IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`KELLOGG CAPITAL MARKETS LLC and ERIC
`ROSENFELD,
`
`Plaintiffs,
`
`v.
`
`C.A. No. 6455-CS
`
`TROY GROUP, INC., TROY GROUP HOLDING
`COMPANY, INC., PATRICK J. DIRK, and BRIAN
`P. DIRK,
`
`Defendants.
`
`COMPENDIUM OF UNREPORTED OPINIONS TO
`PLAINTIFFS’ PRETRIAL BRIEF
`
`OF COUNSEL:
`
`Thomas J. Fleming
`Jennifer L. Heil
`OLSHAN FROME & WOLOSKY LLP
`Park Avenue Tower
`65 East 55th Street
`New York, New York 10022
`(212) 451-2300
`
`Dated: August 30, 2012
`
`John M. Seaman (#3868)
`ABRAMS & BAYLISS LLP
`20 Montchanin Road, Suite 200
`Wilmington, Delaware 19807
`(302) 778-1000
`
`Attorneys for Kellogg Capital Markets LLC
`and Eric Rosenfeld
`
`{A&B-00223261-}
`
`EFiled:  Aug 30 2012 05:59PM EDT  
`Transaction ID 46197774 
`Case No. 6455­CS 
`
` 
`
` 
`
` 
`
`

`

`INDEX
`
`CASES
`
`TAB
`
`Crescent/Mach I P'ship, L.P. v. Turner,
`C.A. Nos. 17455-VCN, 17711-VCN, 2007 WL 1342263
`(Del. Ch. May 2, 2007) ..............................................................................................................1
`
`Gerreald v. Just Care, Inc.,
`C.A. No. 5233-VCP, 2012 WL 1569818 (Del. Ch. Apr. 30, 2012) ..........................................2
`
`Harris v. Rapid Am. Corp.,
`C.A. No. 6462, 1990 WL. 146488 (Del. Ch. Oct. 2, 1990).......................................................3
`
`Lane v. Cancer Treatment Centers of Am., Inc.,
`C.A. No. 12207-NC, 2004 WL 1752847 (Del. Ch. July 30, 2004) .................................................4
`
`In re Loral Space & Commc'ns Inc.,
`C.A. Nos. 2808-VCS, 3022-VCS, 2008 WL 4293781 (Del. Ch. Sept. 19, 2008).....................5
`
`Metro. Life Ins. Co. v. Aramark Corp.,
`C.A. Nos. 16142, 16170, 16171, 1998 WL 34302067 (Del. Ch. Feb. 5, 1998) ........................6
`
`Neal v. Ala. By-Prods. Corp.,
`C.A. No. 8282, 1990 WL 109243 (Del. Ch. Aug. 1, 1990).......................................................7
`
`In re Orchard Enterprises, Inc.,
`C.A. No. 5713-CS, 2012 WL 2923305 (Del. Ch. July 18, 2012)..............................................8
`
`Saliba v. William Penn P'Ship,
`C.A. No. 111-CC, 2010 WL 1641139 (Del. Ch. Apr. 12, 2010)...............................................9
`
`{A&B-00223261-}
`
`

