In Re IBP, Inc., Shareholders Litigation

OPINION

This post-trial opinion addresses a demand for specific performance of a “Merger Agreement” by IBP, Inc., the nation’s number one beef and number two pork distributor. By this action, IBP seeks to compel the “Merger” between itself and Tyson Foods, Inc., the nation’s leading chicken distributor, in a transaction in which IBP stockholders will receive their choice of $30 a share in cash or Tyson stock, or a combination of the two.

The IBP-Tyson Merger Agreement resulted from a vigorous auction process that pitted Tyson against the nation’s number one pork producer, Smithfield Foods. To say that Tyson was eager to win the auc *22 tion is to slight its ardent desire to possess IBP. During the bidding process, Tyson was anxious to ensure that it would acquire IBP, and to make sure Smithfield did not. By succeeding, Tyson hoped to create the world’s preeminent meat products company — a company that would dominate the meat cases of supermarkets in the United States and eventually throughout the globe.

During the auction process, Tyson was given a great deal of information that suggested that IBP was heading into a trough in the beef business. Even more, Tyson was alerted to serious problems at an IBP subsidiary, DFG, which had been victimized by accounting fraud to the tune of over $80 million in charges to earnings and which was the active subject of an asset impairment study. Not only that, Tyson knew that IBP was projected to fall seriously short of the fiscal year 2000 earnings predicted in projections prepared by IBP’s Chief Financial Officer in August, 2000.

By the end of the auction process, Tyson had come to have great doubts about IBP’s ability to project its future earnings, the credibility of IBP’s management, and thought that the important business unit in which DFG was located — Foodbrands— was broken.

Yet, Tyson’s ardor for IBP was such that Tyson raised its bid by a total of $4.00 a share after learning of these problems. Tyson also signed the Merger Agreement, which permitted IBP to recognize unlimited additional liabilities on account of the accounting improprieties at DFG. It did so without demanding any representation that IBP meet its projections for future earnings, or any escrow tied to those projections.

After the Merger Agreement was signed on January 1, 2001, Tyson trumpeted the value of the merger to its stockholders and the financial community, and indicated that it was fully aware of the risks that attended the cyclical nature of IBP’s business. In early January, Tyson’s stockholders ratified the merger agreement and authorized its management to take whatever action was needed to effectuate it.

During the winter and spring of 2001, Tyson’s own business performance was dismal. Meanwhile, IBP was struggling through a poor first quarter. Both companies’ problems were due in large measure to a severe winter, which adversely affected livestock supplies and vitality. As these struggles deepened, Tyson’s desire to buy IBP weakened.

This cooling of affections first resulted in a slow-down by Tyson in the process of consummating a transaction, a slow-down that was attributed to IBP’s on-going efforts to resolve issues that had been raised about its financial statements by the Securities and Exchange Commission (“SEC”). The most important of these issues was how to report the problems at DFG, which Tyson had been aware of at the time it signed the Merger Agreement. Indeed, all the key issues that the SEC raised with IBP were known by Tyson at the time it signed the Merger Agreement. The SEC first raised these issues in a faxed letter on December 29, 2000 to IBP’s outside counsel. Neither IBP management nor Tyson learned of the letter until the second week of January, 2001. After learning of the letter, Tyson management put the Merger Agreement to a successful board and stockholder vote.

But the most important reason that Tyson slowed down the Merger process was different: it was having buyer’s regret. Tyson wished it had paid less especially in view of its own compromised 2001 performance and IBP’s slow 2001 results.

By March, Tyson’s founder and' controlling stockholder, Don Tyson, no. longer *23 wanted to go through with the Merger Agreement. He made the decision to abandon the Merger. His son, John Tyson, Tyson’s Chief Executive Officer, and the other Tyson managers followed his instructions. Don Tyson abandoned the Merger because of IBP’s and Tyson’s pool' results in 2001, and not because of DFG or the SEC issues IBP was dealing with. Indeed, Don Tyson told IBP management that he would blow DFG up if he were them.

After the business decision was made to terminate, Tyson’s legal team swung into action. They fired off a letter terminating the Agreement at the same time as they filed suit accusing IBP of fraudulently inducing the Merger that Tyson had once so desperately desired.

This expedited litigation ensued, which involved massive amounts of discovery and two weeks of trial. 1

In this opinion, I address IBP’s claim that Tyson had no legal basis to avoid its obligation to consummate the Merger Agreement, as well as Tyson’s contrary arguments. The parties’ extensive claims are too numerous to summarize adequately, as are the court’s rulings.

