In Re Kraft Heinz Demand Refused Derivative Stockholder Litigation
This text of In Re Kraft Heinz Demand Refused Derivative Stockholder Litigation (In Re Kraft Heinz Demand Refused Derivative Stockholder Litigation) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE KRAFT HEINZ DEMAND ) REFUSED DERIVATIVE ) CONSOLIDATED STOCKHOLDER LITIGATION ) C.A. No. 2022-0398-LWW
MEMORANDUM OPINION
Date Submitted: April 10, 2024 Date Decided: July 19, 2024
Carmella P. Keener, COOCH & TAYLOR, P.A., Wilmington, Delaware; P. Bradford deLeeuw, DELEEUW LAW LLC, Wilmington, Delaware; Benjamin Kaufman & Patrick Donovan, WOLF HALDENSTEIN FREEMAN & HERZ LLP, New York, New York; Michael Hynes & Ligaya Hernandez, HYNES & HERNANDEZ LLC, Malvern, Pennsylvania; Robert C. Schubert & Willem F. Jonckheer, SCHUBERT JONCKHEER & KOLBE LLP, San Francisco, California; Richard D. Greenfield, Marguerite R. Goodman & Ann M. Caldweel, GREENFIELD & GOODMAN LLC, Philadelphia, Pennsylvania; Fred T. Isquith, Sr., ISQUITH LAW PLLC, New York, New York; Counsel for Plaintiffs
Matthew D. Stachel, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Daniel J. Kramer, Andrew J. Ehrlich & William A. Clareman, 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, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Sandra C. Goldstein, Stefan Atkinson & Kevin M. Neylan, Jr., KIRKLAND & ELLIS LLP, New York, New York; Counsel for Defendants 3G Capital, Inc., 3G Capital Partners Ltd., 3G Capital Partners II LP, 3G Global Food Holdings GP LP, 3G Global Food Holdings LP, and HK3 18 LP
WILL, Vice Chancellor In August 2018, 3G Capital Inc. sold a portion of its ownership interest in The
Kraft Heinz Company. Six months later, Kraft Heinz announced a $15.4 billion
impairment charge. The plaintiffs in this case contend that 3G’s stock sale occurred
based on material non-public information while Kraft Heinz officers and directors
concealed the looming impairment from the market.
These facts may sound familiar to the reader. I addressed them in a prior
decision that dismissed a derivative suit for failure to plead demand futility. The
present action is the demand-made iteration. The three plaintiffs here each sent the
Kraft Heinz board litigation demands about 3G’s stock sale and impairment-related
disclosures.
The board of Kraft Heinz formed an administrative working group of two
directors to consider the demands. The working group hired independent legal
counsel and a forensic accountant to assist with its investigation. It and its advisors
reviewed more than 150,000 documents, interviewed a dozen people, and considered
a detailed prior investigation led by outside counsel. After a two-year process, the
working group authored a 110-page report summarizing its analysis. It
recommended that the demands be rejected, and the full board agreed.
The plaintiffs spurn the board’s conclusions and allege that the demands were
wrongfully refused. In assessing their arguments, I need not resolve whether Kraft
Heinz fiduciaries made material misstatements to the market or whether 3G engaged
1 in insider trading. The board of Kraft Heinz probed these matters and concluded
that it was not in the company’s interest to pursue litigation about them. Instead, I
must consider whether the plaintiffs have pleaded particularized facts creating a
reasonable doubt that the board investigated and rejected the demands in good faith
and with due care. The complaint lacks any such allegations.
The plaintiffs argue that the working group was “structurally flawed” based
both on its mandate and its membership. Their belief that the board should have
empowered the working group with final decision-making authority is at odds with
their tacit concession of the board’s impartiality. And their concerns about the
working group including a director who chaired the Audit Committee during the
challenged events are meaningless, given the dearth of well-pleaded allegations that
he faced a substantial likelihood of liability.
The plaintiffs also make a series of complaints about the findings and
recommendations in the working group’s report. They amount to unsupported
disagreements. None indicate that the board’s refusal of the demands amounts to a
breach of fiduciary duty.
The case is dismissed under Court of Chancery Rule 23.1.
2 I. BACKGROUND
The following background is drawn from the Consolidated Verified
Derivative Complaint (the “Complaint”) and the documents it incorporates by
reference.1
A. The Formation of Kraft Heinz
Defendant 3G Capital, Inc. is a private investment firm. 2 In 2013, it and
Berkshire Hathaway, Inc. acquired The H.J. Heinz Company (“Heinz”).3 Two years
later, Heinz merged with Kraft Food Groups, Inc. (“Kraft”) to form nominal
defendant The Kraft Heinz Company.4 Kraft Heinz—a Delaware corporation—is
one of the world’s largest food and beverage companies.5
3G owned 24% of the combined entity’s shares and Berkshire Hathaway
owned 27%. 6 Each was entitled to appoint directors to Kraft Heinz’s Board of
1 Consol. Verified Deriv. Compl. (Dkt. 49) (“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). The books and records produced in response to the plaintiffs’ demands under 8 Del. C. § 220 are deemed incorporated into the complaint. See Compl. 2; 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 Compl. ¶ 64. 3 Id. ¶ 83. 4 Id. ¶ 2. 5 Id. ¶ 71. 6 See id. ¶ 83; see also In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632, at *6 (Del. Ch. Dec. 15, 2021), aff’d, 282 A.3d 1054 (Del. 2022) (TABLE). 3 Directors. During the time period relevant to this case, Kraft Heinz had an 11-person
Board. Five members were selected by Kraft, three by Berkshire Hathaway, and
three by 3G.7
Alexandre Behring, Jorge Paulo Lemann, and Marcel Herrmann Telles were
3G’s Board appointees.8 The Board appointed 3G partners Bernardo Hees as Chief
Executive Officer and Paulo Basilio as Chief Financial Officer. 9 Basilio was later
reassigned as Zone President of U.S. Business and 3G partner David Knopf became
Kraft Heinz’s CFO.10
B. Kraft Heinz’s Performance
After the merger of Kraft and Heinz closed, management implemented cost-
cutting measures.11 These measures allegedly reduced product quality, damaged
customer relationships, and caused supply chain problems. 12 Short-term positive
financial results followed, allegedly at the expense of Kraft Heinz’s long-term
outlook and asset value.13
7 Compl. ¶¶ 84-86. 8 Id. ¶ 86. 9 Id. ¶¶ 86-87. 10 Id. ¶ 87. 11 Id. ¶¶ 3-4, 23-24, 94, 100, 105, 115-19, 129, 139, 318. 12 Id. ¶¶ 3-4, 13, 25, 95, 100-02, 108, 111-13, 128, 130-32, 139, 143-45, 148, 155, 157, 177, 197, 200-21. 13 Id. ¶ 4.
4 By April 2018, Kraft Heinz senior management purportedly knew that key
reporting units, trademarks, and brands were struggling. 14 According to the
Complaint, they optimistically projected the value of essential business units,
trademarks, and brands while avoiding the threshold for the early warning disclosure
on impairment. 15 Within weeks of an April 1 impairment analysis, EBITDA
projections were revised downward.16
Free access — add to your briefcase to read the full text and ask questions with AI
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE KRAFT HEINZ DEMAND ) REFUSED DERIVATIVE ) CONSOLIDATED STOCKHOLDER LITIGATION ) C.A. No. 2022-0398-LWW
MEMORANDUM OPINION
Date Submitted: April 10, 2024 Date Decided: July 19, 2024
Carmella P. Keener, COOCH & TAYLOR, P.A., Wilmington, Delaware; P. Bradford deLeeuw, DELEEUW LAW LLC, Wilmington, Delaware; Benjamin Kaufman & Patrick Donovan, WOLF HALDENSTEIN FREEMAN & HERZ LLP, New York, New York; Michael Hynes & Ligaya Hernandez, HYNES & HERNANDEZ LLC, Malvern, Pennsylvania; Robert C. Schubert & Willem F. Jonckheer, SCHUBERT JONCKHEER & KOLBE LLP, San Francisco, California; Richard D. Greenfield, Marguerite R. Goodman & Ann M. Caldweel, GREENFIELD & GOODMAN LLC, Philadelphia, Pennsylvania; Fred T. Isquith, Sr., ISQUITH LAW PLLC, New York, New York; Counsel for Plaintiffs
Matthew D. Stachel, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Daniel J. Kramer, Andrew J. Ehrlich & William A. Clareman, 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, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Sandra C. Goldstein, Stefan Atkinson & Kevin M. Neylan, Jr., KIRKLAND & ELLIS LLP, New York, New York; Counsel for Defendants 3G Capital, Inc., 3G Capital Partners Ltd., 3G Capital Partners II LP, 3G Global Food Holdings GP LP, 3G Global Food Holdings LP, and HK3 18 LP
WILL, Vice Chancellor In August 2018, 3G Capital Inc. sold a portion of its ownership interest in The
Kraft Heinz Company. Six months later, Kraft Heinz announced a $15.4 billion
impairment charge. The plaintiffs in this case contend that 3G’s stock sale occurred
based on material non-public information while Kraft Heinz officers and directors
concealed the looming impairment from the market.
