Judge Gale's approval last week of a class action settlement, in In re Krispy Kreme Doughnuts, Inc. Shareholder Litigation, 2018 NCBC 1 gives me another opportunity to rail against disclosure only settlements. You know that I don't like them. If you don’t know that, I’ve written on this subject several times. Like here, here, and here.
The Krispy Kreme shareholder class litigation followed what has become the inevitable path for almost every merger deal. The transaction was announced on May 9, 2016. Seven shareholder lawsuits alleging that the Krispy Kreme board members had breached their fiduciary duties in agreeing to the transaction (five in NC state courts and later consolidated in the NC Business Court) followed in the next month.
The plaintiff shareholders filed a motion for a preliminary injunction blocking any shareholder vote on the transaction until supplemental disclosures in Krispy Kreme's proxy statement were made. The very next day, in connection with a settlement agreement, Krispy Kreme filed a Form 8-K to supplement its proxy statement. The shareholder vote went ahead on July 27th, with 95% of those voting approving the deal.
The value of those additional disclosures was assessed by Judge Gale in determining whether to approve the settlement. As the Opinion didn't consider the amount of attorneys' fees to be awarded to Plaintiffs' class counsel (there has not yet been an application for fees), Judge Gale assessed the "give and the get" of the "give" of the release by the class against the materiality of the additional disclosures (the "get").
North Carolina assesses materiality based on the U.S. Supreme Court's definition of that term in TSC Industries, Inc. v. Northway, 4266 U.S. 48 (1976). The holding in TSC Industries was:
[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . .It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.
Id. at 449.
Okay. Let's assume that I am a reasonable investor looking at the Krispy Kreme supplemented proxy. Would the supplemental disclosures obtained through the blood and sweat of Plaintiffs' counsel have "significantly altered the 'total mix of information made available" to me in the original proxy?
I don't think so.
First, "[t]he Supplemental Disclosures included the specific projected unlevered, after-tax free cash flows of Krispy Kreme for the remainder of 2017 and for the fiscal years 2018 through 2023,as derived from the financial projections provided to Wells Fargo by Krispy Kreme management." This disclosure was designed to deal with the lack of disclosure of Krispy Kreme’s specific projected unlevered after-tax free cash flows Wells Fargo used in its DCF analysis." Op.
That would not change the mix of information before me because it is actually meaningless to me, Unlevered? Come on. What? I don't have a clue what that supplemental disclosure means. Maybe a hedge fund manager or an MBA student focusing on finance would. But they would be too knowledgeable to be considered "reasonable investors".
Class counsel argued that the differences between the discounted cash flow analyses, while "slight in any particular year" that "the differences over time have greater significance." Op. ¶58. Judge Gale accepted that as "a reasoned argument that some shareholders might have found" that the Supplemental Disclosure regarding the DCF analysis was material." Op. ¶58.
The next supplemental disclosure has a little more meaning to me. It was in response to Plaintiffs complaining that the original Proxy did not disclose whether the Krispy Kreme board "had discussed post-Merger employment opportunities at the inception of merger negotiations." Op. ¶52.
In a less than stunning supplemental disclosure, the Defendants added this nugget of questionable value:
that Krispy Kreme board members, in preliminary discussions about a potential merger . . . discussed [the buyer's] 'history or managing its portfolio companies for long-term growth and relying on company management to run the business.'
So board members also employed by Krispy Kreme might have been influenced to vote in favor of the transaction because they might keep their jobs? That speculation makes no difference to me. And how many board members served in company management? Did they have excessively rich employment contracts being drafted with the buyer of Krispy Kreme's assets? Were their votes essential to the approval of the deal?
Another supplemental disclosure concerned the previous relationship of Wells Fargo -- the investment banker on the deal --- to Krispy Kreme and its acquiror.
The supplemental disclosures revealed that in the two years before the deal was struck, Krispy Kreme had paid Wells Fargo $300,000 for "investment banking services" and that an affiliate of the buyer had paid Wells Fargo $1 million "in connection with corporate loans." Op. ¶52.
Would that have caused reasonable investor me to discount Wells Fargo's analysis of the transaction because they were tainted by their previous receipt of fees? No. $1.3 million doesn't carry the influence that it used to.
There's at least one other Krispy Kreme ruling imminent from the Business Court. That will be the ruling on the fee application from the Plaintiff class' lawyers. I will be watching for that.
I should probably disclose that I prefer Dunkin’ Donuts over Krispy Kreme.