At bottom, however, I conclude as follows:

• The Merger Agreement and related contracts were valid and enforceable contracts that were not induced by any material misrepresentation or omission;

• The Merger Agreement specifically allocated certain risks to Tyson, including the risk of any losses or financial effects from the accounting improprieties at DFG, and these risks cannot serve as a basis for Tyson to terminate the Agreement;

• None of the non-DFG related issues that the SEC raised constitute a contractually permissible basis for Tyson to walk away from the Merger;

• IBP has not suffered a Material Adverse Effect within the meaning of the Agreement that excused Tyson’s failure to close the Merger; and

• Specific performance is the decisively preferable remedy for Tyson’s breach, as it is the only method by which to adequately redress the harm threatened to IBP and its stockholders.

I. Factual Background

IBP’s Key Managers

IBP was first incorporated in 1960. Its current Chairman of the Board and Chief Executive Officer, Robert Peterson, has been with the company from the beginning. Having started in the cattle business as a cattle driver, Peterson learned the business from the ground up and has been the strategic catalyst behind IBP’s *24 growth from a relatively small fresh beef business to a diversified food company with sales of over $15 billion annually.

Peterson is a strong and committed CEO, who loves the business he has helped build and the people who work for it. By the late 1990s, however, Peterson was in his late sixties and cognizant that it would soon be time to turn the reins over to a new CEO. Peterson’s heir apparent was IBP’s President and Chief Operating Officer, Richard “Dick” Bond. By 2000, Peterson had also installed one of his top aides, Larry Shipley, as IBP’s Chief Financial Officer. Sheila Hagen was IBP’s General Counsel, having joined the company from one of its beef industry rivals.

Although this quartet all have important roles in the company, it is clear that Peterson remains the dominant manager at IBP, and that Bond is the next most important. Shipley and Hagen, however, each have important duties regarding financial and legal functions at issue in this case. As in any organization, the roles of the four overlapped, but imperfectly so. Put less obliquely, it is common for “big picture” executives to view and speak about issues from a larger strategic perspective that is less specific and technically precise than executives like CFOs and General Counsels who are charged with getting the details precisely right.

IBP’s Business

The traditional business of IBP is being a meat processor that acts as the middleman between ranchers and retail supermarkets and food processors. This is the so-called “fresh meats” business of IBP. Over the years, that business has evolved in sophistication so that just about every inch of the animals eventually can be processed by IBP or a later purchaser into something useful. The fresh meats business has also gotten more and more precise in terms of slaughtering. Whereas very large sections of animals used to be shipped to end-users, the industry trend is for middlemen like IBP to do more of the cutting.

As of 2000, IBP was on the verge of taking that strategy to its next level. Instead of shipping large sections of meat to stores for further butchering, IBP was preparing to butcher meat itself, which would be shipped “case ready” — that is, ready to be put into the supermarket case. This was a new endeavor that was hoped to yield higher margins and reduce the overall cyclicality of IBP’s business.

Likewise, IBP was endeavoring to build up its food processing businesses. These are the businesses that take raw food products and turn them into something canned or packaged for supermarket or restaurant sale. Because these processing activities “add value,” they tend to have higher profit margins and generate more stable earnings than middleman meat slaughtering.

To carry out this strategy, IBP had recently made a series of acquisitions, including the purchase of Corporate Food Brands America, Inc. (“CFBA”) in February 2000. These purchased entities were being put together within IBP under the larger heading of Foodbrands. The companies make a variety of products, such as pizza toppings and crusts, side dishes, sauces, condiments, and portion-controlled meat products. IBP was also intent on promoting a branded line of lunch meat and similar products under the name “Thomas E. Wilson.”

IBP hoped that these processed food investments would provide a vehicle for growth and reduce the year-to-year volatility of IBP’s earnings. Given that most of the acquired companies within Foodbrands had been purchased no earlier than 1998, *25 IBP was obviously quite early in executing this yet-to-be fully proven strategy.

Moreover, while Foodbrands was a central part of IBP’s strategy for the future, it remained at that time a much smaller contributor to the bottom line than IBP’s’ fresh meats business. As originally reported, for example, fiscal year (“FY”) 1999 sales for IBP’s fresh meats business were $12.4 billion as opposed to $1.7 billion for Foodbrands. 2 Similarly, FY 1999 operating earnings in the fresh meats business were $438 million as opposed to $90 million for Foodbrands. 3 Thus, while Foodbrands had a higher profit margin, fresh meats remained by far the most substantial part of IBP’s business.