These facts may sound familiar to the reader. I addressed them in a prior
decision that dismissed a derivative suit for failure to plead demand futility. The
present action is the demand-made iteration. The three plaintiffs here each sent the
Kraft Heinz board litigation demands about 3G’s stock sale and impairment-related
disclosures.
The board of Kraft Heinz formed an administrative working group of two
directors to consider the demands. The working group hired independent legal
counsel and a forensic accountant to assist with its investigation. It and its advisors
reviewed more than 150,000 documents, interviewed a dozen people, and considered
a detailed prior investigation led by outside counsel. After a two-year process, the
working group authored a 110-page report summarizing its analysis. It
recommended that the demands be rejected, and the full board agreed.
The plaintiffs spurn the board’s conclusions and allege that the demands were
wrongfully refused. In assessing their arguments, I need not resolve whether Kraft
Heinz fiduciaries made material misstatements to the market or whether 3G engaged
1 in insider trading. The board of Kraft Heinz probed these matters and concluded
that it was not in the company’s interest to pursue litigation about them. Instead, I
must consider whether the plaintiffs have pleaded particularized facts creating a
reasonable doubt that the board investigated and rejected the demands in good faith
and with due care. The complaint lacks any such allegations.
The plaintiffs argue that the working group was “structurally flawed” based
both on its mandate and its membership. Their belief that the board should have
empowered the working group with final decision-making authority is at odds with
their tacit concession of the board’s impartiality. And their concerns about the
working group including a director who chaired the Audit Committee during the
challenged events are meaningless, given the dearth of well-pleaded allegations that
he faced a substantial likelihood of liability.
The plaintiffs also make a series of complaints about the findings and
recommendations in the working group’s report. They amount to unsupported
disagreements. None indicate that the board’s refusal of the demands amounts to a
breach of fiduciary duty.
The case is dismissed under Court of Chancery Rule 23.1.
2 I. BACKGROUND
The following background is drawn from the Consolidated Verified
Derivative Complaint (the “Complaint”) and the documents it incorporates by
reference.1
A. The Formation of Kraft Heinz
Defendant 3G Capital, Inc. is a private investment firm. 2 In 2013, it and
Berkshire Hathaway, Inc. acquired The H.J. Heinz Company (“Heinz”).3 Two years
later, Heinz merged with Kraft Food Groups, Inc. (“Kraft”) to form nominal
defendant The Kraft Heinz Company.4 Kraft Heinz—a Delaware corporation—is
one of the world’s largest food and beverage companies.5
3G owned 24% of the combined entity’s shares and Berkshire Hathaway
owned 27%. 6 Each was entitled to appoint directors to Kraft Heinz’s Board of
1 Consol. Verified Deriv. Compl. (Dkt. 49) (“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). The books and records produced in response to the plaintiffs’ demands under 8 Del. C. § 220 are deemed incorporated into the complaint. See Compl. 2; 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 Compl. ¶ 64. 3 Id. ¶ 83. 4 Id. ¶ 2. 5 Id. ¶ 71. 6 See id. ¶ 83; see also In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632, at *6 (Del. Ch. Dec. 15, 2021), aff’d, 282 A.3d 1054 (Del. 2022) (TABLE). 3 Directors. During the time period relevant to this case, Kraft Heinz had an 11-person
Board. Five members were selected by Kraft, three by Berkshire Hathaway, and
three by 3G.7
Alexandre Behring, Jorge Paulo Lemann, and Marcel Herrmann Telles were
3G’s Board appointees.8 The Board appointed 3G partners Bernardo Hees as Chief
Executive Officer and Paulo Basilio as Chief Financial Officer. 9 Basilio was later
reassigned as Zone President of U.S. Business and 3G partner David Knopf became
Kraft Heinz’s CFO.10
B. Kraft Heinz’s Performance
After the merger of Kraft and Heinz closed, management implemented cost-
cutting measures.11 These measures allegedly reduced product quality, damaged
customer relationships, and caused supply chain problems. 12 Short-term positive
financial results followed, allegedly at the expense of Kraft Heinz’s long-term
outlook and asset value.13
7 Compl. ¶¶ 84-86. 8 Id. ¶ 86. 9 Id. ¶¶ 86-87. 10 Id. ¶ 87. 11 Id. ¶¶ 3-4, 23-24, 94, 100, 105, 115-19, 129, 139, 318. 12 Id. ¶¶ 3-4, 13, 25, 95, 100-02, 108, 111-13, 128, 130-32, 139, 143-45, 148, 155, 157, 177, 197, 200-21. 13 Id. ¶ 4.
4 By April 2018, Kraft Heinz senior management purportedly knew that key
reporting units, trademarks, and brands were struggling. 14 According to the
Complaint, they optimistically projected the value of essential business units,
trademarks, and brands while avoiding the threshold for the early warning disclosure
on impairment. 15 Within weeks of an April 1 impairment analysis, EBITDA
projections were revised downward.16
On July 13, 2018, the Securities and Exchange Commission sent Kraft Heinz
a document preservation request about procurement and impairment-related issues.17
Kraft Heinz’s Audit Committee members were informed of the investigation during
a meeting two weeks later. 18 Meeting attendees—including Knopf and Audit
Committee Chairman John C. Pope—were also allegedly told that certain business
units, trademarks, and brands were on the verge of the early warning disclosure
threshold.19
14 Id. ¶ 5. 15 Id. ¶¶ 5, 6, 8, 14-15, 17, 20, 25, 30, 86, 135, 145-62, 187, 206, 306-07, 317. 16 Id. ¶¶ 17, 151, 160, 185, 288. 17 Id. ¶ 188; see Compl. Ex. J (Report of the Working Group of the Board of Directors of The Kraft Heinz Company) (“Report”). The Report is expressly incorporated by reference into the Complaint. 18 Compl. ¶ 188. 19 Id.; see also id. ¶¶ 8, 152-53, 183, 188 n.22.
5 C. The 3G Stock Sale
On August 3, 2018, Kraft Heinz filed a Form 10-Q with the SEC that disclosed
the company’s annual impairment testing. An earnings call was held the same day.20
Management reported that temporary “negative headwinds” were affecting the
business.21 The company did not address any worsening problems with business
units, trademarks, or brands caused by cost-cutting.22 Nor did it say that it was
approaching an impairment of Kraft Heinz’s goodwill and intangible assets.23
On August 7, 3G sold 20.3 million shares of Kraft Heinz stock for proceeds
exceeding $1.2 billion.24 The sale represented approximately 7% of 3G’s ownership
in Kraft Heinz.25 It was timed to coincide with the expiration of an insider selling
blackout period and a lockup period.26
20 Id. ¶ 11. 21 Id. ¶¶ 11-12. 22 Id. ¶¶ 5-6, 8, 10-12, 14-15, 17, 20, 25, 30, 86, 144-62, 187, 206, 208, 231, 317. 23 Id. ¶¶ 24, 99, 171. 24 Id. ¶ 13. 25 Transmittal Aff. of Michael A. Pittenger to the 3G Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss the Consol. Verified Deriv. Compl. (Dkts. 68, 70, 72) (“Pittenger Aff.”) Ex. 21. 26 Compl. ¶¶ 146, 187, 190, 198, 291, 305.
6 D. The Subpoena
In October 2018, the SEC served Kraft Heinz with a subpoena about
procurement practices.27 Soon after, Kraft Heinz amended its policy on “Accounting
for Intangible Assets and Goodwill.” 28 The policy change removed subjectivity
from the impairment analysis process.