`

`TAB 1
`
`
`TAB 1
`
`

`

`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`2007 WL 1342263
`Only the Westlaw citation is currently available.
`
`UNPUBLISHED OPINION. CHECK
`COURT RULES BEFORE CITING.
`
`Court of Chancery of Delaware.
`
`CRESCENT/MACH I
`PARTNERSHIP, L.P., et al., Plaintiffs,
`v.
`Jim L. TURNER, et al., Defendants.
`CRESCENT/MACH I PARTNERSHIP,
`L.P., et al., Petitioners,
`v.
`DR PEPPER BOTTLING
`CO. OF TEXAS, Respondent.
`
`No. Civ.A 17455-VCN, Civ.A. 17711-
`VCN.
` | Submitted July 27,
`2006.
` | Decided May 2, 2007.
`
`Attorneys and Law Firms
`
`Michael A. Weidinger, of Morris James LLP, Wilmington,
`Delaware, and Michael Swartz, and Paul B. Derby, of
`Hennigan, Bennett & Dorman LLP, Los Angeles, California,
`for Plaintiffs and Petitioners.
`
`Elizabeth M. McGeever, and J. Clayton Athey, of Prickett,
`Jones & Elliott, P.A., Wilmington, Delaware, for Defendant
`Jim L. Turner.
`
`David J. Teklits, and Kevin M. Coen, of Morris,
`Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, for
`Respondent Dr Pepper Bottling Co. of Texas.
`
`Opinion
`
`MEMORANDUM OPINION
`
`NOBLE, Vice Chancellor.
`
`*1 These actions arose out of the acquisition of Dr. Pepper
`Bottling Holdings, Inc. (“Holdings”), a beverage packager
`and distributor, through a merger on October 8, 1999, with
`a wholly-owned subsidiary of the entity now known as Dr.
`Pepper/Seven-Up Bottling Group, Inc. (“Bottling Group”), an
`entity controlled by Cadbury Schweppes PLC (“Cadbury”),
`
`which was the franchisor for many of the beverages sold by
`Holdings, and the Carlyle Group LP (“Carlyle”), a private
`equity firm. The merger consideration was $25 per Holdings
`share. Former shareholders of Holdings claim that Defendant
`Jim L. Turner (“Turner”), the chief executive officer and
`majority shareholder of Holdings, as well as one of its three
`directors, breached his fiduciary duties by negotiating and
`encouraging them to accept inadequate merger consideration;
`they also seek appraisal, under 8 Del. C. § 262, of their shares
`in order to obtain fair value for them. 1 The two matters were
`tried together, and this Memorandum Opinion sets forth the
`Court's post-trial findings of fact and conclusions of law.
`
`I. BACKGROUND
`
`Turner started in the bottling industry after graduating from
`college in 1969. He became quite successful and was broadly
`recognized as one of the best executives in the industry. By
`1999, he owned, directly or indirectly, 61.5% of Holdings'
`Class A Common Stock.
`
`In 1985, he established Dr. Pepper Bottling Company of
`Texas (“DPB”), a bottling company that would grow by the
`late 1990s, through sound management and value adding
`acquisitions, into Holdings, a company with annual sales in
`excess of one billion dollars. Holdings evolved primarily
`in Texas. 2 There, it held franchises for the distribution of
`such top-of-the-line soft drinks as Dr. Pepper and Seven-
`Up. Its product line also included A & W (root beer),
`Sunkist (orange), Welch's (grape), Canada Dry (primarily
`ginger ale), Schweppes, Hawaiian Punch, Sunny Delight,
`Big Red, and RC. It handled “new age” beverages such as
`Mystic, Snapple, and Arizona. It also distributed the waters of
`Evian, Perrier, and Deja Blue (a less expensive water product
`developed by Turner through a separate business entity). 3 In
`1997, Holdings expanded to Southern California through the
`acquisition of Seven-Up/RC Bottling Company of Southern
`California, Inc. (“Seven-Up/RC”). 4 Significantly, it did not
`acquire the rights to Dr. Pepper in that market. 5
`
`The soft drink industry has little technological risk and
`benefits from franchise distribution rights which virtually
`assure the absence of intra-brand competition. 6 The stability
`provided by these factors, however, is subject to the vagaries
`of consumer preference. 7
`
`Holdings' primary soft drink brands, Dr. Pepper and Seven-
`Up, were both franchised by Cadbury. Cadbury, looking to
`
` © 2012 Thomson Reuters. No claim to original U.S. Government Works.
`
`1
`
`