IBP Management Proposes An LBO

During 1999 and early 2000, IBP’s management was frustrated by the stock market’s valuation of the company’s stock. As earnings-less dotcoms traded at huge multiples to eyeball hits, IBP’s stock traded at a relatively small multiple to actual earnings. In response to this problem, Peterson, Bond, and Shipley were receptive when the investment bank of Donaldson, Lufkin & Jenrette, Inc. (“DLJ”) expressed interest in a leveraged-buy out (“LBO”) of the company.

In July, management informed the IBP board that it would like to pursue an LBO seriously. With the help of DLJ, a syndicate of investors who called themselves “Rawhide” was prepared to take the company private if a deal could be negotiated with the IBP board. The board formed a special committee comprised of outside directors, who then selected Wachtell, Lipton, Rosen & Katz as its legal advisor and J.P. Morgan Securities, Inc. as its financial advisor.

To facilitate their work, the special committee and J.P. Morgan asked IBP management to develop a set of five-year projections for the performance of IBP, which I will call the “Rawhide Projections” or the “Projections.” This request put the IBP management in the position of performing a task that was relatively novel to them. While IBP had periodically prepared two to three-year projections for rating agencies, it was not accustomed to making five-year projections. Even more important, it did not utilize such long-term projections in its own business operations.

To the contrary, IBP generally created plans for the coming year. In the fresh beef part of the business, these plans were quite ambitious and designed to motivate excellent performance, rather than to be predictive of actual results. The plans for the processed foods part of the business were designed to be more predictive, but these plans also dealt with the part of the business that was newest, and that included several units that had been recently purchased by IBP.

Several other factors made it difficult to project IBP’s performance accurately. Although IBP was executing a strategy to diversify its business so as to be less dependent on its fresh meats business, the reality was that fresh meats was still the core of the company, constituting well over 80% of its sales and earnings in 1999. Not only that, IBP’s processed foods division used fresh meats heavily.

As a middleman processor of fresh meats, IBP purchases cows and hogs at market prices, slaughters them, and sells them to food retailers and food processors. IBP’s profit margins are quite tight. When five stock supplies are low, these margins shrink further. When livestock *26 supplies are plentiful, IBP is more profitable.

Cattle and hog supplies go through cycles that can be tracked with some general precision using information from the United States Department of Agriculture. These cycles are affected by actual demand and ranchers’ expectations of market demand, as well as the need at various points to hold animals back to build up herds. Livestock supply is also heavily weather-driven. Ranchers are paid more money for large animals, from which more meat can be butchered. Cold weather makes it difficult for ranchers to grow the animals to the point where they will sell for the optimal price. When a severe winter hits, ranchers may hold animals back, so that they can be sold later after having been grown to more profitable sizes.

IBP’s Foodbrands business was also affected by fluctuations in livestock pricing, because it uses fresh meats as raw material. While Foodbrands has a relatively greater ability to make up for any shortage in livestock than the fresh meats part of IBP, Foodbrands also suffers when livestock supplies are tight and is unable to pass on its increased costs immediately. Instead, it hopes to regain its reduced margins within a reasonable time. 4

For all these reasons, IBP’s management was wary of preparing a five-year projection, but did so. The task fell largely to Shipley as CFO. His methodology was sound and reasonable, if not scientific.

In sum, Shipley’s August, 2000 Rawhide Projections assumed as follows:

• Fresh Meats:

A Beef: Shipley estimates for FY 2000 profitability (“EBIT 5 per head”) and volume were based on first-half results and projected to continue through the rest of the year. Thus, he projected EBIT per head of $27.50. But Shipley assumed a sharp decline in EBIT per head in 2001 to $16.50 per head, and a further decline in 2002 to $15.00, and a modest increase from 2003 to 2005. Profitability during this period was expected to remain fairly flat. 6 Shipley based his estimates on an expected trough in the cattle cycle, in view of historical trends.

A Pork: Shipley used the same per-head EBIT figure for all five years, derived from IBP’s historical average, with a slight upward adjustment for industry rationalization. Overall EBIT fluctuated, but was fairly steady throughout.

• Logistics/Other: This category deals with IBP’s trucking and freezer businesses. Shipley simply assumed that FY 2000 estimated profits would be repeated in each of the projected years because it was a stable business.

• Case Ready: Shipley used management’s existing assumptions. These projected losses for 2000 and 2001, and profitability in years 2002-2005.

*27 • Foodbrands: Shipley divided Foodb-rands into three basic categories as follows:

A Thomas E. Wilson — Shipley assumed that IBP’s venture into branded ready-to-eat or cooked meat products would lose money until 2008, when it would begin to be profitable.