On November 1, Kraft Heinz reported financial results for the third quarter of
2018. It disclosed a $499 million impairment to the value of certain brands and
goodwill.29 Management maintained that internal controls were effective and no
problems with the impairment status of the company’s foundational business units,
trademarks, or brands were disclosed.30
On December 5, Kraft Heinz’s outside auditor delivered its final 2018 annual
impairment analysis. 31 In late December, Kraft Heinz recognized a triggering
event—a sustained decline in its stock price since the November 1 earnings
release—and ran an interim impairment analysis. Revised projections were used to
target the business units, trademarks, and brands for which the company had not
27 Id. ¶ 191. 28 Id. ¶ 192. 29 Id. ¶ 16. 30 Id. ¶¶ 16-17. 31 Id. ¶¶ 182, 187, 194, 310.
7 issued early warning disclosures or recognized an impairment.32 Kraft Heinz’s stock
price continued to fall.33
E. The Impairment On February 21, 2019, Kraft Heinz released its 2018 fourth quarter earnings
report and announced a $15.4 billion non-cash impairment to its goodwill and
intangible assets.34 This reduced the company’s reported net income to an annual
loss of $10.3 billion.35 The write-down was tied to impairments in the carrying
amount of goodwill in five reporting units and five brands.36 Kraft Heinz’s stock
price dropped 27.5%.37
One week later, Kraft Heinz disclosed the receipt of the October 2018 SEC
subpoena.38 It also announced that it would delay filing its Form 10-K for the 2018
fiscal year while the Audit Committee oversaw an internal investigation into the
company’s procurement function.
32 Id. ¶¶ 195-96. 33 Id. ¶ 196. 34 Id. ¶ 202; see Pittenger Aff. Ex. 28. 35 Compl. ¶¶ 18, 202. 36 Id. ¶ 202; see Pittenger Aff. Ex. 29. 37 Compl. ¶ 205. 38 Id. ¶ 209; see Pittenger Aff. Ex. 29.
8 On May 6, 2019, Kraft Heinz reported that the investigation was substantially
complete.39 Kraft Heinz restated its financial statements from 2015 to 2018 to reflect
$208 million in cumulative increases to its previously reported $63.7 billion in cost
of products sold during that time.40 Kraft Heinz also disclosed a revision to its
February 2019 write-down, which resulted in an additional impairment loss of
approximately $105 million.41
F. Subsequent Litigation
An array of lawsuits came on the heels of Kraft Heinz’s restatement
announcement.
In February 2019, a federal securities class action was filed in the United
States District Court for the Northern District of Illinois.42 The plaintiff alleged that
certain Kraft Heinz officers and directors committed securities fraud and that 3G’s
August 2018 stock sale was insider trading. The federal court sustained claims for
securities law violations against Kraft Heinz, Hees, Basilio, Knopf, Behring, and 3G,
as well as former Kraft Heinz director George Zoghbi and Executive Vice President
39 Compl. ¶ 212; Pittenger Aff. Ex. 30. 40 Compl. ¶¶ 22, 212; see Pittenger Aff. Ex. 30. 41 Compl. ¶ 214. 42 See Hedick v. The Kraft Heinz Co., et al., C.A. No. 1:19-cv-01339 (N.D. Ill.).
9 and President, International Markets Rafael Oliveira. 43 The parties reached a
settlement for $450 million.44
Beginning in July 2019, derivative lawsuits were filed in this court. The
plaintiffs claimed that 3G, entities affiliated with it, and certain dual fiduciaries of
3G and Kraft Heinz breached their fiduciary duties in connection with 3G’s stock
sale. They alleged that demand on the Kraft Heinz Board was excused. The cases
were consolidated and dismissed for failure to plead demand futility. 45 The
Delaware Supreme Court affirmed the dismissal.46
Despite Kraft Heinz’s Delaware forum selection bylaw, another derivative
suit was filed in the Northern District of Illinois in July 2019.47 The suit was nearly
identical to those filed in this court and alleged demand futility. The federal court
granted a motion to dismiss on June 5, 2023, holding that a majority of the Board
did not face a substantial likelihood of personal liability.48
43 Compl. ¶¶ 223-24, 227-28. 44 Id. ¶ 29; see Transmittal Aff. of Matthew D. Stachel in Supp. of the Opening Br. in Supp. of Nominal Def.’s and the Individual Defs.’ Mot. to Dismiss under Rules 23.1 and 12(b)(6) (Dkt. 66) (“Stachel Aff.”) Ex. 1. 45 Kraft Heinz, 2021 WL 6012632. 46 Kraft Heinz, 282 A.3d 1054. 47 In re Kraft Heinz S’holder Deriv. Litig., C.A. No. 1:20-cv-2259 (N.D. Ill.). 48 In re Kraft Heinz S’holder Deriv. Litig., 2023 WL 2745118, at *1 (N.D. Ill. Mar. 31, 2023). 10 G. The Demands
Between May 22, 2019 and October 7, 2021, the plaintiffs here—Stephen
Datnoff, Judy Mesirov, and Adriana D. Felicetti—sent litigation demands to the
Board.49 The letters asked the Board to investigate potential wrongdoing by 3G, 3G
affiliates, and current and former directors and officers of Kraft Heinz.
The demands alleged that certain Kraft Heinz fiduciaries had made false
statements about the company’s financial state and failed to oversee financial
disclosure and reporting internal controls, including cost-cutting. They also accused
Kraft Heinz of overstating the value of goodwill and intangible assets before the
February 2019 impairment disclosure. They maintained that the defendants were
involved in procurement-related accounting misconduct, which was the subject of a
prior internal investigation. And they alleged that 3G sold stock based on material
non-public information about the impending impairment charge.
H. The Working Group
The Board launched an investigation in response to the demands. On April
29, 2020, it created an administrative working group (the “Working Group”) of two
outside directors: Pope and Susan Mulder. 50 Mulder had been appointed to the
49 Compl. ¶¶ 252-54, 262, 264-65; see Report 29. Two other purported stockholders also served demands. See id. 50 Compl. ¶ 279. The Working Group was formed after the Mesirov demand was received in the first quarter of 2020. See Report 2 n.1. 11 Board in May 2020, after the challenged events.51 Pope is a former Kraft director
and has served on the Kraft Heinz Board since July 2015.52 The plaintiffs in the
Delaware derivative litigation did not challenge Pope’s disinterestedness or
independence.53 In the federal derivative suit, the court found that allegations about
Pope failed to demonstrate that he faced a substantial likelihood of liability.54
The Working Group was charged with evaluating the allegations in the
demands and recommending an appropriate response to the Board.55 It retained legal
advisors at Simpson Thacher & Bartlett LLP and Young Conaway Stargatt & Taylor,
LLP. 56 Simpson Thacher retained AlixPartners LLP to serve as the Working
Group’s forensic accounting advisor.57
After a two-year process, the Working Group concluded that it was not in
Kraft Heinz’s best interest to pursue litigation based on the issues raised in the
demands. With the “potential exception” of two Kraft Heinz executives—Eduardo
Pelleissone and Klaus Hofmann—who were subjects of “more colorable”
51 Id.; see Report 49-50. 52 Compl. ¶¶ 56, 279. 53 Kraft Heinz, 2021 WL 6012632, at *5 (“The plaintiffs . . . concede that Jackson and Pope are independent and disinterested for purposes of a demand futility analysis.”). 54 Kraft Heinz, 2023 WL 2745118, at *9. 55 Compl. ¶ 279; see Report 51. 56 Compl. ¶ 262, see Report 4, 50. 57 Report 50.
12 allegations, the Working Group identified no evidence that applicable law had been
violated. Even as to Pelleissone and Hofmann, the Working Group concluded that
litigation was imprudent based on practical considerations. These conclusions and
the Working Group’s findings were memorialized in a 110-page Report of the
Working Group of the Board of Directors of the Kraft Heinz Company, dated April
12, 2022 (the “Report”).58
On April 21, 2022, the Working Group reported to the Board that it believed
litigation on the subjects raised in the demands was unwarranted. It recommended
that the demands be denied. 59 The Board accepted the Working Group’s
recommendation and rejected the demands.60
I. This Litigation
On May 6, 2022, the present derivative action was filed in this court by
Datnoff, Mesirov, and a third stockholder who later withdrew as a party. 61 On
November 18, 2022, the plaintiffs filed an amended complaint.62 On March 6, 2023,
Felicetti filed a separate derivative complaint.63
58 Compl. Ex. J. 59 Compl. ¶ 269; Stachel Aff. Ex. 4. 60 Compl. ¶ 271; Stachel Aff. Ex. 4. 61 Dkt. 1. 62 Dkt. 14. 63 Felicetti v. Behring, C.A. No. 2023-0278-LWW (Dkt. 1) (Del. Ch. Mar. 6, 2023).
