Kraft Heinz Wins Dismissal of Consolidated Demand-Refused Stockholder Derivative Action

Paul, Weiss won the dismissal, with prejudice, of a high-stakes stockholder derivative lawsuit on behalf of The Kraft Heinz Company and certain current or former Kraft Heinz officers and directors over Kraft Heinz’s performance and cost-cutting efforts.

In their consolidated lawsuit filed in the Delaware Court of Chancery against our clients and 3G Capital, Inc., and certain affiliates, plaintiffs alleged that the company made misleading statements about its performance amid allegedly imprudent and aggressive cost-cutting efforts, and demanded that the board investigate, litigate and remedy the alleged wrongdoing. According to the plaintiffs, these purportedly misleading statements were followed by the disclosure of disappointing financial results, including $15.4 billion in non-cash impairment charges with respect to certain reporting units and intangible assets, as well as a significant drop in Kraft Heinz’s stock price in February 2019.

The plaintiffs further claimed that the purportedly misleading statements allowed certain defendants to profit improperly from sales of the company’s stock ahead of the February 2019 stock drop, including a $1.2 billion stock sale in August 2018 by entities affiliated with 3G Capital, and that the alleged misstatements harmed the company, including resulting in a $450 million settlement of a securities class action and a $62 million settlement with the Securities and Exchange Commission.

The Kraft Heinz board commissioned an administrative working group to investigate the allegations and make a recommendation to the full board. With the assistance of independent legal and forensic accounting advisors, the group thoroughly investigated the plaintiffs’ allegations and ultimately recommended that the board not pursue litigation because it was not in the best interest of the company. The full board agreed, and this lawsuit followed. Among other things, the plaintiffs alleged that the board’s process was “structurally flawed” because the working group was not empowered as a special litigation committee with final decision-making authority and because one of the directors on the administrative working group was the chair of the audit committee during the challenged events.

In her memorandum opinion regarding Kraft Heinz’s motion to dismiss, Vice Chancellor Lori Will dismissed the complaint with prejudice, finding that the plaintiffs had not satisfied Delaware’s exacting demand-refusal pleading standard because they failed to allege particularized facts creating a reasonable doubt that the board investigated and rejected the demands in good faith and with due care. In particular, the court reasoned that the plaintiffs’ belief that the board should have empowered an administrative working group of directors with final decision-making authority was at odds with the plaintiffs’ tacit concession of the board’s impartiality. The court further reasoned that the plaintiffs’ concerns about the working group including a director who chaired the audit committee during the challenged events were “meaningless, given the dearth of well-pleaded allegations that he faced a substantial likelihood of liability.” Finally, the court rejected the plaintiffs’ “series of complaints about the findings and recommendations in the working group’s report” as “unsupported disagreements.”

The Paul, Weiss team included litigation partners Daniel Kramer; Andrew Ehrlich, who argued the motion; and William Clareman and counsel Matthew Stachel.