Antitrust issues at core of motion to form equity holders committee

By Sherry Bunting, Farmshine, Friday, March 6, 2020

HOUSTON, Tex. – Ahead of next week’s hearings on the Dean Foods Company (Southern Foods Group LLC) bankruptcy and sale, it is illustrative to review the motions hearing of Feb. 19. On tap for March 12 is the hearing to consider DFA as “stalking horse bidder” with the asset purchase agreement DFA and Dean agreed to on Feb. 17 involving 44 plants at a $425 million bid as reported Feb. 21 in Farmshine.

Also on tap next week is a hearing set for March 10 on the motion presented by Joshua Haar to form an adhoc committee of shareholders.

During the Feb. 19 motions hearing, there was extensive discussion about professional bonus payments to keep top staff on board during the bankruptcy. An attorney representing the Teamsters Union challenged these retention bonuses in the face of knowing union contracts will be renegotiated by new buyers, especially if the buyer is DFA.

The bottom line in that exchange was summed up by Judge David Jones’ comment that he is guided by his own interpretation of the numbers, trusts his own bankruptcy experience and skill sets and has clear concern that all parties should work together to see that the assets of Dean Foods continue to operate. Period.

In fact, Judge Jones often chided attorneys to talk in terms of the “practicality” of the situation above their own “strategically” motivated interests.

“I need what’s left of this company to be comfortable and stay in place,” said Jones. “We need to get to a sale process and have people see the opportunity for future jobs to stay in place.”

He showed low tolerance for any party expecting to get 100% of what they have gotten in the past (except for retaining the “critical institutional knowledge” provided by professional staff receiving bonuses), and he indicated that the retention bonus payments are necessary in that regard, giving him “some comfort that we may actually make the end of this because good people will stay in place.”

The Teamsters’ concerns were for financial awards and windfall profits to “talent at the top” while their member employees become creditors owed vacation and so forth.

To understand how Judge Jones views the national fluid milk model of Dean Foods, he said: “This is a business model that worked in the 60s and doesn’t work in 2020,” he said. “I could give a first-year business student this business model and they would look at me and say this is a model that doesn’t work.”

Judge Jones asked during motions, “Why not be hand-in-hand on this issue? I do not want to be responsible for school children not getting their milk, that means a lot to me.”

Saying that the Unions have overstepped in trying to prevent the payment of retention bonuses to professionals that constitute “institutional knowledge,” Judge Jones granted the debtor’s (Dean’s) motion to approve the “key employee retention plan” consisting of a schedule for paying these bonuses.

This exchange about “working together” — with the goal of keeping Dean assets operating — set the stage for Judge Jones to hear a motion by Joshua Haar to form an ad hoc committee of equity holders (shareholders). Haar is the attorney son of Jonathan and Claudia Haar, the New York dairy farmers who were part of the original representatives of the dairy farmer class in the previously settled Northeast Class Action Antitrust Lawsuit against DFA and Dean Foods.

Before hearing Haar’s motion, Judge Jones said he is “getting a sense of urgency,” in regard to seeing an end point and that he did not want to entertain motions that “extend the case on the backs of the vendors, including the farmers supplying the milk.”

In other words, he did not want to see the timeline of this case extended for an “exercise” that did not materially provide a practical solution.

Judge Jones offered to hear Haar’s motion the very next day, for which Haar said he would not be ready. Asking Haar if one hour is sufficient, Judge Jones set hearing on the appointment of an equity committee at 3 p.m. March 10 – two days before the March 12 hearing on the DFA “stalking horse” bid.

As part of this discussion, it was noted that the ad hoc committee of bondholders wanted time to put a plan forward, that they are “actively working on the financing and need time for equity holder involvement,” said Haar.

“On this equity committee request, there will never be an equity recovery here,” said the Judge. In fact, he added later that equity or share holders in Dean Foods, a publicly traded company “are in the worst possible place. If the debtor’s numbers are right, their money was lost years ago, and this is an event that recognizes history.”

Haar’s lengthy motion described milk supply chain and potential antitrust issues inherent in a DFA purchase, seeking time for other options to surface.

