IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ERSTE ASSET MANAGEMENT GMBH, ) ) Plaintiff, ) ) v. ) C.A. No. 2023-1191-LWW BERNARDO HEES, ALEXANDRE ) BEHRING, JORGE PAULO LEMANN, ) MARCEL HERRMANN TELLES, ) PAULO BASILIO, DAVID KNOPF, ) EDUARDO PELLEISSONE, 3G ) CAPITAL, INC., 3G CAPITAL LTD., 3G ) GLOBAL FOOD HOLDINGS, L.P., 3G ) GLOBAL FOOD HOLDINGS GP LP, 3G ) CAPITAL PARTNERS II L.P., 3G ) CAPITAL PARTNERS LTD., HK3 18 LP, ) JOHN CAHILL, GEORGE ZOGHBI, ) RASHIDA LA LANDE, and JOAO M. ) CASTRO-NEVES, ) ) Defendants, ) ) -and- ) ) THE KRAFT HEINZ COMPANY, a ) Delaware Corporation, ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: May 23, 2024 Date Decided: August 8, 2024
Joel Friedlander, Jeffrey M. Gorris & Christopher M. Foulds, FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Lawrence P. Eagel, Melissa Fortunato, Marion C. Passmore & Brandon Walker, BRAGAR EAGEL & SQUIRE, P.C., New York, New York; Counsel for Plaintiff Erste Asset Management GmbH Matthew D. Stachel, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Daniel J. Kramer, Andrew J. Ehrlich & Robert N. Kravitz, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Counsel for Nominal Defendant The Kraft Heinz Company and the Individual Defendants
Michael A. Pittenger, Jacqueline A. Rogers, Caneel Radinson-Blasucci & Camilia R. Katkocin, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Sandra C. Goldstein, Stefan Atkinson & Kevin M. Neylan, Jr., KIRKLAND & ELLIS LLP, New York, New York; Counsel for the 3G Defendants
WILL, Vice Chancellor In December 2021, this court resolved derivative breach of fiduciary duty
claims brought by Erste Asset Management GmbH on behalf of The Kraft Heinz
Company. The claims concerned a sale of Kraft Heinz stock by investor 3G
Capital, Inc. The suit was dismissed with prejudice for failure to adequately plead
demand futility. The Delaware Supreme Court summarily affirmed the dismissal.
Afterwards, Erste made a litigation demand on the Kraft Heinz board. An
investigation ensued and the demand was rejected. Other plaintiffs who likewise
made demands filed wrongful refusal actions in this court. Erste opted for a different
tactic: it asked to reopen its dismissed demand futility suit.
Erste insists that this unusual relief is warranted due to newly discovered
evidence. Its primary theory is that one of the Kraft Heinz directors deemed to be
independent had received stock options for undisclosed consulting services. But
reasonable diligence on Erste’s part—either through its books and records demand
or a thorough review of Kraft Heinz’s public filings—would have uncovered this
information during the prior lawsuit. In fact, Erste raised the director’s options in
its appeal to the Supreme Court.
Erste also seeks to reopen the prior action due to fraud on the court. The
purported fraud, however, concerns public filings Kraft Heinz made outside the
litigation context. Erste raises no conduct affecting the integrity of the judicial
process that could support the relief it seeks.
1 Finally, Erste advances a new claim that several directors breached their
fiduciary duties by failing to correct compensation-related disclosures in Kraft
Heinz’s proxy statements. Erste says that the disclosures harmed it because it
incurred litigation costs in the prior suit. This creative attempt to recover attorneys’
fees falls short of pleading the elements of Erste’s claim.
Erste may disagree with this court’s dismissal of its derivative suit. But the
sort of rare circumstances that might merit revisiting it are absent. Erste must live
with the outcome of that case and the consequences of its strategic choices.
I. BACKGROUND
The following facts are drawn from the Verified Stockholder Complaint for
Relief from Judgment and Damages (the “Complaint”) and documents it
incorporates by reference.1 This includes documents that were produced in response
to a books and records demand. 2 The background also addresses a prior action
captioned In re Kraft Heinz Company Derivative Litigation, C.A. No. 2019-0587-
LWW (the “Prior Action”).
