 in expenses. The defendants have suggested that $1.6 million in fees and $200,000 in expenses is a more reasonable amount, given that some of the work done by the two plaintiffs’ firms was duplicative.

Heyman said the idea that lawyers could get two-thirds of the settlement payment is hard to swallow.

“It does, I think, stick in the company’s craw,” he said, adding that the defendants spent only about $1.7 million on the lawsuit and related litigation.

“I hate to use a trough or cash cow analogy given the subject matter here,” he said.

Grant suggested that Tyson is opposing the attorney fee request because it was miffed at the plaintiffs.

“This was a direct hit to them,” he said. “It’s not business as usual anymore. We’re reining you in.”

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