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 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.
“The bulk of the remaining statements are expressions of corporate optimism that are too vague to be actionable,” the court wrote.
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.
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