1 Verified S’holder Compl. for Relief from J. and Damages (Dkt. 1) (“Compl.”); see In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 170-71 (Del. 2006); Allen v. Encore Energy P’rs, 72 A.3d 93, 96 n.2 (Del. 2013). 2 Compl., Preamble (acknowledging that books and records produced “are expressly incorporated by reference into th[e] Complaint”); see also Reiter ex rel. Cap. One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *2, 5-6, 9 (Del. Ch. Oct. 18, 2016) (considering documents incorporated by reference under agreements governing stockholder inspection demands). 2 A. Kraft Heinz and its Board
The Kraft Heinz Company, a Delaware corporation, is one of the world’s
largest food and beverage companies.3 It became a standalone public company in
2015 after the merger of Kraft Food Groups, Inc. and H.J. Heinz Holding
Corporation.4 3G Capital, Inc., a global investment firm, became a significant Kraft
Heinz minority stockholder.5 Kraft Heinz’s top officials were affiliated with 3G or
3G portfolio companies.6
Kraft Heinz’s post-merger Board of Directors had eleven members.7 As of
June 2019, three 3G principals—Jorge Paulo Lemann, Alexandre Behring, and Joao
Castro-Neves—were on the Board.8 A fourth director, Alexandre Van Damme, was
a longtime business partner of 3G.9 Two other directors—John Cahill and George
Zoghbi—were current or former company consultants.10 The Board determined in
3 Compl. ¶ 68. 4 Id. ¶¶ 68, 82-83. 5 Id. ¶ 31. 6 Id. ¶¶ 43-44, 77, 84, 245. 7 Id. ¶ 3. 8 Id. 9 Id. 10 Id. 3 2019 that Cahill and Zoghbi were not independent due to their consulting
arrangements.11
B. Cahill’s Compensation Cahill became the Chairman and Chief Executive Officer of Kraft Foods in
December 2014.12 After the merger in July 2015, he became a director of Kraft
Heinz and vice chairman of the Board.13 At the same time, he and Kraft Heinz
agreed to a two-year consulting agreement dated July 9, 2015.14 He was paid $4
million per year to provide consulting services to Kraft Heinz’s Chief Executive
Officer Bernardo Hees and Chairman Behring—both 3G partners.15
After the initial consulting agreement expired, Cahill and Kraft Heinz entered
into a new consulting agreement effective November 1, 2017.16 Cahill’s consulting
responsibilities were reduced, and his consulting compensation was lowered to
$500,000 per year for continuing to devote time to Kraft Heinz beyond his
11 Id. ¶¶ 3, 256, 280. 12 Id. ¶ 49. 13 Id. 14 Id. ¶ 51. 15 Id. Cahill received $2 million in 2015, $4 million in 2016, and an undisclosed amount for part of 2017. Id. 16 Id. ¶ 52. 4 responsibilities as a director.17 Cahill’s consulting compensation was in addition to
his annual director compensation of approximately $255,000.18
In June 2019, Cahill emailed Behring and director Gregory Abel to ask that
they “consider a change to [his] financial arrangement with Kraft Heinz.” 19 He
wrote:
The bulk of my financial tie[s] to the Company is in the form of options, and all my options are underwater. This is completely appropriate given our results and the losses shareholders have endured. At the same time, I am mindful that I am deemed to be a non-independent Director because of recurring annual consulting payments of $500,000. This is probably not hea[l]thy for the long term. To address both issues, I recommend the Company suspend consulting payments to me (benefitting the ongoing P&L). In lieu, the Company would provide me a one-time grant of 500,000 options vesting ratably over three years. This would get me on the road to independent status.20
The Compensation Committee of the Board met on June 20, 2019. One of the
matters addressed was Cahill’s consulting arrangement. A deck presented at the
meeting said:
17 Id.; see Transmittal Aff. of Matthew D. Stachel in Supp. of the Opening Br. in Supp. of Defs.’ Mots. to Dismiss the Verified S’holder Compl. (Dkt. 13) (“Stachel Aff.”) Ex. 2 ¶¶ 1, 3. 18 Compl. ¶ 53. Cahill’s annual director compensation had a disclosed value of $255,000 in 2016, $255,000 in 2017, $235,000 in 2018, and $246,000 in 2019. Id. Approximately half of the value in those years took the form of deferred stock awards that were underwater by the end of May 2019. Id. ¶¶ 53-54. 19 Compl. Ex. A. 20 Id. 5 • “[Cahill] [c]urrently receives an annual gross compensation of USD $500k as an advisor.”
• “We are proposing no cash compensation effective July 2019 and [a] one time grant of #500,000 stock options.”
• “This creates a path for Cahill becoming an independent board member in three years.”21
The presentation noted that Cahill’s “stock options [we]re expected to be issued the
later of the end of the blackout period or August 15 based on the closing price for
[Kraft Heinz] stock on that date.” 22 Minutes of the meeting reported that the
Compensation Committee “discussed proposed changes to Mr. Cahill’s
compensation arrangement,” and approved them.23
C. Zoghbi’s Compensation
Zoghbi was Kraft Food’s Chief Operating Officer before the merger with
Heinz.24 Post-closing, Zoghbi became the Chief Operating Officer of Kraft Heinz’s
U.S. Commercial Business and served in that role until October 2017.25 He received
$12 million in compensation in 2016 and over $17 million in 2017.26
21 Compl. Ex. B. 22 Id. 23 Compl. Ex. C. 24 Compl. ¶ 59. 25 Id. ¶ 61. 26 Id. 6 In October 2017, Zoghbi became a Special Advisor to Kraft Heinz. He was
paid an annual base salary of $850,000.27 He received no additional compensation
upon joining the Board in April 2018.28
At the June 20, 2019 Compensation Committee meeting, the attendees
discussed changes to Zoghbi’s arrangement. Presentation materials propose “an
annual gross cash compensation of USD $400k effective July 2019 and [a] one time
grant of #200,000 stock options.” 29 Like Cahill, Zoghbi’s “stock options [we]re
expected to be issued the later of the end of the blackout period or August 15 based
on the closing price for [Kraft Heinz] stock on that date.” 30 The Compensation
Committee discussed and approved the proposed changes.31