13 The two cases were consolidated on April 24, 2023. 64 The operative
consolidated Complaint was filed on May 18, 2023. In it, the plaintiffs allege that
their demands were wrongfully refused. They seek to assert derivative Brophy and
aiding and abetting claims against 3G—the same claims raised in the prior demand
futility actions. 65 They also wish to advance Caremark and Malone breach of
fiduciary duty claims and an unjust enrichment claim against the individual
defendants.66
The defendants moved to dismiss the Complaint on July 24, 2023. 67 On
September 22, 2023, the plaintiffs filed a brief in opposition to the defendants’
motions to dismiss.68 The defendants filed reply briefs in further support of their
motions on November 3, 2023.69 Oral argument was held on April 2, 2024 and the
parties filed letters identifying additional authority on April 8 and 10.70
64 Dkt. 47. 65 Compl. ¶¶ 350-64; see Kraft Heinz, 2021 WL 6012632, at *4. 66 Compl. ¶¶ 334-41, 366-67. They also bring an indemnification and contribution claim. Id. ¶¶ 342-49. 67 Dkts. 65, 67. 68 Pls.’ Omnibus Br. in Opp’n to Defs.’ Mots. to Dismiss (Dkt. 82) (“Pls.’ Answering Br.”). 69 Dkts. 87, 88. 70 Dkts. 101, 103-04.
14 II. ANALYSIS
It is a “cardinal precept” of Delaware law that “directors, rather than
shareholders, manage the business and affairs of the corporation.” 71 “The decision
to bring a law suit or refrain from litigating a claim on behalf of a corporation is a
decision concerning the management of the corporation.”72 A stockholder may only
assume the power to bring a derivative claim on the corporation’s behalf after
satisfying the strict conditions of Rule 23.1.73 A board’s rejection of a litigation
demand is entitled to the protections of the business judgment rule, which presumes
that the directors acted in good faith and on an informed basis.74
The plaintiffs bear the heavy burden of pleading “particularized facts which,
taken as true, raise a reasonable doubt that the refusal was a valid exercise of
business judgment.”75 These “stringent requirements of factual particularity . . .
71 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 72 Spiegel v. Buntrock, 571 A.2d 767, 73 (Del. 1990) 73 See White v. Panic, 783 A.2d 543, 546-47 (Del. 2001) (explaining that the demand requirement of Rule 23.1 “implement[s] the principle that the cause of action belongs to the corporation”). 74 See Aronson, 473 A.2d at 812; Grimes v. Donald, 673 A.2d 1207, 1217 (Del. 1996) (“After investing the time and resources to consider and decide whether or not to take action in response to the demand, the Board is entitled to have its decision analyzed under the business judgment rule unless the presumption of that rule can be rebutted.”), overruled on other grounds by Brehm, 746 A.2d 244. 75 Ironworkers Dist. Council of Phila. & Vicinity Ret. & Pension Plan v. Andreotti, 2015 WL 2270673, at *26 (Del. Ch. May 8, 2015), aff’d, 132 A.3d 748 (Del. 2016). 15 differ substantially from” the notice pleading standard of Rule 8(a).76 “Vague or
conclusory allegations do not suffice” and the court will neither “blindly accept as
true all allegations” nor draw unreasonable inferences in the plaintiffs’ favor.77
A. The Plaintiffs’ Tacit Concessions By making a demand, the plaintiffs “waived any claim they might otherwise
have had that” the Board as then constituted “cannot act independently on the
demand.”78 Their demands “place[d] control of the derivative litigation in the hands
of the board of directors.” 79 Although the Complaint nevertheless contested the
directors’ independence and disinterestedness, the plaintiffs have since
acknowledged that they tacitly conceded the Board as a whole could impartially
consider the demands.80
76 Brehm, 746 A.2d at 254. 77 Ironworkers, 2015 WL 2270673, at *25 (citation omitted); see also Brehm, 746 A.2d at 255 (“[C]onclusory allegations are not considered as expressly pleaded facts or factual inferences.”). 78 Scattered Corp. v. Chi. Stock Exch., Inc., 701 A.2d 70, 74 (Del. 1997), overruled on other grounds by Brehm, 746 A.2d 244; see also Thorpe v. CERBCO, Inc., 611 A.2d 5, 10 (Del. Ch. 1991) (explaining that by making a demand, the plaintiff “made an important concession: that the board is able to function on the question” of whether claims should be pursued). 79 Spiegel, 571 A.2d at 775. 80 See Compl. ¶¶ 284-85; Tr. of Oral Arg. on Defs.’ Mots. to Dismiss (Dkt. 104) (“Hr’g Tr.”) 37 (The Court: “You’re not refuting that you tacitly conceded that the board as a whole could consider the demand impartially; is that right?” Counsel: “Yes, that is correct.” The Court: “You’re focused solely on Mr. Pope.” Counsel: “We are focused solely on Mr. Pope.”). The plaintiffs’ answering brief does not argue that a majority of the Board was conflicted either at the time the demands were made or when the demands were refused. 16 Even if the plaintiffs had not abandoned their argument that the Board was
biased, it would fail. The purported conflicts raised in the Complaint—that the
directors were involved in the challenged events, named as defendants in the federal
derivative complaint, or have ties to 3G—were known when the first demand was
made by Mesirov in May 2019. 81 By opting to serve demands rather than file
demand excused suits, the plaintiffs conceded that at least six of the eleven directors
ex ante could impartially act on a demand.82
The Board membership changed between the making of the first demand in
2019 and the rejection of the demands in 2022, with six directors turning over and
five remaining. 83 The purported conflicts affecting the recomposed Board are,
however, either the same as or weaker than those allegedly existing when the first
demand was made.84 The new directors were neither named in the federal suits nor
See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). 81 See Compl. ¶¶ 284-85; Stachel Aff. Ex. 6 ¶¶ 16, 19-28. 82 See FLI Deep Marine LLC v. McKim, 2009 WL 1204363, at *3 (Del. Ch. Apr. 21, 2009) (reasoning, in the wrongful refusal context, that it would be inappropriate to “part ways with established Delaware law to grant the Plaintiffs relief from a strategic decision they now regret”). 83 Compl. ¶ 284. 84 As discussed below, a number of new directors joined the Board between the time Mesirov made her demand and when Datnoff and Felicetti made their demands (and Mesirov made a supplemental demand). See infra notes 88-91 and accompanying text; see also Report 29; Compl. ¶¶ 252, 261, 264-65. The plaintiffs neglect to address the import of the director turnover relative to their respective demands. 17 involved in the events raised in the demands. There are no changed circumstances
pleaded between the time of the demands and the Board’s refusal of the demands
that would put in doubt the independence or disinterestedness of a majority of these
directors.85
The best the plaintiffs can muster is to insinuate that the Board as comprised
in 2022 was dominated by 3G, which they argue was a controlling stockholder.86
That argument is without factual or legal support. During the relevant period, 3G
was Kraft Heinz’s second largest stockholder (after Berkshire Hathaway) with less
than a quarter of the company’s stock.87 It lacked the ability to control the Kraft
Heinz Board and appointed just three of the Board’s eleven directors.
85 See Andersen v. Mattel, Inc., 2017 WL 218913, at *5 (Del. Ch. Jan. 19, 2017) (holding a plaintiff to his tacit concession where he “ha[d] not pled any facts suggesting that the board became interested or beholden” to an interested party); see also FLI Deep Marine, 2009 WL 1204363, at *3 (rejecting the plaintiffs’ attempt to avoid their concession where they “maintain[ed] the Board lacked independence since at least the time of their demand”); Ironworkers, 2015 WL 2270673, at *32 (noting that the plaintiff had conceded that the board at the time of the demands could consider a demand and did “not challenge, ex post, the Board’s interest or independence”). In fact, the federal court rejected similar allegations against the directors after the demands were made. See Kraft Heinz, 2023 WL 2745118, at *6-9. 86 See, e.g., Compl. ¶¶ 1, 173, 282, 284-85, 287, 293, 303. 87 See supra note 6 and accompanying text. The plaintiffs argue that a company’s second- largest stockholder can be deemed controlling based on the Court of Chancery’s decision in Williamson v. Cox Communications, Inc. 2006 WL 1586375, at *5-6 (Del. Ch. June 5, 2006); see Pls.’ Answering Br. 59; Dkt. 101. That case does not aid them. In Williamson, the court considered whether it was reasonably conceivable that two minority stockholders—Cox Communications and Comcast Corporation—were controlling stockholders of At Home Corporation. Cox and Comcast were viewed as a single unit throughout the court’s analysis about a transaction in which they allegedly caused At Home 18 In any event, the same number of directors with alleged disabling ties to 3G
were on the 2019 and 2022 Boards. Between the making of the first demand and
rejection of the demands, 3G partners Lemann and Telles left the Board, with
Behring remaining.88 The plaintiffs make only the conclusory assertion that two
new directors—Joao M. Castro-Neves (who joined the Board in June 2019) and
Miguel Patricio (who joined the Board in May 2021)—“were closely related to and
not independent of 3G” and “beholden” to it “for their livelihoods.”89
Notably, though, Castro-Neves was on the Board when Datnoff made his
demand in March 2020 and when Mesirov made a supplemental demand in October
2020. 90 And both Castro-Neves and Patricio were on the Board when Felicetti made
her demand in October 2021.91 No other directors who joined the Board post-2019
are alleged to have been interested or lack independence with regard to the demands.