`

`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`develop its United States soft drink distribution business
`along the lines of the separate bottling companies of Coca-
`Cola and Pepsi-Cola, had teamed with Carlyle to form ABC
`Holdings, Inc. (“ABC”), a bottling company serving the
`Midwest that was the largest independent (i.e., affiliated with
`neither Coke nor Pepsi) soft drink bottling company in the
`United States. That acquisition had not worked out well,
`but Cadbury and Carlyle, nonetheless, sought to broaden
`their territorial coverage. They turned to Holdings because
`of its position in significant markets-Texas and Southern
`California-and for the management skill of Turner. In the
`summer of 1998, they approached him about a potential
`acquisition.
`
`*2 Turner had become increasingly concerned about
`Holdings' competitive position. 8 Growth in the sales of
`carbonated soft drink beverages was slowing as consumers'
`preferences turned to water and other noncarbonated
`beverages. Also, the Coke and Pepsi affiliated bottlers, with
`the substantial financial support of the leading national
`companies sponsoring them, were providing increasing
`competition for Holdings. 9 Turner feared a price war in
`which Holdings would not have the same support and
`resources as its nationally-backed competition. In addition,
`the supermarket industry was consolidating, and supermarket
`chains preferred to deal on a national, instead of a regional,
`basis. That provided another significant advantage to Coke
`and Pepsi, to the detriment of Holdings. 10 Moreover, Texas,
`during the years of Holdings' growth, had enjoyed the lowest
`soft drink prices in the United States. Holdings was not
`able to lower its prices significantly to acquire any greater
`market share. Finally, Cadbury had provided greater support
`to Holdings than to any other bottler of Cadbury product and
`was in the process of restructuring its franchise relationship
`with Holdings to its greater advantage.
`
`Turner had already started thinking about succession issues.
`No one in his family was involved with Holdings. His options
`for selling the business were limited. Coke and Pepsi would
`likely have run into insurmountable antitrust obstacles. No
`other participant in the soft drink industry appeared to be
`willing and able to acquire Holdings. Moreover, Cadbury, the
`franchisor, had the power to limit private equity purchasers,
`and it had made it clear to Turner that it would not likely
`consent to a private equity acquisition. Thus, Turner was
`confronted with a stark market reality: there was only one
`viable option for an acquisition: Cadbury (or Cadbury as
`part of a team). Turner, however, had other reasons for
`seeking a sale of Holdings. His view, one at which the
`
`Plaintiffs scoff but which the Court finds he genuinely
`held, was that the soft drink industry then faced troubling
`times ahead and that Holdings, in particular, because of the
`competitive challenges posed primarily by Coke and Pepsi,
`would encounter substantial market difficulties.
`
`initially proposed an acquisition price of
`Cadbury
`approximately $19.50 per share. Turner rejected that, but
`conversations continued, sometimes on, but mostly off, until
`July 1999. Those talks involved not only the price for
`Holdings but also Cadbury's insistence that Turner (i) become
`the chief executive officer of the new enterprise that would
`combine the operations of Holdings with those of ABC and
`(ii) invest a significant portion of his merger proceeds in the
`new entity. Turner sought a price in the range of $28-$30 per
`share, but, after some bargaining, they agreed to a price of
`$25 per common share of Holdings. 11 Cadbury and Carlyle
`had wanted Turner to invest $50 million in the new venture;
`he was able to negotiate that down to $25 million. 12 He also
`agreed to take the CEO position at the new entity at the same
`salary as he received as the head of Holdings. 13
`
`*3 Holdings' board approved the merger on August
`30, 1999. 14 Donaldson, Lufkin & Jenrette (“DLJ”)
`provided a fairness opinion supporting the merger. 15 It
`relied upon Turner's projection of 3% annual volume
`growth over the following five years, as well as the
`other assumptions-including pricing projections-necessary to
`model the anticipated 3% volume growth. DLJ established a
`fairness range by discounted cash flow analysis of between
`$19.32 and $31.05; by comparable transaction analysis of
`between $22.29 and $34.84; and by trading comparable
`analysis of between $19.75 and $28.53. Thus, the merger
`consideration of $25 per share fell comfortably within the
`various ranges established by the different and accepted
`methodologies.
`
`Funding of the transaction required raising money. Carlyle
`needed financial data in order to sell the deal to its investors.
`A critical projection was the volume growth rate in case
`sales. Holdings' chief financial officer, Holly Lovvorn, ran
`two sets of numbers: one based on a 3% volume growth rate;
`the other based on a 4% growth rate. The 3% growth rate
`numbers were given to lenders and to Holdings' shareholders
`in the disclosures accompanying the merger proxy statement.
`Carlyle trumpeted the 4% growth rate as it sought to induce
`the participation of investors. 16
`
` © 2012 Thomson Reuters. No claim to original U.S. Government Works.
`
`2
`
`