In September 2019, Zoghbi agreed to a new arrangement in which his Special
Advisor salary was reduced to $100,000 (effective July 1, 2019) and he became
eligible for a stock option award of 200,000 shares no sooner than August 15, 2019.32
27 Id. ¶¶ 58, 62. 28 Id. 29 Compl. Ex. B. 30 Id. 31 Compl. Ex. C. 32 Stachel Aff. Ex. 6 at 1. 7 D. The Disclosures
On August 2, 2019, Kraft Heinz filed its 2019 proxy statement with the
Securities and Exchange Commission.33 The filing came after the Compensation
Committee approved terminating Cahill’s 2017 consulting agreement and reducing
Zoghbi’s compensation, but before their stock options were issued. Cahill’s
consulting arrangement was described:
On November 2, 2017, we entered into a consulting agreement with Mr. Cahill pursuant to which he provided advisory and consulting services to us related to then-current and historical finances, relationships with licensors, customers and vendors, employee matters, product development, marketing and distribution, government affairs and strategic opportunities. Mr. Cahill provided advisory and consulting services to Kraft Heinz related to then-current and historical finances, relationships with licensors, customers, and vendors, employee matters, product development, marketing and distribution, government affairs, and strategic opportunities. Such services were provided pursuant to a consulting agreement entered into between Mr. Cahill and the Company in November 2017. Mr. Cahill’s advisory and consulting arrangement terminated on July 1, 2019. Payments to Mr. Cahill under the consulting agreement are disclosed in the “All Other Compensation” column of 2018 Non-Employee Director Compensation Table below. Previously, Mr. Cahill had provided similar services under a consulting agreement entered into following the 2015 Merger, which had expired in July 2017.34
Zoghbi’s arrangement was also described:
For as long as Mr. Zoghbi continues to serve as a Special Advisor at Kraft Heinz, it is anticipated that he will not receive compensation for
33 Transmittal Aff. of Joel Friedlander, Esquire in Supp. of Pl. Erste Asset Mgmt. GmbH’s Answering Br. in Opp’n to Defs.’ Mots. to Dismiss the Verified S’holder Compl. (Dkt. 17) (“Friedlander Aff.”) Ex. E; see also Stachel Aff. Ex. 3. 34 Friedlander Aff. Ex. E at 16, 35 n.4; see Compl. ¶ 256. 8 his services as a director. Effective July 1, 2019, Mr. Zoghbi’s base salary was reduced to $400,000.35 Both Cahill and Zoghbi’s stock options were issued on August 16, 2019.36
Four days later, the grants were disclosed in Form 4 filings with the SEC.37 The
Form 4 regarding Cahill states that his stock options “cliff-vest on August 16, 2022,
subject to the terms and conditions of the stock option award agreement.” 38 The
Form 4 about Zoghbi’s options included the same information.39
Kraft Heinz’s 2020 proxy statement was filed with the SEC on March 27,
2020.40 It disclosed that Cahill received $250,000 in 2019 for serving as a consultant
under a 2017 “advisory and consulting arrangement terminated on July 1, 2019.”41
It further stated that Cahill received a “one-time grant of 500,000 stock options”
“[i]n connection with the termination of his consulting agreement.” 42 Cahill’s
consulting services were described as “distinct and separate from his duties as a
35 Friedlander Aff. Ex. E at 16. The Company also filed a September 2019 offer letter outlining the changes to Zoghbi’s compensation as an exhibit to its October 31, 2019 Form 10-Q. Stachel Aff. Ex. 6. 36 Stachel Aff. Exs. 4, 7. 37 Id. 38 Stachel Aff. Ex. 4; see also Friedlander Aff. Ex. D (stock award agreement). 39 Stachel Aff. Ex. 7. 40 Friedlander Aff. Ex. F; see also Stachel Aff. Ex. 5. 41 Friedlander Aff. Ex. F at 20. 42 Id. at 20, 32; Compl. ¶ 258. 9 director.”43 As to Zoghbi, the proxy explained that his base salary had been reduced
to $400,000 effective July 1, 2019, that he had received a one-time grant of 200,000
stock options, and that he was eligible to receive director compensation.44
Kraft Heinz’s 2021, 2022, and 2023 proxy statements refer to Cahill as a
“former consultant.”45 Cahill’s compensation from service on the Board and certain
committees of the Board is disclosed.46 The 2023 proxy statement notes that Cahill
“last provided consulting services to Kraft Heinz in June 2019,” “received a grant of
stock options in 2019 in connection with the termination of his consulting
agreement,” and was “determined to be independent effective August 17, 2022.”47
E. The Prior Action Complaint
On December 2, 2019, Erste served a books and records demand pursuant to
8 Del. C. § 220 on Kraft Heinz.48 Kraft Heinz produced documents in response.49
On January 21, 2020, Erste filed a derivative complaint in this court.50 Erste sought
43 Friedlander Aff. Ex. F at 32. 44 Friedlander Aff. Ex. F at 20; see also Compl. ¶ 261. 45 Friedlander Aff. Ex. G at 20; Friedlander Aff. Ex. H at 27; Friedlander Aff. Compl. Ex. I at 33; see Compl. ¶ 259. 46 See Friedlander Aff. Ex. G at 36-38; Friedlander Aff. Ex. H at 40, 45. 47 Friedlander Aff. Ex. I at 33; see Compl. ¶ 259; see also Friedlander Aff. Ex. I at 30 (describing Cahill as the “Independent Vice Chair” of the Board). 48 Stachel Aff. Ex. 8 (Section 220 demand sent by Bragar Eagel & Squire, P.C.) 49 See Compl., Preamble. 50 C.A. No. 2020-0043-AGB (Dkt. 1) (Del. Ch.). 10 to assert derivative claims for breach of fiduciary duty regarding 3G’s August 2018
sale of a portion of its stake in Kraft Heinz. Its complaint post-dated both Kraft
Heinz’s 2019 proxy statement and Form 4 filings about Cahill and Zoghbi’s
options.51
Erste’s action was consolidated with another derivative action brought on July
30, 2019. 52 Erste was appointed co-lead plaintiff. 53 A consolidated amended
complaint was filed in the Prior Action on April 27, 2020—after Kraft Heinz’s 2020
proxy statement was filed.54 It alleged that the defendants breached their fiduciary
duties to Kraft Heinz in connection with the approval of 3G’s stock sale, which was
purportedly based on material non-public information.