to transfer complete control to a third stockholder, AT&T. It was sufficiently pleaded that Cox and Comcast had “significant leverage” over At Home and wielded board-level veto power. Williamson, 2006 WL 1586375, at *5-6. Based on a reasonable inference that Cox and Comcast were controlling stockholders, the court sustained a claim that they had breached their fiduciary duties by causing the company to undertake a transaction benefitting them and AT&T with no regard for At Home’s other stockholders. Id. 88 Compl ¶¶ 47, 51. 89 Id. ¶ 284; see also Kraft Heinz, “Board of Directors,” https://ir.kraftheinzcomany.com/company-profile/board-of-directors (last visited July 17, 2024); The Kraft Heinz Company, Sched. 14A (filed with the SEC on Mar. 27, 2020) at 1. 90 Report 29; see also id. at 29 n.54 (noting that Felicetti made a further demand on the full Board on May 7, 2022); supra note 89 and accompanying text. 91 Id.; see supra note 89 and accompanying text.
19 B. The Board’s Good Faith and Due Care
With the disinterestedness and independence of a majority of the Board
conceded, “the only issues to be examined are the good faith and reasonableness of
its investigation.”92 The plaintiffs argue that they have sufficiently put these matters
in doubt for two reasons. First, they point to “structural flaws” in the Working Group
that they say undermine the Board’s independence and good faith in responding to
the demands. 93 Second, they assert that the Working Group’s rejection of the
demands was based on a grossly negligent and bad faith “flawed process.”94
Bad faith requires the pleading of particularized allegations that a director’s
“decision was so far beyond the bounds of reasonable judgment that it seems
essentially inexplicable” on any other ground.95 A plaintiff must allege that a board
“intentionally act[ed] with a purpose other than that of advancing the best interests
92 Spiegel, 571 A.2d at 777. 93 Pls.’ Answering Br. 27-36. 94 Id. at 36-57. 95 In re J.P. Stevens & Co., Inc. S’holders Litig., 542 A.2d 770, 780-81 (Del. Ch. 1988).
20 of the corporation.”96 The directors must have acted with scienter—either an intent
to harm or knowing indifference to the harm caused.97
Gross negligence is “conduct that constitutes reckless indifference or actions
that are without the bounds of reason.” 98 In the wrongful refusal context, “[t]he
gross negligence inquiry focuses on whether the board properly informed itself of
material information reasonably available to it before refusing the demand.”99 The
court considers whether the plaintiff has pleaded with particularity that the board
failed to investigate or pursued a process so inadequate that it may reasonably infer
gross negligence.100
96 Ironworkers, 2015 WL 2270673, at *27; see also In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006) (“A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation[.]”). 97 See, e.g., Ironworkers, 2015 WL 2270673, at *27 (“For the actions of directors to have been in bad faith, the directors must have acted with scienter, i.e., with a motive to harm, or with indifference to harm that will necessarily result from the challenged decision— here, that decision being rejection of the Plaintiff’s demand.”). 98 McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008). 99 Andersen, 2017 WL 218913, at *4. 100 See Ironworkers, 2015 WL 2270673, at *26 (explaining that to demonstrate wrongful refusal, a plaintiff can “plead particularized facts that reasonably imply gross negligence, in that the board acted in an uniformed manner by failing either to investigate the demand at all or in pursuing such an inadequate investigation, in light of the seriousness of the demand, that a court may reasonably infer a breach of the duty of care”); see also Drachman v. Cukier, 2021 WL 5045265, at *8 (Del. Ch. Oct. 9, 2021) (concluding that bad faith was adequately alleged where the board did “nothing” to investigate before sending a response that gave the demand the “back of the hand”). 21 No well-pleaded facts support a reasonable inference of bad faith or gross
negligence. The plaintiffs’ assertions about the Working Group’s formation and
structure are conclusory at best. As to the Working Group’s process, the plaintiffs
have not made particularized allegations putting the Board’s good faith and care in
doubt. The Complaint must be dismissed for failure to demonstrate wrongful refusal
under Rule 23.1.
1. The Alleged “Structural Flaws”
The plaintiffs allege that the Board acted in bad faith by forming a
“structurally flawed” Working Group. 101 In their view, the Board should have
delegated its decision-making authority over the demands to an independent
committee rather than form an administrative Working Group. They also insist that
the Board left the Working Group “hopelessly conflicted” when it appointed Pope—
a director “with exposure to a substantial likelihood of liability.”102
These arguments fail for several reasons. The Board that formed the Working
Group is concededly unconflicted. It was empowered to decide how to investigate
the demands as a matter of business judgment. That disinterested and independent
Board was also free to appoint Pope to the Working Group. Even if this choice were
101 Compl. ¶ 279; id. ¶ 285; see also Pls.’ Answering Br. 35-36. 102 Compl. ¶ 281.
22 imperfect, it is not fatal. There are no particularized allegations calling into doubt
Pope’s independence or disinterestedness.
a. The Working Group’s Authority
The plaintiffs allege that the “hopelessly conflicted Board[’s]” retention of
“ultimate control over whether to sue its members” or 3G “affiliates of its members”
indicates the “sham nature” of its process.103 This theory ignores that the plaintiffs
opted to make demands on the Board that formed the Working Group.104 Having
chosen that path, the plaintiffs can no longer argue that the Board was incapable of
proceeding impartially. There are also no particularized facts alleged suggesting that
the Board became conflicted post-demands such that it could no longer act
impartially in responding to them.105
There is no set path a board must take in assessing and responding to a
litigation demand.106 The Board was not required to vest the committee with its full
decision making authority.107 It was entitled to decide how to form and empower
103 Id. ¶ 285. 104 The Working Group was formed the month after Datnoff’s demand and well before Felicetti’s demand. See supra note 50; Report 29. 105 See supra notes 83-85 and accompanying text. 106 See Levine v. Smith, 591 A.2d 194, 214 (Del. 1991), overruled on other grounds by Brehm, 746 A.2d 244. 107 See Andersen, 2017 WL 218913, at *5 (“Plaintiff’s argument that Mattel’s investigation was flawed because the board did not form a special committee also fails.”); see also Bresalier v. Good, 246 F. Supp. 3d 1044, 1055 (D. Del. 2017) (rejecting an argument that 23 the Working Group. There is no basis for the plaintiffs or this court to second guess
that choice.
b. The Working Group’s Membership
The plaintiffs also argue Pope’s service on the Working Group indicates that
the Board’s response to the demands was a “sham.”108 In their view, Pope’s role as
Chairman of the Audit Committee left him unable to objectively investigate “the
Company’s accounting and financial statements or its filings with the SEC.”109 They
believe that the Board should have appointed a director who joined the Board after
the relevant period to serve alongside Mulder.110
The plaintiffs’ position relies on precedent where boards delegated their full
decision-making authority to committees, such as special litigation committees.111
the board should have appointed a special litigation committee instead of a demand review committee). 108 Compl. ¶ 285; id. ¶ 280; see Pls.’ Answering Br. 35-36. 109 Compl. ¶ 280. 110 Compl. ¶ 281; see Hr’g Tr. 37-38 (arguing that the Board “had other options who were not even on the [B]oard at the time of the wrongdoing” and were “available to be part of this Working Group process”). 111 See Pls.’ Answering Br. 29 (“[M]ember independence is paramount in the special litigation committee process.”); e.g., London v. Tyrell, 2010 WL 877528 (Del. Ch. Mar. 11, 2010); Lewis v. Fuqua, 502 A.2d 962 (Del. Ch. 1985); In re Oracle Corp. Deriv. Litig., 824 A.2d 917 (Del. Ch. 2003); see also City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, 2019 WL 549938, at *1-2 (Del. Ch. Feb. 12, 2019) (considering and rejecting allegations that a special committee was interested or lacked independence where it was given the “authority to act on behalf of the Board”); id. at 8-9 (observing that the tacit concession doctrine should not be extended to committees with full decision making authority). 24 In that context, the committee must demonstrate that its independence is “above
reproach” because the board is overall unqualified to consider a demand or
lawsuit. 112 Here, however, a different standard applies. The plaintiffs have
acknowledged that the Board was qualified to respond to the demands and have not
sufficiently pleaded that the Board became conflicted when its membership changed.