▲ IBP Foods — This was a unit comprised of businesses that IBP had purchased out of bankruptcy. Shipley projected losses in 2000 and 2001, and profitability in the remaining years.

A Other Foodbrands — This was the heart of Foodbrands’ business. Shipley assumed 2000 EBIT of $157 million with a steady growth rate of 8% for the remaining years.

The overall picture for Foodbrands therefore was a composite of these assumptions that had Foodbrands producing $125 million in EBIT in 2000, $137 million in 2001, and growing to nearly $300 million by 2005. The $125 million EBIT number excluded $42.5 million in one-time costs associated with IBP’s acquisition of CFBA and the write-off of bad debt relating to a customer (together, the “CFBA Charges”). Shipley excluded the CFBA Charges because they were a non-recurring cost that was not expected to affect Foodbrands going-forward. All users of the Rawhide Projections relevant to this opinion were made aware of this feature of Shipley’s analysis.

Shipley’s assumptions were reasonable given the inherent imprecision of the task he was given. In reaching this conclusion, I also find that the Rawhide Projections were prepared with particular users in mind: a sophisticated special committee and investment bank that would understand that projections of this kind are at best a useful roadmap to where a business may go if the assumptions used in the model pan out and if the company’s business plan is executed well. Shipley reasonably assumed that the users of the Projections would approach them with the sort of intrinsic skepticism and caution that one expects from seasoned professionals, rather than with the unquestioning attitude of a believer at the foot of a prophet.

The IBP Board Accepts A Bid From The Rawhide Group

After several months of negotiations, the Rawhide Group and the special committee struck a deal on October 1, 2000 whereby the Rawhide Group would purchase all of IBP’s shares at $22.25 per IBP share. At a special committee meeting in connection with approval of the transaction, Peterson expressed his view that IBP’s performance for the second half of the year was softening, and that overall EBIT for FY 2000 might be $500 to $525 million, a range that was lower than the Rawhide Projection estimate that had been performed in August.

The Rawhide deal was publicly announced the next day. By this time, rumors had been circulating within the financial community about the possibility of such a deal. '

The announcement of the transaction inspired class action lawsuits in this court, alleging that the transaction was unfair. These suits were filed irrespective of the minimal barriers that existed to a higher transaction.

Problems At DFG Foods Begin To Surface

In 1998, as part of its strategy to grow IBP’s higher-margin food processing business, IBP management purchased a specialty hors d’oeuvres, kosher foods, and “airline food” business for $91 million, in- *28 eluding assumed debt. IBP bought this business from its managers, including its President, Andrew Zahn. Within IBP, the business became known as DFG Foods, Inc. or “DFG.” In late 1999, IBP purchased a competitor of DFG named Wilton Foods, and combined its operations with DFG. Zahn stayed on board after the purchase of DFG and continued to run the business, with a right to certain earn-out payments upon his departure that were tied to the unit’s performance.

Although IBP hoped that DFG would become a useful part of its overall strategy to move into higher-margin businesses, as of the year 2000, DFG was an insignificant portion of IBP’s overall business. Before the drastic adjustments that I will discuss later, DFG’s 1999 sales had been around $75 million and its pre-tax earnings were $8.2 million. At these levels, DFG constituted less than 1% of IBP’s sales and less than 2% of its pre-tax earnings. While IBP employed around 50,000 people at over 60 production facilities, DFG employed approximately 300 workers at its two facilities.

On September 30, 2000, Andrew Zahn left DFG and took a sizable earn-out payment with him. On October 16, 2000, IBP issued a press release announcing earnings for the third quarter of FY 2000 of $83.9 million and year-to-date earnings of $203 million. Soon after this announcement, Dick Bond learned that there were problems with the integrity of DFG’s books and records, and that it was possible that DFG’s inventory value was overstated.

The evidence reveals that audit staff within the Foodbrands unit had harbored concerns about DFG’s accounting procedures for some time. Dan Hughes, the director of internal audit at Foodbrands, had been questioning issues. His boss, Bill Brady, who was Foodbrands’ CFO, had not taken these concerns as seriously, and had resisted Hughes’s suggestion to inform IBP’s audit committee about possible overstatements. Despite Tyson’s arguments to the contrary, there is no credible evidence that suggests that anyone in IBP top management were on notice about irregularities at DFG until mid-October 2000.