F. The Prior Action Decision and Appeal
In June 2020, certain defendants moved to dismiss the Prior Action under Rule
23.1 for failure to plead demand futility and Rule 12(b)(6) for failure to state a
claim.55
51 See supra notes 33, 36-37 and accompanying text. 52 In re Kraft Heinz Co. Deriv. Litig., C.A. No. 2019-0587-LWW (“Prior Action”). Where appropriate, I take judicial notice of the filings in the Prior Action and the related appeal. 53 Prior Action Dkt. 106. 54 Prior Action Dkt. 117; see supra note 40 and accompanying text. 55 Prior Action Dkt. 125; Prior Action Dkt. 124. 11 On December 15, 2021, this court issued a memorandum opinion dismissing
the Prior Action with prejudice under Rule 23.1.56 The opinion explained that the
plaintiffs had failed to plead particularized facts creating a reasonable doubt that six
of the eleven directors on Kraft Heinz’s Board when the original complaint was filed
were disinterested or lacked independence from 3G or its defendant partners. Those
six directors are: Jeanne Jackson, John Pope, Feroz Dewan, Tracy Britt Cool, Abel,
and Cahill. 57 Because those six constituted a majority of the Board, the court
declined to address whether Zoghbi or Van Damme were disinterested and
independent of 3G.58
Regarding Cahill, the plaintiffs had alleged that: “[U]ntil July 1, 2019, Cahill
served as a consultant for [Kraft Heinz] and was paid an annual base salary of
$500,000, in addition to annual Board fees of approximately $235,000, which
together constituted more than half (52%) of Cahill’s publicly reported income in
2018.”59 This allegation was insufficient to cast doubt on Cahill’s independence
56 In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632 (Del. Ch. Dec. 15, 2021), aff’d, 282 A.3d 1054 (Del. 2022) (TABLE). 57 Id. at *5, *8. 58 Id. at *13. 59 The defendants’ briefs in the Prior Action emphasized the plaintiffs’ allegations about the termination of Cahill’s consultancy agreement on July 1, 2019. The opening brief in support of their motion to dismiss stated: “Critically, the Complaint concedes that Mr. Cahill is not currently a Company consultant and thus fails to plead any existing arrangement that could somehow cause him to lack independence from 3G.” Compl. ¶ 269. 12 from 3G. The opinion explained: “Cahill’s consulting agreement with Kraft Heinz
terminated on July 1, 2019—before this action was filed. There are no facts alleged
indicating that Cahill expected his consulting arrangement to resume.”60 This court
reasoned that, even if it were to find Cahill’s past consulting and director fees
material to him at the time, “it is not clear why they would create a sense of
‘owingness’ to 3G.”61
The plaintiffs appealed the dismissal to the Delaware Supreme Court. They
argued that the 2019 changes to Cahill and Zoghbi’s compensation arrangements
were made tactically with future derivative litigation in mind.62 Based on public
disclosures (including the August 2019 Form 4 filings), the plaintiffs argued:
• “The stock grants to Zoghbi and Cahill were disclosed in August 2019, and Zoghbi’s new consulting agreement was entered into on September 6, 2019, suggesting that the economic arrangements for both individuals were being restructured in anticipation of the filing of derivative actions.”63
• “[Kraft Heinz’s] 2020 proxy statement describes the grant of stock options to Cahill ‘[i]n connection with the termination of his consulting agreement’[], but the Form 4 respecting the options was filed on August 20, 2019, and states that the ‘transaction date’ was August 16, 2019—after the termination of
Their reply brief also noted “Mr. Cahill’s prior consulting arrangement with Kraft Heinz.” Id. 60 Kraft Heinz, 2021 WL 6012632, at *11. 61 Id. at *12. 62 Stachel Aff. Ex. 9 (Appellant’s Reply Br.). 63 Id. at 3. 13 the consulting agreement and after the filing of the first derivative complaint. . . .”64
• “As with Cahill, the timing of Zoghbi’s new agreement [in 2019] suggests that KHC was trying to restructure his compensation in anticipation of derivative litigation, in the hope of defeating demand futility. . . . The 2020 proxy statement disclosed that Zoghbi received 200,000 stock options in connection with the new agreement reducing his compensation. . . . He received those 200,000 options on August 16, 2019, the same day that Cahill got 500,000 options.”65
The appellate brief of Kraft Heinz and the individual defendants described Cahill as
a “former consultant” with a “prior consulting arrangement.”66
On August 1, 2022, the Delaware Supreme Court, sitting en banc, affirmed
this court’s decision on the basis of, and for the reasons stated in, the December 15,
2021 opinion.67 The Prior Action was closed.68
G. The Demand and Working Group Report
On November 29, 2022, Erste served a litigation demand on the Board.69 The
demand raised the allegations made in the Prior Action, including about 3G’s stock
64 Id. at 15 (quoting 2020 proxy statement and August 20, 2019 Form 4). 65 Id. at 19 (citing 2020 proxy statement and August 20, 2019 Form 4). 66 Compl. ¶ 271; see Friedlander Aff. Ex. K at 3, 25-27, 30-32. 67 In re Kraft Heinz Co. Deriv. Litig., 282 A.3d 1054 (Del. 2022) (TABLE). 68 Prior Action Dkt. 178. 69 Stachel Aff. Ex. 10. 14 sale. It also averred that certain 3G-affiliated defendants caused Kraft Heinz to
“gift” Cahill “500,000 options after his consulting agreement was terminated.”70
The Board tasked a Working Group of two independent directors with
investigating the allegations in various related stockholder demands. The Working
Group interviewed Cahill about, among other things, the rationale for granting him
new stock options in 2019.71 It issued a report on May 20, 2023 recommending that
the Board reject the demands. 72 The report addressed the Working Group’s
investigation into, among other things, the grant of Cahill 500,000 stock options. It
explains that the options were to compensate Cahill for “ongoing work for the
Company that exceeded the role and scope of his service as director.”73
The Board endorsed the Working Group’s recommendation not to pursue
litigation. Erste’s counsel was notified of the Board’s decision by letter dated May
30, 2023.74
On August 21, 2023, Erste served a books and records demand to investigate
the rejection of its litigation demand.75 On October 11, 2023, Kraft Heinz produced
70 Id. at 6-7. 71 Stachel Aff. Ex. 1. 72 Compl. ¶¶ 253, 275. 73 Id. ¶ 253; see Stachel Aff. Ex. 1 at 31-34. 74 Stachel Aff. Ex. 11. 75 Stachel Aff. Ex. 12. 15 various documents cited in the Working Group report, including Cahill’s June 1,
2019 email and the minutes and presentation from the June 20, 2019 Compensation
Committee meeting.76
H. This Litigation After their litigation demands were rejected, several stockholders filed
lawsuits in this court asserting wrongful refusal.77 Erste took a different approach.
