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Shareholder Suits Against Kraft Heinz Start Piling Up

Oct. 10, 2019, 7:25 PM

Food giant Kraft Heinz Co. has been hit with another shareholder lawsuit over write-downs in February, this time in Delaware’s Court of Chancery alleging insider trading.

Shareholder Barbara Kailas on Oct. 9 sued several affiliates of global investment firm 3G Capital Inc, which partnered with Warren Buffet’s Berkshire Hathaway in 2013 to buy H.J. Heinz Co., and later acquired control of Kraft Foods Group when the two food giants merged in 2015.

Kailas alleges that 3G founders and partners, who worked as key executive officers and directors of Kraft Heinz, sold millions shares of the company’s stock at a premium in 2018, before the company revealed bad news that sent the stock price plummeting 27 percent.

“Only insiders, and not public investors, could discern the increasing impairment in the value of these assets because Kraft Heinz’s financial reports were notoriously lacking in detail,” the complaint says.

Kraft announced on Feb. 21, 2019 that it was making $15.4 billion in impairment charges in goodwill and intangible assets for some of its units including the Kraft natural cheese and Oscar Mayer brands.

The write-downs resulted in a $12.6 billion net loss for common shareholders and a diluted loss per share of $10.34, according to the company’s release at the time. In that same quarterly report, the company announced it had received a subpoena in Oct. 2018 from the U.S. Securities and Exchange Commission concerning an investigation into the company’s accounting policies and its internal controls related to procurement.

The disclosures sent Kraft Heinz common stock plummeting from $48.18 per share to $34.95 per share, the complaint says. Controlling shareholders at 3G avoided losses at the time because almost half a year earlier, just after the second quarter 2018, they had sold 20 million shares of stock at $59.50 per share.

“All of these triggering events occurred in 2017 through 2018 and thus insiders had non-public knowledge of the risk of material asset write-downs,” the complaint says.

A Kraft Heinz turnaround may necessitate further cuts in its dividend, which the company cut by 36% in February, according to a recent report from Madeleine Hart and Hoai Ngo of Bloomberg Intelligence. The SEC probe of the company’s procurement hasn’t identified misconduct by management but it is still ongoing, and on March 1 Kraft received an additional subpoena from the SEC regarding goodwill and intangible asset impairments, the report says.

The derivative shareholder complaint is at least the second in Delaware’s Chancery Court to accuse Kraft Heinz of insider trading.

In July, David DeFabiis filed a similar complaint in Chancery after a suit he filed in the Southern District of New York was dismissed.

Kraft shareholder complaints have also been filed in U.S. District Court in the Northern District of Illinois (Hedick v. Kraft Heinz Co.) and the Western District of Pennsylvania (In re: Kraft Heinz Shareholder Derivative Litigation).

Blake A. Bennett of Cooch and Taylor, P.A. is the local counsel for both plaintiffs in Delaware’s Chancery Court. DeFabiis is also represented by Squitieri & Fearon LLP in New York, and Kailas is represented by Wexler Wallace LLP of Chicago.

Both Chancery Court lawsuits seek restitution to Kraft Heinz from 3G and a disgorgement of all profits from the alleged insider trading.

Kraft Heinz on Oct. 10 declined to comment. The company will release its third quarter financial results on Oct. 31.

The cases in Chancery are: Kailas v. 3G Capital Inc., Del. Ch., No. 2019-0808, Complaint filed 10/9/19 and DeFabiis v 3G Capital Inc., Del. Ch., No. 2019-0587, Complaint filed 7/30/19.

To contact the reporter on this story: Leslie A. Pappas in Wilmington, Del. at lpappas@bloomberglaw.com