When IBP top management learned of the problems at DFG, a full inventory audit was ordered. The audit concluded that DFG’s inventory was overvalued by $9 million. On November 7, 2000, IBP therefore announced that it would take a $9 million reduction over pre-tax earnings from the amounts previously reported for third quarter of FY 2000. These amounts were reported to the SEC in IBP’s third quarter 10-Q. As of that time, Peterson and Bond were led to believe that the $9 million overstatement was the extent of the problem at DFG, although efforts to get control of DFG’s financials continued.

The Auction For IBP Begins

The rumors about IBP’s possible sale had not gone unnoticed among meat industry leaders. Two industry participants had toyed with the idea of making a play for IBP for years.

One was Smithfield Foods, the nation’s number one pork processing firm. When combined with IBP, Smithfield would be the number one producer of beef and pork products. The strength of the Smithfield-IBP combination, was also its weakness. Because of IBP’s own strength in pork, anti-trust and political concerns were bound to be raised about a merger. Nonetheless, those concerns did not impede Smithfield from making an unsolicited bid for IBP on November 12, 2000. The Smithfield bid offered $25 in Smithfield stock .for each share of IBP stock. This was not the best of news for IBP manage *29 ment, whose relationship with Smithfield management was not warm.

Meanwhile, Tyson Foods had been pondering a deal with IBP for several years. Bob Peterson and Tyson founder and controlling stockholder, Don Tyson, were old industry friends with great respect for one another. In the preceding year or so, Peterson had bantered with Don Tyson about the idea of putting Tyson and IBP together. This would create a company that was number one in beef and chicken, number two in pork, and that would have a diverse processed food business. Put mildly, Peterson’s ardor for a combination with Tyson was much stronger than for a deal with Smithfield.

When Peterson spoke with him earlier, Don Tyson saw the potential of the combination, but had recently stepped aside as CEO to make way for a new management team, destined to be led by his son John Tyson. Don Tyson felt that the new team needed to settle in before undertaking-such a big deal.

By November 2000, the new Tyson team had been putatively in charge for some time, and was led by John Tyson, the company’s CEO. As a part of its active consideration of corporate strategy, Tyson management periodically ran numbers on the feasibility of a merger with IBP. By mid-November, Tyson was seriously considering making a play for IBP. Shortly before Thanksgiving, John Tyson received a call from George Gillett, a major IBP stockholder who was a participant in the Rawhide group. Gillett called to encourage Tyson to bid for IBP. By the time Gillett got to John Tyson, John Tyson was already quite receptive.

Soon after the call with Gillett, John Tyson called Dick Bond to set up a meeting to discuss a possible combination. The meeting was arranged for November 24, 2000 at an airport in Tampa due to the various Thanksgiving itineraries of the expected participants. The primary participants were to be Peterson and Bond for IBP, and Don and John Tyson for Tyson.

The November 24 Meeting

The November 24 meeting was a love-fest. Tyson came ready to buy, and IBP came ready to be bought. The meeting was dominated by the two elder statesmen, Peterson and Don Tyson. Each was excited about the possibility of combining the companies, under the day-to-day leadership of John Tyson and Dick Bond. Don Tyson had even been dreaming about the companies’ combined balanced sheets at bedtime.

The two discussed the combination in general, big picture terms with great enthusiasm. Peterson told the two Tysons that the Rawhide Projections would soon be published. He expressed confidence that performance of the kind indicated in the Projections could be achieved by IBP and that his own internal operating plans for IBP were more ambitious. But at no time did Peterson promise that IBP could be guaranteed to perform as the Projections predicted. Indeed, Peterson discussed many of the risk factors that affected IBP and that would naturally lead a reasonable listener to conclude that future results could not be projected with certainty. These risk factors included the cattle cycle, which Peterson explained was likely to be on the downside in the ensuing years.

The testimony suggests that the conversation was largely focused on the future and the synergistic benefits of the combination, and not as much on year 2000. While I have little doubt that Peterson expressed confidence in his company, I also conclude that he did not promise Tyson that IBP’s FY 2000 results would be exactly as set forth in the Rawhide Projec *30 tions. I do think Peterson felt that IBP would have a good year and projected that confidence. That is, I conclude that his subjective belief was fully in accord with the views he expressed to the Tysons.

I also conclude that Peterson felt that he was having a big picture conversation with savvy businessmen, who would be careful to absorb his larger thoughts against a backdrop informed by careful reading and examination of all the information usually considered by a corporation considering a mega-transaction. In this regard, I specifically conclude that a reasonable participant in the meeting would have assumed that the statements of all participants were general and in keeping with the informal and preliminary nature of the meeting. In talking about the Rawhide Projections that were to be released soon, the IBP participants would have naturally assumed that the Tysons would read them carefully and the information that qualified them. This assumption that Tyson Foods was proceeding cautiously and not heedlessly is borne out by record evidence that shows that Tyson was running its own assumptions about a combination, with downside cases.