`

`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`the Plaintiffs expressed
`the merger closed,
`Before
`dissatisfaction with the price and filed their fiduciary
`duty action. The Plaintiffs, as Petitioners, also pursued an
`appraisal action. They properly dissented from the merger
`and perfected appraisal rights for 1,014,023 shares. 17 One
`Petitioner (Jefferies) also held 2,390 shares which were
`tendered for merger consideration and, thus, are not eligible
`for the appraisal process.
`
`II. CONTENTIONS
`
`The Plaintiffs, in their fiduciary duty action, contend
`that Turner breached his fiduciary duties by understating
`projections for Holdings and unreasonably denigrating its
`prospects. They argue that he had his personal reasons
`for selling cheaply and to the detriment of the minority
`shareholders. The Petitioners, in their appraisal action, rely
`not only on a revision of the unfairly pessimistic, in their
`view, projections sponsored by Turner but also on a thorough
`review of the various inputs-especially endorsing a discount
`rate of 9.41%-for the discounted cash flow analysis. They
`argue for a fair value of approximately $48.69 per share. 18
`
`Turner contends that his only purpose in selling the Company
`was to realize the greatest value and that his disclosures to his
`fellow shareholders represented his best understanding based
`on his lengthy service in the industry and with Holdings.
`The Respondent, invoking the opinion of its expert, asserts
`that a fair value of each share submitted for appraisal would
`be $25.10. Its valuation depends primarily upon Turner's
`projections and a discount rate of 10%. 19
`
`III. ANALYSIS OF THE FIDUCIARY DUTY CLAIMS
`
`As a director of a Delaware corporation, 20 Turner, of course,
`owed fiduciary duties to the corporation and to his fellow
`stockholders, 21 and he is entitled to the presumption that he
`discharged those duties faithfully. 22 In general, in order to
`fulfill his duty of care, he was obligated to be reasonably
`informed about the business of Holdings, the industry in
`which it operated, and its prospects. 23 To satisfy his duty
`of loyalty, and its subsidiary requirement that he act in good
`faith, he needed to be candid with both his fellow board
`members and with his fellow stockholders and to act with
`their best interests in mind. 24
`
`*4 The Plaintiffs do not contend that Turner was
`uninformed; indeed, they acknowledge his deserved position
`of respect within the industry. Instead, they argue that he
`was less than candid (indeed, that he knowingly provided
`misleading information) by understating key financial
`projections which he personally believed to be more
`optimistic than he reported and by generally disparaging
`Holdings' future even though he held a more favorable view.
`Not only was Turner not candid, according to the Plaintiffs,
`with his fellow directors and shareholders, but he also misled
`DLJ which provided the fairness opinion supporting the
`merger. In essence, the Plaintiffs argue that, without Turner's
`conscious efforts to understate the favorable prospects for
`Holdings, the fairness opinion would have demonstrated that
`the merger consideration was too light. 25
`
`Holdings' success-best measured by reference to EBITDA 26
`growth-would depend on volume growth and pricing growth.
`Volume growth could result from population increases,
`increases in the public's appetite for soft drinks, and capturing
`market share from other soft drink suppliers. Consumer
`preference could be affected by increased advertising
`and, probably more significantly, aggressive pricing (i.e.,
`discounting). Population growth in the markets served by
`Holdings was projected to be approximately 3% annually.
`Turner and the Respondent contend that volume growth, as
`a practical matter, would be driven primarily by population
`growth. The Plaintiffs assert that, in addition to the population
`growth component, the favorable product mix marketed
`by Holdings, supported by a superior management, should
`have been able to achieve an additional one percent annual
`volume growth. As for pricing growth, Turner and the
`Respondent argue for 0.4% annually, an increase that would
`essentially offset anticipated cost increases. The Plaintiffs, in
`contrast, project an annual pricing increase of 1.8%. EBITDA
`growth based on the first set of projections (3% volume;
`0.4% pricing) approximates 3% annually. By comparison,
`EBITDA growth based on the second set of projections (4%
`volume; 1.8% pricing) leads to an annual 5.5% increase.
`
`The debate over volume growth, and, thus, derivatively
`EBITDA growth, starts with Exhibit 40, which contains two
`sets of projections prepared by Holly Lovvorn, Holdings'
`chief financial officer, who forwarded them to Cadbury/
`Carlyle on July 21, 1999. One set, of course, is based on a
`3% volume growth and 0.4% pricing growth. 27 EBITDA,
`when driven by those parameters, grows at approximately
`3% annually over the ensuing five years. The other set
`
` © 2012 Thomson Reuters. No claim to original U.S. Government Works.
`
`3
`
`