It sought instead to reopen this court’s dismissal of the Prior Action.
On October 30, 2023, Erste attempted to file a Motion for Relief from
Judgment Pursuant to Rule 60(b) in the Prior Action.78 The Prior Action, however,
had been closed for over a year. Erste proceeded to file the present suit as an
“independent action, pursuant to Court of Chancery Rule 60(b)” to set aside the Prior
Action.79
Erste’s Complaint advances five claims—two of which are pertinent to this
decision.80 Count I seeks relief from the dismissal of the Prior Action under Rule
76 Compl. ¶ 277; Friedlander Aff. Ex. L. 77 See In re Kraft Heinz Demand Refused Deriv. S’holder Litig., 2024 WL 3493957 (Del. Ch. July 19, 2024) (dismissing the demand refused suits). 78 Friedlander Aff. Ex. M. 79 Compl., Preamble. 80 The parties agreed to brief Counts I and II in the first instance, since the dismissal of those claims would be dispositive of the others. Counts III, IV, and V include Brophy and aiding and abetting claims about 3G’s August 2018 stock sale. 16 60(b) and for purported fraud on the court. 81 Count II is a claim for breach of
fiduciary duty against certain director defendants for not “correcting” disclosures
about Cahill and Zoghbi’s compensation arrangements in Kraft Heinz’s proxy
statements.82
The defendants moved to dismiss the Complaint and filed opening briefs in
support of their motions on March 4, 2024.83 On April 23, the plaintiffs filed an
answering brief in opposition to the defendants’ motions to dismiss. 84 The
defendants filed a reply brief in further support of their motions on May 17. 85 Oral
argument was held on May 23 and the motions were taken under advisement.86
II. ANALYSIS
Erste seeks to reopen this court’s dismissal of the Prior Action under Rule
60(b). Rule 60(b) provides that relief from a judgment may be granted on the
grounds of:
(1) Mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence; (3) fraud (whether heretofore denominated
81 Compl. ¶ 286. 82 Id. ¶ 293; see also id. ¶¶ 46-68. Opening Br. in Supp. of Defs.’ Mots. to Dismiss the Verified S’holder Compl. Under 83
Rules 12(b)(6), 60(b), and 23.1 (Dkt. 12) (“Defs.’ Opening Br.”). Pl. Erste Asset Mgmt. GmbH’s Answering Br. in Opp’n to Defs.’ Mots. to Dismiss the 84
Verified S’holder Compl. (Dkt. 16) (“Pls.’ Answering Br.”). 85 Reply Br. in Supp. of Defs.’ Mots. to Dismiss the Verified S’holder Compl. Under Rules 12(b)(6), 60(b), and 23.1 (Dkt. 22). 86 Dkts. 26, 28. 17 intrinsic or extrinsic), misrepresentation or other misconduct of an adverse party; [if] (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment.87
The defendants oppose Erste’s Rule 60(b) arguments in Count I and seek
dismissal of Count II under Rule 12(b)(6).88 Under Rule 12(b)(6), dismissal is only
appropriate if the plaintiff would not be able to recover under any “reasonably
conceivable set of circumstances [subject to] proof.” 89 The court takes the facts
alleged by the plaintiff as true and draws reasonable inferences from well-pleaded
allegations. 90 Because the Rule 12(b)(6) motion is effectively the defendants’
opposition to Erste’s Rule 60(b) application, the standards and policies animating
Rule 60(b) are pertinent to assessing whether Erste has stated a reasonably
conceivable claim for relief.91
87 Ct. Ch. R. 60(b). 88 Defs.’ Opening Br. 27-28. 89 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002). 90 Id. 91 See Franklin v. Glenhill Advisors, LLC, 2023 WL 569192, *5 (Del. Ch. Jan. 27, 2023) (considering a Rule 12(b)(6) motion to dismiss an action under Rule 60(b) to be “effectively an opposition to [the plaintiff’s] application for relief”), aff’d, 897 A.2d 162 (Del. 2006); see also Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 247 A.3d 229, 234 (Del. 2021) (describing the defendant’s Rule 12(b)(6) motion as “its opposition to the Rule 60(b) arguments raised by” the plaintiff), abrogated on other grounds by Willis v. State, 302 A.3d 417 (Del. 2023). 18 A. Rule 60(b) Arguments About Cahill
Count I of the Complaint is brought under Rule 60(b). Two “significant
values” are “implicated” by that rule.92 “The first is ensuring the integrity of the
judicial process and the second, countervailing, consideration is the finality of
judgments.”93 In furtherance of these principles, a Rule 60(b) application is “not to
be taken lightly or easily granted.”94 It is not “an opportunity for a do-over or an
appeal.”95 “[W]hether to grant a motion for relief pursuant to Rule 60(b) rests in the
sound discretion of the trial court.”96
Erste invokes two subsections of Rule 60(b). First, it contends that under Rule
60(b)(2), “newly discovered evidence” provides grounds to reopen the Prior
Action.97 Second, it invokes Rule 60(b)(3) and contends that “[t]he dismissal of the
Prior Action was the product of fraud upon Erste and the Court respecting the
consultancy status and compensation of Cahill.”98 Neither argument succeeds.