As a result, I conclude that John and Don Tyson did not form a belief at the November 24 meeting that the Rawhide Projections were in the bank and would be met with ease. Instead, they took away the view that Peterson and Bond believed that IBP would meet those Projections, but that there were no guarantees of that and that there were known risks that could compromise IBP’s ability to deliver.

At a later point in the meeting, enthusiasm for the deal had run so high that the participants called in Tyson General Counsel Les Baledge, who had flown down with John Tyson, to discus's generally how the parties would proceed if Tyson made a bid. 7 By the end of the meeting, the Ty-sons were enthusiastic. Don Tyson ended the meeting by saying that the companies ought to be put together as quickly as possible.

The Rawhide Projections Are Published

On November 28, 2000, the preliminary proxy statement for the Rawhide deal was filed with the SEC. The preliminary statement included a description of the Rawhide Projections. The statement included the Projections “solely because of the disclosures [of them] that were made to J.P. Morgan ” during the negotiation process. 8 The preliminary proxy statement included a large amount of highlighted language that was intended to signal the caution with which those Projections should be used. A careful reader of the preliminary proxy would have noted, among other things, that: (i) the Projections had been prepared in August 2000; (ii) that the Projections had not been updated; (iii) that IBP Management does not ordinarily make such Projections; (iv) that the Projections should be read in light of IBP’s most recent financial statements; (v) that there were a large number of risks that could affect whether the Projections would *31 be met, particularly supply cycles in the livestock markets; and (vi) that the Projections were not guarantees of particular results.

By November 28, 2000, IBP had already issued its third quarter 10-Q. The preliminary proxy statement expressly informed readers that the Rawhide Projections — - which had been made as of August 2000 and had not been updated — should be read in light of the third quarter 10-Q. The third quarter 10-Q contained information that suggested that IBP would have difficulty meeting the $542 million in EBIT predicted for the year 2000. By the end of the third quarter, IBP’s total reported EBIT was $340 million, a result that, trailed third quarter results for FY 1999 by $67 million. 9 Whereas the Rawhide Projections had assumed that Foodbrands would deliver EBIT of $125 million for full year 2000, Foodbrands had only delivered around $50 million as of the end of third quarter 2000 on a normalized basis. 10 It thus needed to generate more EBIT in the fourth quarter than the whole of the preceding year to meet the Rawhide Projections’ estimate.

Tyson Makes Its Opening Bid

In early December, the Tyson board of directors met to consider making a bid for IBP. John Tyson’s vision for the deal was fundamental: he wanted to dominate the meat ease of America’s supermarkets and be the “premier protein center-of-the-plate provider” in the world. 11 Tyson/IBP would be number one in beef and chicken, and number two in pork. It would therefore be able to provide supermarkets with nearly all the meat they needed.

Not only that, John Tyson saw the potential to bring Tyson Foods’ own experience and unique expertise to bear outside of the poultry realm. As all parties agree, Tyson was an innovator in the meat industry, which had been the leader in demonstrating that a meat processor could produce value-added meat products of a ready-to-eat and ready-to-heat nature. In the past, meat processors sold large portions of meat to supermarkets and other processors, who butchered them and cooked them into higher priced serving sizes. Tyson began to do much of that work itself, thus preserving more of the profit for itself.

IBP was acknowledged to have a great fresh beefs business with an excellent, long-term track record. While it was beginning to embark on value-added strategies in the beef and pork industry, IBP was by all accounts not as far along in that corporate strategy and could most benefit from Tyson’s expertise in that particular area. John Tyson saw the potential for Tyson’s expertise to help IBP do in beef and pork what Tyson had done in poultry. His vision of the companies, however, had little to do with DFG specifically, a small subpart of Foodbrands that he knew little, if anything, about.