`

`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`assumes 4% volume growth and uses a projected 1.8% annual
`pricing growth. With these projections, EBITDA growth of
`5.5% annually is projected. The Plaintiffs generally endorse
`Lovvorn's second set.
`
`Why the numbers were run in this fashion is not clear.
`Turner asserts that the 3% growth rate was his projection
`and assumes that 4% growth rate calculations were done at
`the request of Cadbury/Carlyle. Lovvorn's recall is similarly
`cloudy. The Plaintiffs contend that the 3% projections were
`necessarily the “conservative” projections routinely made to
`form the basis for covenants to lenders, and that the 4%
`projections were management's (i.e., Holdings' and Turner's)
`actual projections.
`
`*5 Projections of the acquired company's management are
`frequently given substantial weight in the appraisal analysis,
`especially if the numbers have not been generated with a
`view toward the merger at issue. 28 Management is generally
`regarded as having the best information available and the
`best understanding of the company's prospects and, thus,
`unless there are reasons that would induce management to
`manipulate the projections, its projections are generally the
`most informed projections available to the Court. In this case,
`if Turner intentionally understated the prospects of Holdings
`in order to facilitate the merger, his fiduciary duties are
`implicated. That conclusion would also have consequences
`for the appraisal aspect of these proceedings because accurate
`future projections are critical to the appraisal process. Of
`course, it is at least possible that Turner, while acting in an
`informed fashion and with all good faith, simply held a view
`of Holdings' future that was too pessimistic. For that, there
`would be no liability for breach of fiduciary duty, but it could
`be significant for the appraisal process. Indeed, the outcome
`of the appraisal analysis would increase by perhaps as much
`as 15% if the 4% volume growth projections were adopted
`instead of the 3% projections.
`
`The Plaintiffs seek to demonstrate that Turner believed in
`the 4% volume growth projections (akin to a 5.5% annual
`increase in EBITDA) and that he purposely understated
`Holdings' favorable future. In order to understand the
`Plaintiffs' claims, the Court first turns to the various
`projections. The debate focuses upon three sets of projections:
`
`1. The 3% Volume Growth Projection
`
`This projection is sponsored by both Turner and the
`Respondent. It anticipates a 3% volume growth and a 0.4%
`pricing growth, resulting in an effective 3% annual growth
`
`in EBITDA. This is one of the sets projected by Lovvorn.
`These projections were used in the proxy statement issued
`to Holdings' shareholders in the effort to gain support for
`the merger. Also, the acquirers used these numbers in their
`solicitation of lenders.
`
`2. The 4% Volume Growth Projection
`
`The projection of 4% annual volume growth accompanied
`by an annual pricing growth of 1.8% leads to a 5.5% annual
`growth in EBITDA. This is Lovvorn's other set of projections.
`The Petitioners rely primarily upon these projections. Carlyle
`used these numbers to solicit equity investors.
`
`3. The Exhibit 80 Projections
`
`This set of projections-sometimes referred to as the Exhibit
`80 numbers-is the product of work performed by Cadbury
`and Carlyle's investment banker, Schroders. Its projection of
`annual growth in EBITDA is slightly less than the results
`from the 4% volume growth model. These numbers have been
`referred to as the “acquisition model.”
`
`EBITDA growth resulting from each of the three models can
`be summarized in the following table: 29
`
`*6 The Plaintiffs point to several facts which they contend
`support their view that Turner did not believe in the 3%
`volume growth projections.
`
`First, the Exhibit 80 projections contain a footnote (flagged
`to 1999 EBITDA for the Southern California operations)
`that identifies the source as Jim Turner. The footnote states,
`“[e]stimated at $11.4-12 MM. (Source: Jim Turner).” 30
`Through the footnote, the Plaintiffs seek to attach all of
`the other Exhibit 80 projections to Turner. That would be
`an unreasonable inference because the reference to Turner
`as the source is to one data point estimated for one part
`of Holdings' business. If Turner were the source for all
`of the numbers (the table includes projections for many
`items, including volume, net sales, gross profit, EBITDA,
`capital expenditures, EBITDA from the Texas operations, and
`EBITDA from the Southern California operations), he would
`not have been identified as the source for them through a
`footnote clearly tied to just one entry.
`
`Second, David A. Gerics, a vice president for corporate
`finance at Cadbury when the Holdings acquisition was
`negotiated, testified that the Exhibit 80 projections were
`based on Holdings' (i.e., Turner's) projections. 31 Moreover,
`Gerics believed, at the time, that the Exhibit 80 projections
`
` © 2012 Thomson Reuters. No claim to original U.S. Government Works.
`
`4
`
`