92 MCA, Inc. v. Matsushita Elec. Indus. Co., Ltd., 785 A.2d 625, 634-35 (Del. 2001) (citation omitted). 93 Id. 94 Id. Carlyle Inv. Mgmt. L.L.C. v. Nat’l Indus. Grp. (Hldg.), 2012 WL 4847089, at *5 (Del. 95
Ch. Oct. 11, 2012), aff’d, 67 A.3d 373 (Del. 2013). 96 Joseph v. Shell Oil Co., 1985 WL 21146, at *1 (Del. Ch. June 6, 1985). 97 Compl. ¶ 286. 98 Id. 19 1. “Newly Discovered Evidence”
“Delaware law is clear that reopening a judgment based on new evidence is
disfavored.”99 To obtain relief under Rule 60(b)(2), Erste has the burden to show:
(1) newly discovered evidence has come to its knowledge since the [dismissal]; (2) it could not, in the exercise of reasonable diligence, have been discovered for use [before dismissal]; (3) [the evidence] is so material and relevant that it probably will change the result if [relief] is granted; (4) it is not merely cumulative or impeaching in character; and (5) it is reasonably possible that the evidence will be produced [in the reopened suit]. The court also may examine additional equitable factors, including: (6) whether the moving party has made a timely motion; (7) whether undue prejudice will inure to the nonmoving party; and (8) considerations of judicial economy.100
Erste asserts that “newly discovered evidence” about Cahill’s consulting
arrangement and stock options satisfy this rule. The evidence is four documents
produced in response to Erste’s 2023 Section 220 demand: (1) Cahill’s June 2019
email to Abel proposing a new consulting arrangement; (2) the June 20, 2019
Compensation Committee presentation; (3) the June 20, 2019 Compensation
Committee minutes; and (4) the Working Group report. 101 According to Erste,
without these documents, it could not have known that Cahill’s consultancy
99 Okla. Firefighters Pension & Ret. Sys. v. Corbat, 2018 WL 1254958, at *2 (Del. Ch. Mar. 12, 2018). Vianix Del. LLC v. Nuance Commc’ns, Inc., 2011 WL 487588, at *4 (Del. Ch. Feb. 9, 100
2011). 101 Pls.’ Answering Br. 32-35; see Compl. Exs. A-C; Stachel Aff. Ex. 1. 20 continued after July 1, 2019. But Erste would have known about both Cahill’s stock
options and recut consulting arrangement had it exercised reasonable diligence.102
Kraft Heinz disclosed in August 2019 that Cahill had received an award of
500,000 options.103 Erste would have known this by searching public sources.104
Kraft Heinz also disclosed the options in its 2020 proxy statement, which preceded
the filing of the Prior Action amended complaint.105 But Erste waited until its appeal
to raise arguments about Cahill’s receipt of stock options, relying on the Form 4 and
2020 proxy statement for the first time.106
The fact that Cahill provided consulting services to Kraft Heinz on new terms
was also knowable to Erste before the Prior Action was dismissed. Erste made a
Section 220 demand in December 2019 for eleven categories of “Board
Materials.”107 The Compensation Committee minutes and presentations are the sort
102 See Riker v. Teucrium Trading, LLC, 2021 WL 1779317, at *3 (Del. Ch. May 3, 2021) (explaining that a party seeking relief under Rule 60(b)(2) must show that the “new” evidence “could not, in the exercise of reasonable diligence, have been discovered” prior to the judgment); see also Wimbledon Fund LP v. SV Special Situations Fund LP, 2011 WL 378827, at *5 n.32 (Del. Ch. Feb. 4, 2011) (collecting cases). 103 Stachel Aff. Ex. 4. 104 See generally U.S. Securities and Exchange Commission, https://sec.gov/search-filings (“Enjoy free public access to millions of informational documents filed by publicly traded companies and others in the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.”). 105 See supra notes 40, 54 and accompanying text. 106 See supra notes 62-65 and accompanying text. 107 Stachel Aff. Ex. 8 at 8-10; id. at 8 n.1 (defining “Board Materials”). 21 of documents routinely provided in response to Section 220 demands.108 But Erste
chose not to demand documents about directors’ compensation or consulting
arrangements with Kraft Heinz. 109 It cannot now claim that these Board-level
materials are “newly discovered evidence” when it failed to request them years
ago.110
2. Fraud on the Court
A party seeking relief from a judgment under Rule 60(b)(3) for fraud on the
court “bears a heavy burden.”111 It must adequately plead that the opposing party
committed fraud “prevent[ing] the moving party from fully and fairly presenting his
108 Okla. Firefighters Pension and Ret. Sys. v. Amazon.com, Inc., 2022 WL 1760618, at *12 (Del. Ch. June 1, 2002) (explaining that “[f]ormal board-level documents are often the beginning and end of a Section 220 production”). Most likely, Cahill’s 2019 email would not have been produced in response to Erste’s Section 220 demand. But the information in that email (and the Working Group report) are cumulative. The 2019 Compensation Committee materials would have allowed Erste to understand Cahill’s new arrangement. 109 Stachel Aff. Ex. 8 at 8-10. Erste demanded, for example, “[d]ocuments reflecting any and all personal, familiar, financial, or business relationships, other than their service as directors of Kraft Heinz, between or among any members of the Board.” Id. at 10. None of the categories requested can be read to include documents about compensation or consulting arrangements. 110 See In re U.S. Robotics Corp. S’holders Litig., 1999 WL 160154, at *11 (Del. Ch. Mar. 15, 1999) (denying motion for relief from judgment where the new evidence was not discovered by movant’s counsel before trial because he pursued a different legal theory and observing that “[t]he only reason that class counsel did not discover [the evidence] is that they did not ask”); Wimbledon Fund, 2011 WL 378827, at *5 (denying a Rule 60(b)(2) motion where the party made a strategic decision to forego discovery prior to summary judgment and the filing of a Rule 56(f) affidavit). 111 MCA, 785 A.2d at 639. 22 case.”112 “[S]inister suspicions and dark imaginings of duplicitous conduct are not