The fact that the plaintiffs made demands does not, of course, mean that the
Board’s independence and disinterestedness has been conclusively established.113
Still, Pope’s appointment to the Working Group does not give me reason to question
the Board’s good faith in forming it. There are no particularized allegations
indicating that Pope lacked independence, faced a substantial likelihood of liability
for the issues raised in the demands, or was otherwise biased to a degree affecting
his judgment.114 Pope is not alleged to have benefitted—in any way—from the
wrongdoing alleged in the Complaint. He has no disabling ties to 3G or any
purportedly conflicted individual.
112 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1055 (Del. 2004) (quoting Lewis, 502 A.2d at 967). 113 Scattered Corp., 701 A.2d at 74 (“Simply because the composition of the board provides no basis ex ante for the stockholder to claim with particularity and consistently with Rule 11 that it is reasonable to doubt that a majority of the board is either interested or not independent, it does not necessarily follow ex post that the board in fact acted independently, disinterestedly or with due care in response to the demand.”). The plaintiffs make no argument that Mulder or the Working Group’s outside advisors 114
were conflicted. They also do not argue that any member of the Board was beholden to Pope. 25 The plaintiffs’ sole critique is that Pope was the Audit Committee Chairman
during the relevant events.115 Pope’s role alone does not, however, mean that he
faces a substantial likelihood of liability for a non-exculpated claim.116 Delaware
courts reject the premise that “membership on the Audit Committee is a sufficient
basis to infer the requisite intent.”117
To show that Pope faced a substantial likelihood of liability for the breach of
fiduciary duty claims in the Complaint, the plaintiffs would need to demonstrate bad
faith.118 For their Malone claim, they must plead with particularity that Pope knew
public statements he disseminated were materially misleading when made.119 For
115 Pls.’ Answering Br. 34-35. 116 See Stachel Aff. Ex. 7 (Kraft Heinz certificate of incorporation) art. VIII(B). 117 Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) (explaining that a director’s service on an audit committee was an insufficient basis to infer liability); see also Rattner v. Bidzos, 2003 WL 22284323, at *12-13 (Del. Ch. Sept. 30, 2003); Kraft Heinz, 2023 WL 2745118, at *8 (“Members of the Audit Committee may have a specific responsibility for oversight of matters related to the allegedly misleading shareholder communications, but it does not follow that they had knowledge of deception or wrongdoing in the dissemination of those communications or the materials they relied on, particularly considering that board members are entitled to rely in good faith on the reports of employees and officers.”). 118 See McElrath v. Kalanik, 224 A.3d 982, 991-92 (Del. 2020) (explaining that to identify a non-exculpated claim, a plaintiff must plead that a director was “motivated by an actual intent to do harm,” consciously disregarded his duties, or “knew he was so acting” (citation omitted)). 119 See Malone v. Brincat, 722 A.2d 5, 14 (Del. 1998) (explaining that a plaintiff must plead facts showing that a director “knowingly disseminat[ed] materially false information” and was “deliberately misinforming shareholders”). 26 their Caremark claim, they must sufficiently allege that Pope consciously
disregarded a red flag of misconduct.120 They do neither.
The plaintiffs merely state that Pope attended Board and Audit Committee
meetings where the distressed reporting units, trademarks, and brands suffering from
impairment risks were discussed with Knopf before 3G’s stock sale. 121 Pope
purportedly received some unspecified information at these meetings. He also
“caused” Kraft Heinz to issue Form 10-Ks in 2017 and 2018 that made disclosures
about impairment testing.122 From that vague premise, the plaintiffs assert that Pope
knew Kraft Heinz’s impairment testing was ineffective, covered it up, and allowed
it to continue.
Pleading that a director “‘caused’ or ‘caused or allowed’ the [c]ompany to
issue certain statements is not sufficient particularized pleading” under Rule 23.1.123
120 See Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006). The plaintiffs do not plead that Pope utterly failed to cause Kraft Heinz to establish a system of controls. They concede the existence of an Audit Committee and relevant corporate policies. See TVI Corp. v. Gallagher, 2013 WL 5809271, at *15-16 (Del. Ch. Oct. 28, 2013) (dismissing a Caremark claim where the plaintiffs “acknowledge[d] that the Board maintained an audit committee”). 121 Compl. ¶ 280 (“Pope was present at the Audit Committee Meetings where the distressed reporting units, trademarks, and brands on the fringe of impairment were identified and discussed with . . . Knopf before 3G Capital sold a huge block of stock at artificially inflated prices.”); see Transmittal Aff. of Carmella P. Keener in Supp. of Pls.’ Omnibus Br. in Opp’n to Defs.’ Mot. to Dismiss (Dkt. 82) (“Keener Aff.”) Ex. 1. 122 Compl. ¶¶ 168-169. 123 In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 133, n.88 (Del. Ch. 2009); see also In re Zimmer Biomet Holdings, Inc. Deriv. Litig., 2021 WL 3779155 (Del. Ch. 27 Nor is merely alleging that a director served on a committee tasked with overseeing
matters within which a corporate trauma occurred.124 Even if the allegations suggest
that Pope understood Kraft Heinz was facing business headwinds or approaching
impairment triggers, I cannot reasonably conclude that he knew misconduct was
occurring or that Kraft Heinz’s public statements were untrue.125 Any such inference
is further undercut by the plaintiffs’ acknowledgement that Pope contemporaneously
relied on reports of officers and outside advisors.126
The limited statements in the Complaint about Pope cannot support an
inference that he knowingly issued false statements or allowed misconduct to
proceed unabated. There are no particularized allegations that he received
information placing him on notice of wrongdoing. Pope’s receipt of presentations
Aug. 25, 2021) (“A statement that the documents were signed by the Director Defendants, or that they ‘approved’ the disclosures and ‘caused’ or ‘consented to’ their filing is not— without more—a particularized allegation of fact.” (citation omitted)), aff’d, 279 A.3d 356 (Del. 2022) (TABLE). 124 See Citigroup, 964 A.2d at 128; South v. Baker, 62 A.3d 1, 17 & n.6 (Del. Ch. 2012) (“[A]n allegation that the underlying cause of a corporate trauma falls within the delegated authority of a board committee does not support an inference that the directors on that committee knew of and consciously disregarded the problem.” (citation omitted)). 125 See Citigroup, 964 A.2d at 130 (“[T]he mere fact that a company takes on business risk and suffers losses—even catastrophic losses—does not evidence misconduct.”). 126 See Compl. ¶¶ 90, 95, 97, 99, 102, 107, 108, 118, 123, 130, 137, 142, 147, 150, 154, 172, 178, 182-83, 186, 189, 245, 296; see also 8 Del. C. § 141(e); Graham v. Allis- Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963) (“[D]irectors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong.”). 28 about impairment risks or oversight responsibility for Kraft Heinz’s financial
reporting comes nowhere close to indicating disloyalty. Regardless of whether Pope
was the best choice for the Working Group, his involvement is not grounds to second
guess the Board’s good faith in investigating the demands.127
2. The Alleged Process Flaws
The plaintiffs next argue that the demands were wrongfully refused because
the Working Group’s process and conclusions are flawed. They believe that the
process was grossly negligent because certain information was not obtained and
prior investigatory work was relied upon. They also maintain that the determinations
in the Report are contradicted by evidence and common sense, indicating bad faith.