`

`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`were reasonable estimates for Holdings. This, however, does
`not demonstrate that Turner thought that the volume would
`increase by more than 3% annually because in the income
`statement, 32 the volume growth is shown as a series of
`percentages over the years, but all are less than 3% (except
`for the first year's growth of 3.1%). Thus, even if the
`volume growth estimates were provided by Turner (or on his
`behalf) they are not inconsistent with the 3% volume growth.
`Also, Gerics testified, although somewhat uncertainly, that
`“the numbers on [Exhibit 80 at C9483] were developed by
`Schroders.” 33
`
`Third, on November 11, 1999 (after the merger), Gerics
`transmitted to John Wartig, Cadbury's chief financial officer
`for its beverage group, the following EBITDA projections for
`the former operations of Holdings: 34
`
`The entries on the “bank book” line are the same as the 3%
`(or proxy statement) projections. The entries for the “equity
`plan” are the same as the 4% model. The “acquisition model”
`numbers are similar to these shown on Exhibit 80. In addition,
`the following note appears on the exhibit: “JT supplied the
`equity plan amounts to be used as a basis for compensation
`plans.” 35
`
`This transmittal was between individuals involved in the
`acquisition of Holdings; there is no evidence that Turner
`ever saw it. 36 Yet it is troubling for a number of reasons.
`First, labeling the 4%/equity plan as “JT's numbers” may
`be construed to support the Plaintiffs' argument that Turner
`adopted the 4% volume growth projections as his own. 37
`Second, Turner would be expected to seek a lower measure
`of goals against which his compensation plan would be
`measured. If he did not believe in the 4% numbers (i.e.,
`they were unrealistic because he considered 3% to be the
`most likely volume growth to be achieved), it makes little
`sense for him to accept higher projections-and therefore be
`less likely to receive incentive compensation. Finally, the
`analysis is consistent with Plaintiffs' contention that there
`are typically three sets of projections for transactions of
`this nature: (i) a conservative one that would be used for
`establishing lending covenants (i.e., the “bank book”); (ii) the
`number that those close to the deal actually believed (i.e., the
`“acquisition model”); and (iii) the more optimistic numbers
`that would be used to “sell the deal.” In this instance, there is
`little divergence between the equity plan and the acquisition
`model, but there is significant difference with respect to the
`bank book numbers (i.e., the proxy statement projections).
`
`*7 One answer could be that the equity plan incorporates
`the benefits of the merger. As a general matter, however,
`the merger between Holdings and ABC came with few
`synergies. Perhaps purchasing in larger quantities could
`squeeze out a small discount in the cost of goods sold;
`duplicate management could be eliminated. There is virtually
`no evidence that, at the time of the merger, anyone anticipated
`these typical synergies to provide significant benefits from
`the business combination. Indeed, the benefits that might
`come from new management cannot be viewed as significant
`because Holdings (i.e., Turner and his management team) was
`going to remain in charge of the combined entity.
`
`Nonetheless, the acquirers expected to improve the net
`performance of the assets comprising Holdings. The risk of
`competition from Coke and Pepsi would be substantially
`less because of the resources that Cadbury and Carlyle
`could make available. The most significant benefit can be
`found in the franchise relationship. With the Coke and Pepsi
`bottling company models, a better relationship between the
`franchisor and the bottler/distributor is said to exist because
`the franchisor and the bottler both share the same economic
`incentives and the tension between them is significantly
`dissipated. With a reduction in tension, a more focused effort
`to expand the brands' presence can be expected to result. This
`consideration was particularly important for the Holdings'
`combination because it had become clear that Cadbury's
`support for Holdings (the highest of any bottler marketing its
`product) was about to end (or to be significantly reduced).
`That support had given Holdings a true advantage in its
`competition for the soft drink market in Texas. With the
`decline or reduction in that support, Holdings' ability to
`compete would be impaired.
`
`The Court turns to, and relies upon, the testimony of Jerome
`H. Powell, whom the Court finds to be a highly credible
`witness with a solid command of the facts, especially in
`light of the passage of approximately six years. Powell
`was Carlyle's lead partner on the Holdings' acquisition, as
`managing director of its United States buyout unit. He makes
`clear that the “bank case, the management case” was not
`the acquirer's case. Furthermore, Turner was not involved
`in soliciting equity investors and, thus, was not involved in
`preparing the relatively optimistic numbers for the acquirers.
`Finally, Powell articulated in some detail what Carlyle and
`Cadbury expected to achieve by implementing the Coke and
`Pepsi bottlers' model as the means of creating value through
`the transaction.
`
` © 2012 Thomson Reuters. No claim to original U.S. Government Works.
`
`5
`
`