Tyson’s board supported management’s recommendation to make a bid. On December 4, 2000, Tyson proposed to acquire IBP in a two-step transaction valued at $26 (half cash, half stock) per share. Tyson trumpeted the fact that its offer was preferable to Smithfield’s, in no small measure because Tyson did not face the same degree of anti-trust complications that Smithfield did and could thus deliver on its offer more quickly. To emphasize this point, Tyson said that its offer was “subject to completion of a quick, confirmatory *32 due diligence review and negotiation of a definitive merger agreement.” 12

To that end, Tyson sent IBP an executed “Confidentiality Agreement,” modeled on one signed by Smithfield, which would permit it to have access to non-public, due diligence information about IBP. That Agreement contains a broad definition of “Evaluation Material” that states:

For purposes of this Agreement, Evaluation Material shall mean all information, data, reports, analyses, compilations, studies, interpretations, projections, forecasts, records, and other materials (whether prepared by the Company, its agent or advisors or otherwise), regardless of the form of communication, that contain or otherwise reflect information concerning the Company that we or our Representatives may be provided by or on behalf of the Company or its agents or advisors in the course of our evaluation of a possible Transaction. 13

The agreement carves out from the definition the following:

This Agreement shall be inoperative as to those particular portions of the Evaluation Material that (i) become available to the public other than as a result of a disclosure by us or any of our Representatives, (ii) were available to us on a non-confidential basis prior to the disclosure of such Evaluation Material to us pursuant to this Agreement, or (iii) becomes available to us or our Representatives on a non-confidential basis from a source other than the Company or its agents or advisors provided that the source of such information was not known by us to be contractually prohibited from making such disclosure to us or such Representative. 14

As plainly written, the Confidentiality Agreement thus defines Evaluation Material to include essentially all non-public information in IBP’s possession, regardless of whether the company’s employees or agents prepared it. The terms of the Confidentiality Agreement also emphasize to an objective reader that the merger negotiation process would not be one during which Tyson could reasonably rely on oral assurances. Instead, if Tyson wished to protect itself, it would have to ensure that any oral promises were converted into contractual representations and warranties. The Confidentiality Agreement does so by providing:

We understand and agree that none of the Company, its advisors or any of their affiliates, agents, advisors or representatives (i) have made or make any representation or warranty, expressed or implied, as to the accuracy or completeness of the Evaluation Material or (ii) shall have any liability whatsoever to us or our Representatives relating to or resulting from the use of the Evaluation Material or any errors therein or omissions therefrom, except in the case of (i) and (ii), to the extent provided in any definitive agreement relating to a Transaction. 15

The Due Diligence Process Begins

Tyson did not enter into the due diligence process alone. It retained Millbank, Tweed, Hadley & McCoy as its primary legal advisor, Merrill Lynch & Co. as its primary financial advisor, and Ernst & Young as its accountants.

*33 The bidding process was being run by IBP’s special committee. As members of the Rawhide group, Peterson, Bond and their subordinates were considered “interested” participants. Thus, while IBP management played a key informational role, the special committee had the final say.

On December 5 and 6, 2000, Tyson’s due diligence team reviewed information in the data room at Wachtell, Lipton. Tyson soon learned that the data room did not contain certain information about Foodb-rands and the reason why that was so: IBP was reluctant to share competitively sensitive information with Smithfield. The special committee’s approach to this sales process was to treat the bidders with parity. As a result, Tyson was told that any information it wanted that was not in the data room could be provided, but that if Tyson received that information, so would Smithfield.

As a result of its due diligence, Tyson flagged certain items including:

• Possible asset impairments at DFG and certain other Foodbrands companies. 16

• Discrepancies in the way that IBP reported its business segments. 17

• Concerns regarding whether the CFBA acquisition qualified as a pooling. 18

• IBP’s policy of recognizing revenue, upon invoicing, which was going to have to change on a going-forward basis because of new SEC guidance. 19

• IBP’s possible over-confidence about the outcome of certain environmental cases. 20

• IBP’s decision to treat its stock option plan as involving the issuance of “fixed” rather than “variable” options, and whether the accounting treatment for the plan, which was disclosed in the company’s financial statements, was proper. 21

IBP And Tyson Hold A December 8, 2000 Due Diligence Meeting

On December 8, 2000, due diligence teams from Tyson and IBP met in Sioux City, Iowa. The meeting was attended by the top managers from each side. Tyson’s team included its CEO John Tyson, its CFO Steve Hankins, its Senior Finance Vice President Dennis Leatherby, and the in-house lawyer who was its due diligence point person, Read Hudson. Tyson was also represented by its outside financial and legal advisors. The IBP team included Peterson, Bond, Shipley, and Hagen, as well as its outside financial and legal advis-ors.

Tyson came to the meeting expecting the now de rigeur Power-Point presentation. IBP came expecting to answer Tyson’s questions. As a result, the meeting became a question and answer session that covered IBP’s business, segment by segment.