Each argument is deficient.128
127 The Complaint also brings claims against Pope (and the other individual defendants) for unjust enrichment and contribution and indemnification. See supra note 66. Other than Pope’s receipt of ordinary director fees and stock awards (Compl. ¶ 51), these claims rest on the same conclusory allegations addressed above. The plaintiffs also seemingly abandoned their argument that Pope faces a substantial likelihood of liability for the federal derivative action. See Reply Br. in Supp. of Nominal Def.’s and the Individual Defs.’ Mot. to Dismiss Under Rules 23.1 and 12(b)(6) (Dkt. 88) 7; Pls.’ Answering Br. 32. It would fail in any event. The federal derivative action was dismissed. Further, Delaware courts reject the notion that directors face a substantial likelihood of liability because they were named defendants in lawsuits or “would be deciding to sue themselves.” Citigroup, 964 A.2d at 121; see Aronson, 473 A.2d at 815 (explaining that naming directors as defendants is insufficient to plead a substantial likelihood of liability). 128 The plaintiffs’ accusations of bad faith and gross negligence are muddled because they argue that matters reflect both bad faith and gross negligence. I have tried to address the allegations in a logical way that considers whether they appear aimed at undermining the directors’ care or good faith. It should be understood that none of the plaintiffs’ allegations are sufficient to rebut either. 29 a. Adequacy of the Investigation
The Working Group’s process spanned two years. It and its advisors reviewed
more than 150,000 Kraft Heinz documents, plus SEC and court filings and other
materials.129 They interviewed 12 people, including current and former Kraft Heinz
directors and officers. The Working Group reviewed a 63-page report by
AlixPartners on accounting issues related to the $15.4 billion impairment charge.130
Simpson Thacher also conducted an evaluation of the prior investigation into
procurement-related issues, which had been led by Gibson Dunn & Crutcher LLP.131
Simpson Thacher spent 5,000 hours on the investigation and AlixPartners devoted
1,500 hours to its work.132 At the end of this process, the Working Group produced
a 110-page Report (excluding exhibits) that was accepted by the full Board.133
Despite these facts, the plaintiffs argue that the Working Group’s process was
deficient for three reasons.134 The Working Group did not request 3G’s internal
documents. 135 It did not interview the confidential witnesses discussed in the
129 Report 55-57. 130 Report App’x A. 131 Report 52. 132 Id. at 4-5. 133 Stachel Aff. Ex. 4; see Compl. ¶ 271. 134 Pls.’ Answering Br. 42-46. 135 Compl. ¶ 303.
30 securities class action complaint.136 And it relied on Gibson Dunn’s procurement-
related investigation.137
Although directors are obligated to act with care when responding to a
demand, “there is obviously no prescribed procedure that a board must follow.”138
The Working Group’s “choice of people to interview or documents to review is one
on which reasonable minds may differ.” 139 The critical inquiry is whether the
directors neglected to consider material facts that are reasonably available.140
According to the Report, the Working Group determined that 3G and
affiliated persons lacked material non-public information belonging to Kraft Heinz
before the August 2018 stock sale. 141 The focus of a Brophy analysis is on the
corporation’s confidential information, and the Working Group determined from
Kraft Heinz’s documents that there was no material non-public information at issue.
136 Id. ¶ 315. 137 Id. ¶¶ 301-02. 138 Levine, 591 A.2d at 214. 139 Mount Moriah Cemetery v. Moritz, 1991 WL 50149, at *4 (Del. Ch. Apr. 4, 1991), aff’d, 599 A.2d 413 (Del. 1991). 140 See Brehm, 746 A.2d at 259 (explaining that “the informational component of the directors’ decisionmaking does not mean that the Board must be informed of every fact” but that they are “responsible for considering only material facts that are reasonably available, not those that are immaterial or out of the Board’s reasonable reach”); Andersen, 2017 WL 218913, at *4 (“The gross negligence inquiry focuses on whether the board properly informed itself of material information reasonably available to it before refusing the demand.”). 141 Report 92-103.
31 It is unclear why 3G’s internal documents were needed to reach this conclusion or
why they would have altered the Working Group’s findings and recommendations.
As to the confidential witness interviews, there is no basis to conclude that
they would have been material rather than cumulative. The plaintiffs aver that the
Working Group should have spoken with the 26 confidential witnesses because
certain statements from them were used in the securities action complaint. But an
investigatory committee is not required to speak to every person with relevant
information.142 The plaintiffs’ suggestion that these witnesses had unique material
information compared to the dozen witnesses interviewed and tens of thousands of
documents reviewed is speculative.143 There is no factual basis to infer that the
interviews would have altered the Working Group’s conclusions or the Board’s
decision to refuse the demands.144
142 See Moritz, 1991 WL 50149, at *4 (“Inevitably, there will be potential witnesses, documents and other leads that the investigator will decide not to pursue. That decision will not be second guessed by this Court on the showing made here.”); Belendiuk v. Carrión, 2014 WL 3589500, at *6 (Del. Ch. July 22, 2014) (“This Court repeatedly has held that a stockholder’s criticisms regarding the types of documents reviewed or the persons interviewed in connection with an investigation do not rise to the level of gross negligence, because those choices are ones on which reasonable minds may differ.”). 143 Compl. ¶¶ 315-19. 144 See Ironworkers, 2015 WL 2270673, at *26 n.255 (rejecting an argument that a committee was grossly negligent for failing to interview certain individuals where there were no particularized allegations that “information unique to these individuals” would “have changed the Board’s determination to refuse the demand, in light of the otherwise exhaustive investigation conducted”). 32 The Working Group’s use of Gibson Dunn’s prior investigatory work is also
not indicative of a defective investigation. 145 According to the plaintiffs, the
Working Group’s reliance on a “years-old investigation into the issues” suggests that
it “was interested only in absolution, not the truth.”146 This theory is undermined by
the Report.147
Simpson Thacher concluded that Gibson Dunn’s process was sufficiently
robust that the Working Group could rely on it; the Working Group agreed. Gibson
Dunn had collected and reviewed 2.2 million documents from 24 custodians and
conducted 105 interviews of 77 current and former Kraft Heinz employees. 148
Simpson Thacher supplemented Gibson Dunn’s investigation in several respects,
including additional witness interviews and a separate evaluation of the remedial
145 See Kops v. Hassell, 2016 WL 7011569, at *4 (Del. Ch. Nov. 30, 2016) (holding that the board was entitled to rely on a prior investigation conducted in response to a previous stockholder demand and rejecting arguments that such reliance implied gross negligence or bad faith by a demand review committee); see also Gould ex rel. Bank of Am. v. Moynihan, 275 F. Supp. 3d 487, 496-97 (S.D.N.Y. 2017) (applying Delaware law and concluding that the board “was adequately informed when it refused the Demand” where it “had been responding to significant regulatory investigations and civil lawsuits” and “drew on its existing knowledge developed in the course of responding to related allegations”). 146 Compl. ¶ 321. 147 Report 52-54. 148 Id. at 52.
33 measures implemented by the company.149 This record in no way implies grossly
negligence—much less bad faith—by the Working Group.
b. Reasonableness of the Conclusions
The Report stated that, with the “potential exception” of Pelleissone and
Hofmann, there was no evidence showing the individuals and entities named in the
demands had violated applicable law.150 The Working Group determined there was
no basis to conclude that material misstatements or omissions were made with
scienter in Kraft Heinz’s public statements, SEC filings, or consolidated
financials.151 The Working Group found no evidence of wrongdoing concerning the
Company’s procurement function or the $15.4 billion impairment charge. 152 It
identified no evidence “establishing that there are colorable claims relating to insider
trading” by 3G. 153 With respect to Pelleissone and Hofmann, it concluded that
litigation would not be in Kraft Heinz’s best interest based on practical
considerations.154
149 Id. at 54. 150 Id. at 12. 151 Id. at 14-15, 61-76. 152 Id. at 16-18, 77-88. 153 Id. at 91. 154 Id. at 12-14, 63-64, 77-78. It bears noting that neither Pelleissone nor Hofmann were 3G partners. 34 The plaintiffs take issue with these assessments as incorrect, unsupported, or
incredible. 155 But there are no well-pleaded facts contradicting them. “[M]ere
disagreement with the [Working Group’s] ultimate conclusion, as well as its
subsidiary conclusions leading thereto, will be insufficient to raise a reasonable
doubt that the Board acted in good faith and on an informed basis.”156
The plaintiffs’ lead argument is that both internal documents and common
sense belie the Working Group’s finding that 3G lacked material non-public
information when it sold stock in August 2018. Much is made of a July 24, 2018
email from a 3G employee to Knopf—an email discussed in the Report.157 The
Working Group found that this email reflects notice of 3G’s intention to sell
approximately 19 million shares from its Fund IV and requests information from
Kraft Heinz in connection with the sale. 158 The plaintiffs read the email as
evidencing insider trading because the sender sought Kraft Heinz’s valuation using
“realistic” assumptions “based on [the] current 2019 view.”159 The plaintiffs say that
this statement implies the publicly available information was unrealistic and
155 See Pls.’ Answering Br. 37-39, 47-50. 156 Ironworkers, 2015 WL 2270673, at *27. 157 Keener Aff. Ex. 2 (email from M. Romaniero of 3G to D. Knopf and T. Dadon of Kraft Heinz); see Pls.’ Answering Br. 47; Hr’g Tr. 40-43. 158 Report 92. The email also references a lockup pertaining to Fund III; the intended sale was for Fund IV. Keener Aff. Ex. 2. 159 Keener Aff. Ex. 2.