enough.”113
The sort of fraud implicating Rule 60(b)(3) is narrow. It is “confined to the
more serious, but fortunately rare, cases involving a corruption of the judicial
process itself.” 114 Delaware courts consider the distinction between “extrinsic
fraud” that “affects the integrity and fairness of the judicial process itself” and
“intrinsic fraud” that “can be discoverable through the ordinary processes and rules
of the trial court.” 115 To justify relief under Rule 60(b)(3), the “fraud must be
extrinsic.”116 It must “directly affect[]” the “integrity of the court and its ability to
function impartially.”117
Erste alleges that the dismissal of the Prior Action “was the product of fraud
upon [it] and the Court respecting the consult[ing] status and compensation of
112 Wilson v. Montague, 19 A.3d 302 (Del. 2011) (TABLE) (emphasis omitted). Chang v. Child.’s Advoc. Ctr. of Del., Inc., 2016 WL 3636539, at *1 (Del. Ch. June 29, 113
2016) (citation omitted). 114 Smith v. Williams, 2007 WL 2193748, at *4 (Del. Super. July 27, 2007) (discussing precedent interpreting federal Rule 60(b)); see also Postorivo v. AG Paintball Hldgs, Inc., 2008 WL 3876199, at *21 (Del. Ch. Aug. 20, 2008) (discussing the difference between extrinsic and intrinsic fraud as described in Smith); Paron Cap. Mgmt., LLC v. Crombie, 2012 WL 214777 (Del. Ch. Jan. 24, 2012) (“This Court has held that ‘only extrinsic fraud will justify dismissal to remedy a fraud on the court, and only where established by clear and convincing evidence.’” (citation omitted)). 115 Smith, 2007 WL 2193748, at *5. 116 Id. 117 Id. at *4. 23 Cahill.”118 The purported fraud is Kraft Heinz’s public statements that Cahill was a
“former consultant whose consulting agreement had been terminated.” 119 The
plaintiffs argue that these disclosures created a misimpression that Cahill’s
consulting relationship was in the past, which were relied upon by Erste, this court,
and the Supreme Court in the Prior Action.120
Even if this were fraud, it is “intrinsic.”121 The relevant disclosures pre-date
the April 27, 2020 amended complaint in the Prior Action. Erste does not raise
“egregious conduct involving a corruption of the judicial process itself.”122 It does
not cite anything approaching “bribery of a judge or juror, improper influence
exerted on the court by an attorney, or involvement of an attorney as an officer of
the court in the perpetration of fraud.”123 It merely challenges statements made in
SEC filings—outside the judicial process. Erste can bring (and has brought) claims
to remedy these alleged misstatements in SEC filings.
The only conduct Erste raises that is arguably linked to the judicial process is
defense counsel’s statements in the Prior Action. During oral argument on the
118 Compl. ¶ 286. 119 Id. ¶ 9. 120 Pl.’s Answering Br. 41-42. 121 Postorivo, 2008 WL 3876199, at *21. 122 MCA, 785 A.2d at 639 (citation omitted). 123 Franklin, 2023 WL 569192, at *10 (citation omitted). 24 motion to dismiss in the Prior Action, for example, counsel for Kraft Heinz
represented that Cahill’s consulting agreement terminated on July 1, 2019.124 These
statements were addressing allegations in the Prior Action complaint about Cahill’s
consultancy. Erste makes no well-pleaded allegation supporting a reasonable
inference that counsel gave false information to this court. Its theory seems aimed
at relitigating the Prior Action, which falls well short of what Rule 60(b)(3)
requires.125
B. Rule 60(b) Arguments About Zoghbi
Erste’s arguments about Zoghbi are even weaker. They turn on the 2019
proxy statement, since Erste acknowledges that the 2020 proxy disclosed all relevant
information about Zoghbi’s compensation.126 Erste could have obtained the June
2019 Compensation Committee materials with the exercise of reasonable diligence
before filing its initial complaint in the Prior Action.127 But even minimal diligence
would have allowed it to raise the disclosures in the 2020 proxy statement before
124 See Compl. ¶¶ 266-73 (quoting oral argument transcript). 125 See Wilson, 2011 WL 1661561, at *3 (explaining that a Rule 60(b)(3) motion will be denied “if it is merely an attempt to relitigate the case” (quoting 11 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2860 (2d ed.))). 126 See supra note 44 and accompanying text; Compl. ¶ 264 (“The 2020 Proxy disclosed the actual facts respecting Zoghbi’s new compensation arrangements . . . .”). 127 See supra notes 107-10 and accompanying text. 25 dismissal. Erste’s belief that it could rely on the 2019 proxy statement and ignore
the subsequent year’s filing cannot meet its high burden under Rule 60(b).128
Erste’s Rule 60(b)(3) arguments also fail as they relate to Zoghbi. They
(again) concern statements in SEC filings. The very same disclosures are the subject
of Erste’s breach of fiduciary duty claim in this action. No extrinsic fraud on the
court is raised.129
Further, Erste cannot meet its “heavy burden” of showing that the information
about Zoghbi’s compensation would change the result in the Prior Action.130 This
court did not reach whether Zoghbi was conflicted for purposes of Rule 23.1 because
a majority of the Board was deemed capable of considering a demand.131 Since there
is no reason to reopen Prior Action as it concerns Cahill, the court’s holding that
demand futility was not established remains unchanged.
