Pacific Foods Accused of Being Under Valued $250 Million in Campbell Soup Co. Acquisition

Michael Lynch v. Pacific Foods of Oregon, Inc., et. al. involves the issue of valuing a closely-held family business and its ownership interests in the event of death or other trigger event (disability, divorce, etc.). I’m sure most everyone in the Northwest knows of Pacific Foods, the organic food processing company. In this case, one of the founders, Ed Lynch, died in 2015 at the age of 94, and according to the terms of the buy-sell agreement, the company was to buy back (redeem) a deceased owner’s shares to keep the business in the family. During the life of the business, the company and its shares were valued annually with the price to be set at its fair market value – what a willing buyer would be willing to pay a willing seller with full knowledge of the facts.

Ed’s estate is now arguing that it did not receive full fair market value on the redemption in 2015 because the company was subsequently sold to Campbell’s Soup for $700M, a price much higher than the company was valued in 2015. In other words, the surviving co-founder low-balled the estate by up to $250M.

While I do not have all of the facts of the case, I believe that Ed’s estate would have a hard time proving that there was an intent of misrepresentation of the purchase / redemption price since the company and its shares were valued annually for a number of years and the fact that they could likely not anticipate Campbells’ offer being so high – the executives at Campbells may have thought a premium on the price was appropriate. Of course, maybe the valuation experts did not adequately take other factors into account when valuing Pacific Goods (goodwill, reputation, and other intangibles) throughout the years, but without seeing the reports and analysis, I can’t make that claim.

Of course, hindsight is always 20/20, and the personal representative for Ed’s estate may believe that the estate and the charitable causes that Ed supported during life should be entitled to part of the sales proceeds even though the sale took place two years after Ed’s death. It’s always about the money. But this case highlights the problems that family businesses face when a drastic event occurs and the necessity for proper planning (in this case, executing a buy-sell agreement and actually committing to doing the things the buy-sell agreement states must occur) prior to the event so that disputes can be resolved more equitably than without any planning at all.

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