`

`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`[T]he idea was [Cadbury] would put more marketing
`dollars behind the company, more advertising dollars, that
`they would have a closer partnership with management.
`Just that the-we would all be pulling in the same direction;
`that, you know, the bane of the existence of the bottling
`industry is fighting with the brand owner. And so this was
`a way to get everybody pulling in the same direction.
`
`*8 You think about it. The brand owner and the bottler
`have adverse interests in a lot of ways. The brand owner
`wants the profits to show up over here. The bottler wants
`the interest to show up on the bottler's income statement.
`This was a way to align the interests, and it was really that
`simple. 38
`
`Thus, there is documentation which can plausibly be read
`to support the Plaintiffs' claims; ultimately, the paper record
`is ambiguous as to what Turner actually anticipated. The
`Respondent's position is supported by the credible Powell, but
`it is not helped by the somewhat inconsistent-and more likely
`confused-Gerics. Thus, the Court must return to Turner.
`
`Turner, of course, is, at least in theory, the best source
`of going-forward projections for Holdings. He was, by all
`accounts, a sophisticated, knowledgeable, experienced, and
`able bottling company manager. He understood Holdings'
`markets, especially Texas, and was in the best position
`to anticipate the challenges and successes that Holdings
`might experience. His projections-as the head of Holdings'
`management-are of the type of projections which this Court
`will frequently rely upon. On the other hand, the projections
`before the Court were not-as far as the record shows-
`Turner's projections on that proverbial clear day-before he
`was focused on and personally committed to the merger. With
`that background, it is necessary to turn to Turner's testimony.
`It may be somewhat unusual for a case of this nature, but the
`outcome here turns, in large part, on the Court's assessment of
`Turner's (and to a lesser extent, Powell's) credibility. Turner's
`testimony as to what he believed the future held for Holdings
`as of the time leading up to the merger was unequivocal.
`
`Turner testified that the 3% volume growth projections were
`his; that he did not participate in the preparation of, or accept,
`the 4% volume growth projections. He considered a 0.4%
`annual pricing growth projection to be reasonable in the
`markets in which Holdings competed. He acknowledged that
`Carlyle and Cadbury eventually adopted both the 4% volume
`projections and the 1.8% pricing projections, but he viewed
`them as aggressive. He agreed to the $25 per share price with
`
`Cadbury and Carlyle on July 19, 1999. 39 The 4% projections,
`prepared by Lovvorn and transmitted to Carlyle, were created
`after agreement as to price had been reached. He does not
`know the source of the 4% projections, but he has speculated
`that those numbers were run at Carlyle's request. 40