At least two important issues were discussed at the meeting. I will start with the DFG issue. Going into the December 8, 2000 meeting, the chairwoman of the IBP special committee, Joann Smith, specifically told John Tyson to ask about DFG at the meeting.

According to IBP witnesses, the DFG situation had gotten more serious by De *34 cember 8. IBP’s top management was concerned that the accounting problems at DFG were deeper than they had recognized and that additional charges to earnings might be necessary. The IBP employee-witnesses all remember Peterson saying that the DFG problem had gotten worse by at least $20 million. Peterson himself remembers speaking in angry and vehement terms about Andy Zahn, labeling him as a “thief in the hen house,” and the progeny of a female dog who should be hanged on main street in front of a crowd. 22 He also recalls saying that DFG was a “black hole.” His colleagues at IBP have far less specific recollections, but do recall Peterson being quite upset.

The Tyson witnesses have a different recollection. They recall being told that DFG was a $9 million problem. Leather-by’s notes of the meeting note that there had been a “$9 mm writedown here (guy fired) fudged earnout,” that DFG was “not doing well,” but that IBP “believe[d] in bus.” 23 Hankins’s notes about DFG tersely state: “DFG — At bottom of problem.” 24 None of the Tyson witnesses heard Peterson describe Zahn — at that meeting — in such unforgettable terms. They do admit, however, that Peterson appeared agitated and upset by the issue, that the problem was attributed to fraud by Zahn, that Zahn had been the head of the business, that Zahn was now gone, and that IBP was looking into his activities.

Tyson CEO John Tyson testified at his deposition that he was told at the December 8, 2000 meeting that the problem had reached $20 million, which accords with the account of the IBP witnesses. 25 At trial, John Tyson recanted this testimony. And a chronology prepared in early 2001 by Leatherby indicates that the DFG problem was defined at $9 million on December 8, 2000, but that he was told by IBP in mid-December, 2000 that the DFG problem was “more like $80 mm.” 26

I cannot conclude with any certainty exactly what was said at the December 8, 2000 meeting. I find it unlikely that Peterson spoke as vividly as he now recalls at that meeting; rather I believe that Peterson is recalling later comments he made to Tyson representatives. But the parties were then engaged in very intensive efforts on several fronts at once* The DFG discussion on December 8, 2000 then had little of the significance that it has now.

It is quite possible that all of the witnesses are testifying honestly, but that some have telescoped separate events together in a manner that generates chronological error. For reasons that will become clear, the question of whether Tyson was informed on December 8 that the problem was worse than $9 million is not critical. The undisputed facts show that Tyson was apprised of fraud by the highest level executive of DFG and that the business had serious problems. Likewise, it is undisputed that the IBP representatives believed that DFG was a viable business, notwithstanding the serious problems it faced because of Zahn, and that they were acting to address those problems so that DFG could be turned around.

The Discussion Of The Rawhide Projections

The Rawhide Projections were also discussed at the December 8 meeting. IBP management again indicated that the Projections were based on reasonable and at- *35 tamable assumptions, and that they had confidence in the company’s ability to meet those projections in future years. Again, however, these statements were made in a context that emphasized the inherent uncertainty of any prediction of future performance. Much of the meeting dealt with IBP’s business, including the various rink factors that influence whether IBP will perform well. In particular, the Tyson representatives were told about the cattle cycle, and the adverse effect that severe weather conditions have on cattle supplies. 27 IBP’s management never promised or guaranteed that the company would meet the Rawhide Projections. In fact, Peterson told Tyson that one of DLJ’s biggest concerns during the LBO process was the difficulty of forecasting’ IBP’s future earnings. 28

The participants seem to have placed little focus on FY 2000. IBP’s representatives never clearly indicated that the company would not meet the Rawhide target for the year. For their part, the Tyson participants appear to have been oblivious to the obvious warnings in the IBP third quarter 10-Q that IBP was well behind the run-rate needed to meet the Projections, particularly as to Foodbrands. Therefore, the Tyson and IBP representatives did not get “granular” — as the current lexicon goes — regarding IBP’s 2000 performance-to-date. Indeed, at no time in December did Tyson ever ask IBP for updated profit and loss information for the year.

Tyson Asks For Additional Due Diligence Regarding Foodbrands

After the December 8, 2000 meeting;, Tyson quickly commenced its tender offer. As due diligence continued, Tyson requested access to additional accounting information involving Foodbrands. IBP management responded with this basic and consistent theme: “if you want to look at it, we have to show it to Smithfield, too. But if you want Smithfield to see it, you can have it.”

This line of reasoning was frustrati