Judge Jones said he read the motion, but added: “I want you to understand the standard that is required for an equity committee. I’ll always give you the opportunity to talk and give the shareholder’s view of the world, but if you are looking for a committee, that’s a tough burden, and I expect you not to waste everyone’s time.”

He warned against a prepared speech of “just words… Telling me all the things you might do that are eloquent, I tend to be more blunt… especially when I tell people what’s coming and they choose to ignore it. I want you to represent your people. This is about people. But that’s what I expect.”

He expects an equity holders committee to be able to contribute to the process of the Dean Foods reorganization and sale, not to use one group of stakeholder for the sake of others.

Haar indicated that among the equity holders are persons and entities “connected to 15% of the U.S. milk supply” so in that sense this motion was not trying the milk supply antitrust concerns but rather what could be a legitimate consideration of a better way to move forward with offers that could potentially allow equity holders to participate in value recovery.

It was apparent that Judge Jones needs to be convinced with numbers and math and actual bids that can be consummated in the next few months, not the eloquence of ideas about what can or should or could be some time in the future.

Harr said of the motion that, “We can add significant value to the estate.”

With that, the hearing for Haar’s motion was set for March 10 with response motions due March 3.

Next up in the vein of “other options” was the existing creditors committee. Their attorney indicated concern as to how the asset purchase agreement negotiations with DFA took place.

“They got bid materials. We issued requests for these materials. The debtor (Dean Foods) wanted to share these materials but were unable to share them with us because DFA put a confidentiality clause on it,” said the attorney for the Dean creditors. “We did a letter writing campaign. DFA would not agree. We did file an emergency form to compel the bid materials, and an hour before the bid deadline, the documents flowed to the advisors for the committee.”

In other words, too late to analyze the issues.

As the negotiations between Dean Foods and DFA continued, the creditors committee apparently repeated its requests for information and were told “no.”

 

Finally, a week before the Feb. 19 motions hearing, they received a two-page slide packet from DFA that “gave very little information and did not give the information about what Dean plants were included and excluded in that asset purchase agreement until it was announced publicly.

“The creditors committee’s initial impression is negative,” said the attorney representing the committee, indicating it will be heavily contested. “First and foremost, we are concerned about aggregate consideration… it is not clear that there is enough (in the bid) to pay-in-full the creditors.”

She mentioned that DFA, in addition to seeking stalking horse bidder status, is also a large creditor of Dean Foods with significant payables and that their bid could represent a “dollar-for-dollar deduction in value of assets to cover their claims.”

The Judge was un-moved. “If integration fixes the problem, then we ought to be working on integration,” he said, telling the DFA lawyer to work with the lawyer for the creditor committee. “Get her at your table,” he said.

The response from counsel for the creditors was that they want a seat at the table and would “engage in good faith, but there could still be a contested hearing on March 12.”

Attorneys for DFA and Dean indicated engaging in dialog with the DOJ on antitrust issues.

A potential bondholder bid was also referenced. The attorney for the creditors said the bondholders have done a “tremendous amount of work looking into financial investment into the company. We are hopeful the process can get there before March 12 with a more value-maximizing offer than the one on the table now.”

But again, it was mentioned that a “critical piece of information is still missing. There is some information that the ad hoc bondholder committee needs that the debtor is not willing to provide and we implore the debtor to turn it over now so the bondholders have the information. The next two weeks are critical.”

One item needed is “milk payables. We need to see, or the financiers need to see that, and it has been difficult getting it provided to us for third-party financing.”

Judge Jones offered his office as mediator for emergency hearings to get that flow of documents moving in the event that having the information allows other bid processes to go forward.

In short, the creditors committee, ad hoc bondholders committee and lenders were “left out of the information flow” during the Dean negotiations with DFA on their asset purchase agreement. They all read it at the same time (when it became public on Feb. 17) and are looking for a bid with more value to come in.

Judge Jones turned to the Dean Foods attorney and said “you took this in and you know what to do. I am trying to convey my sense of urgency here. Let’s figure out how to move the process forward. We all have the same goal.”

(Facilities in South Dakota, North Dakota and Minnesota — where Dean bottles under the Land O’Lakes brand — are excluded from the DFA-Dean asset purchase agreement. The licensing of the Land O’Lakes brand elsewhere is also excluded.)

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