* * *
Erste’s Rule 60(b) arguments are insufficient to overcome the crucial interest
in maintaining the finality of judgments. A request for compensated-related
128 Erste’s position also ignores that the Form 4 about Zoghbi’s options was publicly filed by August 20, 2019. 129 See supra notes 114-17 and accompanying text (SMITH). 130 Wimbledon Fund, 2011 WL 378827, at *5 n.32; see also Concord Steel, Inc. v. Wilm. Steel Processing Co., Inc., 2010 WL 3931097, at *6-7 (Del. Ch. Oct. 7, 2010) (considering whether information would “be material or likely to affect the outcome of the trial” rather than “purely cumulative” information). 131 Kraft Heinz, 2021 WL 6012632, at *13. 26 documents in Erste’s 2019 Section 220 demand or more comprehensive review of
public filings would have allowed Erste to raise the pertinent facts before the Prior
Action was dismissed. Indeed, Erste highlighted them before the Delaware Supreme
Court on appeal. Erste was not deceived and this court was not defrauded.
Accordingly, I need not reach the other grounds for dismissal of Count I raised
by the defendants.
C. The “False Disclosures” Claim
In Count II of the Complaint, Erste alleges that five Kraft Heinz directors
“knew that the 2019 Proxy falsely and misleadingly described the changes to the
compensation arrangements of Cahill and Zoghbi, and that subsequent proxy
statements falsely described Cahill’s ongoing consultant status.”132 It claims that
these directors breached their fiduciary duties disloyally “never correcting” Kraft
Heinz’s 2019 2020 proxy statements.133 As relief, it seeks payment of litigation
costs it incurred “to escape the effect of the wrongful dismissal of the Prior Action
based on fraudulent public disclosures.”134
132 Compl. ¶ 291. The claim is brought against Cahill, Zoghbi, Castro-Neves, Lemann, and Rashida La Lande. Id. ¶ 67. Erste argues that the claim includes Kraft Heinz’s proxy statements from 2019 to 2023. Pl.’s Answering Br. 46. 133 Compl. ¶ 292. 134 Id. ¶ 293. 27 Erste disavows any breach of fiduciary duty claim for false and misleading
disclosures seeking stockholder action. 135 It is not asserting that stockholders’
economic or voting rights were impaired by disclosures. And it is seeking
compensatory damages.136 As such, Erste must plead the elements of reasonable
reliance, causation, and resulting damages.137 The Complaint makes no effort to do
so.138
This pleading deficiency may well be because Count II is aimed at recovering
the attorneys’ fees and expenses Erste incurred due to its own litigation strategy.
Erste chose to bring the complaint in the Prior Action based on documents procured
in its Section 220 demand and public filings it reviewed. It opted not to seek books
135 Pl.’s Answering Br. 47 (“Count II is not a duty of disclosure claim; it is a ‘duty of loyalty [claim] for failure to tell the truth.’” (quoting Dohmen v. Goodman, 234 A.3d 1161, 11745 (Del. 2020))). Despite this argument, Erste cites case law concerning disclosures where stockholder action was sought. Id. at 47 n.7. 136 See Compl. ¶ 293; Pls.’ Answering Br. 47 (requesting “individual compensatory damages for needless costs incurred litigating demand futility”); see also Dohmen, 234 A.3d at 1168 (“[T]he per se damages rule presumes only nominal damages. It does not extend to compensatory damages.”). 137 See Dohmen v, 234 A.3d at 1172 (observing that if the defendant had a fiduciary duty of disclosure, the plaintiff would have to demonstrate “reliance and causation to recover the compensatory damages sought”); see also Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998) (explaining that only breach of fiduciary duty claims “arising out of disclosure violations in connection with a request for stockholder action” are exempt from pleading “the elements of reliance, causation and actual quantifiable monetary damages”). 138 Erste’s answering brief also makes no attempt to argue that it has pleaded these elements. See Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (“Issues not briefed are deemed waived.”), aff’d, 840 A.2d 641 (Del. 2003). 28 and records about compensation or to review relevant Kraft Heinz public statements
(such as the Form 4 filings). It also neglected to review the 2020 proxy statement,
which would have allowed it to raise Cahill’s receipt of options and Zoghbi’s
changed compensation in its amended complaint. Erste waited to debut its
disclosure-related theory on appeal.
On these facts, I cannot reasonably infer that the director defendants “knew”
false statements were being used to “create a false [litigation] record.”139 Nor can I
infer that Erste has brought a claim on which it can conceivably recover its attorneys’
fees. Count II is dismissed.
III. CONCLUSION
Count I fails to demonstrate that relief is warranted under Rule 60(b). Count
II fails to state a claim on which relief can be granted. The Complaint is dismissed
in its entirety with prejudice under Rule 12(b)(6).
139 Compl. ¶ 292. 29