`
`Turner's projection of 3% volume growth was influenced by
`several factors. Holdings participated in the most competitive
`soft drink market in the United States. As an independent
`bottler, it was at a competitive disadvantage to Coke and
`Pepsi bottlers, which, among other advantages, had a lower
`cost of capital. Holdings' ability to drive prices was at the
`mercy of Coke and Pepsi bottlers which could respond to any
`pricing effort initiated by Holdings. For these reasons, it was
`especially difficult for Holdings to gain price increases. 41
`Turner suggested that Coke and Pepsi, because they shared
`many markets between them, were likely to continue to be
`especially aggressive in competing with Holdings in Southern
`California because they would respond to the presence of
`a third major competitor. Also, Cadbury, Holdings' primary
`franchisor, was attempting “to shift more of the profitability”
`from the bottler to the franchisor by changing the fountain
`program and decreasing marketing support funds.
`
`*9 Turner believed that the soft drinks that Holdings
`sold had done very well during the preceding decade,
`but that further opportunities for market share acquisition
`were deteriorating. One particular problem was that Coke
`and Pepsi had started to enter into exclusive contracts
`for convenience store chains. Another problem was
`that supermarkets had been consolidating and the major
`supermarkets were “going from regional players to national
`players.” They wanted to deal with soft drinks on a national
`basis and that was a major drawback for a regional bottler
`such as Holdings with no relationship with Coke or Pepsi.
`
`In sum, the Court concludes that Turner believed in the 3%
`projections; the Court also concludes that the 4% projections
`were not Turner's (or adopted by Holdings' management). His
`projection of 3% was based on his knowledge of the market,
`his expertise in the bottling industry, and his experience.
`That estimate was his truthful estimate and a reasonable
`estimate. 42 Turner provided the projections to DLJ, for use in
`the preparation of its fairness opinion, and to his shareholders
`in, inter alia, the merger proxy statement, with loyalty and
`with due care. Thus, Turner exercised faithfully his fiduciary
`duties. 43 Furthermore, the Court finds, for purposes of the
`appraisal action, that for the period following the merger,
`a fair and reasonable projection of annual volume increases
`
` © 2012 Thomson Reuters. No claim to original U.S. Government Works.
`
`6
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`Crescent/Mach I Partnership, L.P. v. Turner, Not Reported in A.2d (2007)
`
`would be 3% and pricing growth would increase annually at
`0.4%. 44
`
`ten cents higher than the $25 offered as consideration in the
`merger.
`
`IV. THE APPRAISAL DETERMINATION
`
`A. General Principles Guiding an Appraisal
`
`In an appraisal action, the Court is charged with determining
`the fair value of the entity in question as