Investor Suit Over A&P Woe Given Partial Go-Ahead
The U.S. District Court for the District of New Jersey April 30 allowed investors to proceed in part with their securities class action over struggles at venerable supermarket operator Great Atlantic & Pacific Tea Co. (Dudley v. Haub, D.N.J., No. 2:11-cv-05196(WJM), 4/30/13).
Judge William Martini said that the A&P defendants are current or former officers and directors of A&P. Defendant Yucaipa Companies LLC is a Los Angeles-based private equity firm headed by defendant Ronald Burkle.
In 2007, the court explained, A&P acquired Pathmark Stores Inc., a discount supermarket chain in which Yucaipa had been the majority shareholder. After the acquisition, A&P discovered that Pathmark had “numerous hidden liabilities,” allegedly including “organized crime within the stores,” the court said. In addition, A&P allegedly discovered hundreds of millions of dollars worth of pension and vacation liabilities held by Pathmark, which A&P had not uncovered during due diligence.
In July 2009, the A&P defendants announced that Yucaipa had agreed to invest $115 million in the company in the form of newly issued preferred shares, together with an additional $60 million investment by Tengelmann Warenhandelsgesellschaft KG, A&P’s existing majority shareholder.
In return, the court recounted, Yucaipa would receive an ownership interest in A&P and would be entitled to appoint two members of A&P’s board. The new investment and the additional investment by Tengelmann were conditioned on a notes offering by A&P. Further struggles followed, and in January 2010, the A&P defendants recognized a $321.8 million impairment charge, representing an impairment of the entire amount of reported goodwill for the Pathmark business, the court said. It added that after the announcement of the impairment charge, there was a substantial drop in A&P stock.
A&P’s “turnaround plan” eventually failed and in December 2010, the company issued a press release in indicating that it had filed for bankruptcy protection under Chapter 11, the court said. In November 2011, the court said, Yucaipa and two other investors agreed to provide a $490 million capital investment to fund A&P’s bankrupt reorganization plan, which the bankruptcy court approved. The bankruptcy court confirmed A&P’s plan, and A&P emerged from bankruptcy with about one-third of its pre-petition debt. Yucaipa emerged from the bankruptcy with a minority interest in the newly privatized A&P, and Burkle became chairman of the board.
This litigation followed. The court first determined that the plaintiffs “have plausibly alleged” that certain individual A&P defendants “made material misrepresentations in connection with the Goodwill Impairment Charge” for the Pathfinder business.
Forward Looking Statements
Meanwhile, the court said that the vast majority of the A&P defendants’ allegations concerning the turnaround plan are “inactionable. Many of these alleged misrepresentations are classic forward-looking statements. These forward looking statements were accompanied by” meaningful cautionary language, identifying specific risk factors, such as the possible adverse effects of changes in customer shopping habits; cash flow and supplier quality control problems that could affect customer satisfaction and operations; and the possibility that failure to complete the turnaround plan would raise substantial doubts about the company’s ability to continue as a going concern. These statements fall within the Private Securities Litigation Reform Act safe harbor “and are not actionable,” the court determined.
“The bulk of the remaining statements are expressions of corporate optimism that are too vague to be actionable,” the court wrote.
However, the court determined that that two of the statements made to analysts were sufficiently pled to be misleading. First, court said that a statement indicating that A&P’s relationship with its vendors was “collaborative” and “supportive” is misleading given that various suppliers allegedly were so concerned about the company’s creditworthiness that they were requiring cash upon delivery.
Second, the court determined that a statement about A&P’s “dark store” leases-properties where A&P had stopped operating but was still liable for lease payments under long-term agreements–is actionable. This statement asserted that the company was minimizing any negative cash flow related to dark stores.
No reasonable investor, the court said, would understand that statement to mean that the company had stopped paying rent for these stores and was involved in numerous lawsuits as a result. Further, it is “certainly plausible that the Company’s lease defaults would have been considered material information to investors give that this may have been one of the first indications that the Company had become insolvent,” the court wrote.
In other rulings, the court determined that the plaintiffs’ failed to adequately allege scienter against Yucaipa defendants, and dismissed them from the suit.