Could a lawsuit scupper Campbell Soup’s deal to acquire Pacific Foods?

Pacific Foods says it is “working hard” to resolve a lawsuit that threatens to thwart Campbell Soup’s $700m deal to acquire the Oregon-based company.

In the lawsuit* filed in Oregon on August 21 against Pacific Foods, three named directors at the company, and the accounting firm Moss Adams LLP, plaintiff Michael Lynch (representing the estate of his father, former Pacific Foods shareholder Ed Lynch) argued that Pacific Foods redeemed his father’s shares at a value “vastly less than true fair market value” when he died in 2015.

 “Ed’s most valuable asset upon his death was his 43% interest in Pacific Foods of Oregon, Inc,” says the lawsuit.

“Following Ed’s death in 2015, Pacific Foods redeemed Ed’s shares, and represented that the price at which the shares were being redeemed was the true fair market value for the shares. That representation was incorrect.”

Plaintiff 'brings this [$250m] suit to recover funds rightfully belonging to the estate'

The $700m price tag Campbell Soup said it would pay in July 2017 was “higher than the 2015 redemption valuation by an order of magnitude,” adds the suit.

“[Yet] there were no changes at Pacific Foods between 2015 and 2017 that justify or explain the vast difference... PFO’s payment of a massively deflated redemption price to the estate for Ed’s shares had the effect of transferring the bulk of the value of Ed’s estate back to the company, to the very significant detriment of the estate and to the great benefit of the remaining shareholders.

“Plaintiff brings this suit to recover funds rightfully belonging to the Estate so that such funds may be distributed to charity according to Ed’s wishes...."

The lawsuit doesn’t say how much Pacific Foods agreed to pay the estate for Ed Lynch's shares, but says the estate is now due more than $250m: "As a direct result of Pacific Foods' breach of the Articles [of incorporation], plaintiff has been damaged in an amount to be proven at trial in excess of $250m.”

Campbell Soup: ‘We remain enthusiastic about acquiring Pacific Foods’

In a statement issued Wednesday afternoon, Campbell Soup (which is not named in the suit), said the lawsuit “creates an impediment to closing,” and said it had given Pacific Foods 60 days to resolve the issues arising from the suit if the $700m deal is to go through.

After the 60-day period, Campbell has the option to extend the cure period or terminate the agreement, said Mark Alexander, Campbell’s President, Americas Simple Meals and Beverages: “We remain enthusiastic about acquiring Pacific Foods, which has a track record of growth and strong health and well-being credentials. However, we will not complete the transaction unless the issues arising from this litigation are resolved to our satisfaction.”

Pacific Foods: 'We’re working hard to resolve the lawsuit'

Pacific Foods - which told reporters last month that it had followed "to the letter" a valuation process agreed to by Ed Lynch - told FoodNavigator-USA on Wednesday that it was“working hard to resolve the lawsuit with every intention of joining the Campbell Soup Company."

A spokesman added: "We remain as enthusiastic as Campbell about our combined potential, and as focused as ever on category leading product innovation and nourishing, organic foods.”

More to follow…

*The case is Michael Lynch v Pacific Foods of Oregon Inc et al 17-cv-36090

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Founded in 1987, Pacific Foods is best known for its shelf-stable plant-based beverages and organic broths and soups, and generated net sales of $218m in the year to May 31, 2017.

While it has national distribution, teaming up with Campbell Soup would help it expand into more conventional accounts and boost its marketing, brand-building, R&D and customer service capabilities, said the company, which will become part of Campbell's Americas Simple Meals and Beverages division should the deal go through, but will continue to be run from its HQ in Tualatin, Oregon.  

Read more about the deal with Campbell Soup HERE.