35 unreliable, requiring 3G to seek out non-public “realistic” information directly from
Kraft Heinz.160
The plaintiffs’ interpretation is strained. The email came at the end of the
quarter.161 It does not express any concern about the reliability of the projections
or—more importantly—the impairment risks. Nor does it suggest that the trading
defendants learned material information different from what the market knew.162 It
is hardly a smoking gun.
Regardless, it was the Working Group’s prerogative to evaluate the document.
The email was assessed after the Working Group and its counsel reviewed the
circumstances surrounding the sale, including by interviewing Knopf (who received
the email) and Behring (who made the information request).163 “The existence of
160 See Hr’g Tr. 41 (plaintiffs’ counsel explaining this theory). 161 Compl. ¶ 172. 162 See In re Camping World Hldgs., Inc. S’holder Deriv. Litig., 2022 WL 288152, at *9- 10 (Del. Ch. Jan. 31, 2022) (explaining that an assessment of materiality requires well- pleaded allegations of a “substantial likelihood” that the information “would have assumed actual significance in the deliberations of a person deciding whether to buy, sell, vote, or tender stock” and that “the context of the supposedly material information, including the information that was known to the market” is relevant (citation omitted)), aff’d, 285 A.3d 1204 (Del. 2022); Tilden v. Cunningham, 2018 WL 5307706, at *19 (Del. Ch. Oct. 26, 2018) (stating that courts will not credit conclusory allegations that “because [defendants] were on the Board and in management” they “must have obtained some additional, material nonpublic information”). 163 Report 57.
36 one or a few troubling documents is insufficient” to support an inference of bad faith
by the Working Group and Board.164
Next, the plaintiffs quarrel with the results of AlixPartner’s forensic
accounting review.165 In a report attached as Appendix A to the Working Group’s
Report, AlixPartners opined that Kraft Heinz did not experience a sustained decline
in market capitalization or share price before November 1, 2018 that would have led
it to recognize an impairment triggering event. 166 The plaintiffs insist that this
analysis is flawed because Kraft Heinz allegedly faced business headwinds and other
“potential triggering events” during this period. 167 Conclusory allegations and
164 Zucker v. Hassell, 2016 WL 7011351, at *10 (Del. Ch. Nov. 30, 2016). The plaintiffs say that Zucker is distinguishable because the committee there was shown the document in question but the directors here relied on counsel. Pls.’ Answering Br. 48. This argument is meritless. The Working Group and Board were entitled to rely on Simpson Thacher. See 8 Del. C. § 141(e). The “informed decision to delegate a task is as much an exercise in business judgment as any other.” Grimes, 673 A.2d at 1214, overruled on other grounds by Brehm, 746 A.2d 244. The email here is also not so “troubling,” as in Zucker, that I would expect the Working Group to have personally reviewed it. 165 Compl. ¶¶ 294-95, 306-10. 166 Report App’x A at 18-22 (stating that there was no sustained decline in share price or market capitalization before November 1, 2018 both in “absolute terms and relive to [Kraft Heinz’s] peers”). Although the Complaint alleges other share price declines, it does not allege with particularity that there was a sustained decline both in absolute terms and relative to the company’s peers. 167 Pls.’ Answering Br. 52; see also id. at 51-53.
37 suppositions cannot, however, put in doubt the Board’s good faith in weighing the
analysis of its independent advisor.168
The plaintiffs further attack the Working Group for giving short shrift to the
opinion denying a motion to dismiss the securities class action in the Northern
District of Illinois. Twice, though, the Report states that the Working Group
carefully considered the pleadings in that case while remaining mindful that the
operative standard in the opinion required the federal court to treat allegations as
true.169 As the report correctly noted, a different benchmark guided the Working
Group’s efforts. The Working Group was not accepting allegations but charged with
making a fact-based inquiry into whether pursuing litigation would be in the best
interest of Kraft Heinz and its stockholders.170
168 Ironworkers, 2015 WL 2270673, at *30 (“[T]hat the Plaintiff disagrees with the Committee’s conclusions is simply insufficient to raise a reasonable doubt that the Board's adoption of the Committee's recommendation was made in good faith, and the Plaintiff has made no other proffer as to why the decision to decline to pursue litigation on this claim must be in an interest other than that of the corporation.”). 169 Report 10-11, 16. 170 Id. at 11. The argument that the Working group “downplay[ed] the SEC’s Order,” in which accounting improprieties were found, is similarly baseless. Pls.’ Answering Br. 5. The Report explains that the Working Group considered all finance and gatekeeping personnel in addition to Hofmann and Pelleissone. Id. at 79-80. It further details the Working Group’s consideration of the facts of the misconduct and the company’s remedial measures. Id. at 77-82. 38 Finally, the plaintiffs disagree with the Working Group’s conclusion that five
practical factors cut against litigation.171 These factors are: (1) that the costs of
litigation would outweigh any potential recovery from the demands’ targets,
especially considering advancement and indemnification obligations; (2) the
exculpatory provision in the company’s charter; (3) the diversion of key personnel
that would impede the business, especially given existing remedial efforts; (4) the
risk of undermining the company’s defenses in pending litigation; and
(5) unwarranted reputational harm to Kraft Heinz.172 The Working Group weighed
these factors individually and collectively in concluding that litigation was
unadvisable, including against Pelleissone and Hofmann.173 The factors were not
assessed in a vacuum but in view of the Working Group’s findings on the merits.
The plaintiffs’ insistence that I reject these considerations as “unpersuasive”
may be the worst example of their desire to substitute their subjective views for the
Board’s.174 “It is within the bounds of business judgment” for a board to refuse a
litigation demand after concluding “that a lawsuit, even if legitimate, would be
171 Pls.’ Answering Br. 54-57. 172 Report 107-110. 173 Id. 174 See Pls.’ Answering Br. 54.
39 excessively costly to the corporation or harm its long-term strategic interests.”175
Disagreement does not plead bad faith.
* * *
Viewed together, the plaintiffs’ allegations fail to meet the Rule 23.1 standard
for pleading wrongful refusal. The fact of their demands concedes that the Board ex
ante could consider them impartially. There are no well-pleaded facts calling into
question the Board’s disinterestedness or independence ex post. Arguments about
“structural flaws” in the Working Group fail on that basis, and because Pope did not
face a substantial likelihood of liability.
The plaintiffs’ challenges to the Working Group’s process and Board’s
response to the demands are similarly lacking. The Working Group undertook a
thorough investigation and reached conclusions based upon evidence and
independent advice. There are no well-pleaded facts creating a reasonable doubt
that the Board acted in good faith and with due care when it rejected the demands.
175 In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 986 (Del. Ch. 2007); see also In re AbbVie Inc. S’holder Deriv. Litig., 2015 WL 4464505, at *6 (Del. Ch. July 21, 2015) (observing that Delaware courts have “long recognized that derivative litigation is burdensome to companies, by way of the direct costs of the litigation, including advancement and indemnification obligations, as well as indirect costs, such as distraction to management and the board, and possible detriment to employee morale” (citation omitted)); Busch ex rel. Richardson Elecs., Ltd. v. Richardson, 2018 WL 5970776 (Del. Ch. Nov. 14, 2018) (holding that a complaint failed to plead bad faith, in part, because the special committee concluded that it was “unclear that the Company was harmed,” that an exculpatory charter provision might apply, and that the “potential costs of bringing any lawsuit outweigh the potential benefits”). 40 III. CONCLUSION
The plaintiffs have failed to allege that the Kraft Heinz Board wrongfully
refused their demands. The defendants’ Rule 23.1 motion to dismiss is granted and
the Complaint is dismissed with prejudice. As a result, the Rule 12(b)(6) motion to
dismiss is moot.
Related
Cite This Page — Counsel Stack
In Re Kraft Heinz Demand Refused Derivative Stockholder Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-kraft-heinz-demand-refused-derivative-stockholder-litigation-delch-2024.