The parties in the Kraft Heinz Securities Group securities class action litigation have agreed to settle the case for $450 million, a massive settlement that makes the list of all-time largest settlements. The settlement is subject to court approval. A copy of the parties’ stipulation and agreement of settlement, which was filed with the court on May 5, 2023, can be found here.
Kraft Heinz was formed through a 2015 merger between Kraft Foods Group, Inc. and H.J. Heinz Holding Corporation, a transaction that was orchestrated by Brazilian private equity firm 3G Capital. In February 2019, the merged company announced that it was taking a $15.4 billion goodwill charge in connection with its write-down of the value of the Kraft and Oscar Mayer brands. In the subsequently filed securities class action lawsuit, the plaintiff alleged that the goodwill charge was one of the largest goodwill impairment charges taken by any company since the financial crisis.
On February 24, 2019, the first of several securities class action lawsuits was filed against Kraft Heinz, certain of its directors and officers, and 3G Capital. The various complaints were ultimately consolidated. The action alleges that while Kraft Heinz claimed following the merger that the company was reporting increased profits and profit margins due to cost cutting “synergies” between the combined companies, in fact 3G was imposing comprehensive costs cuts that “gutted” the company’s investments in R&D, quality control, and its supply chain. The plaintiffs allege that these undisclosed cost cuts caused a deterioration in the brand value of the company’s food brands and harmed key customer relationships, which drove the goodwill impairment. In response to the impairment and related news, analysts criticized the company for having concealed “bad news.”
In addition, the plaintiffs alleged, Kraft also disclosed that it received a subpoena from the SEC in the same quarter it took the write-down, and that the company was conducting an internal investigation relating to the company’s side agreements with vendors. Because of the subpoena and investigation, the company took an additional $25 million charge relating to its accounting practices. Kraft Heinz ultimately settled the SEC procurement-related allegations for $62 million.
The plaintiff alleged violations of Sections 10(b) and 20(a) against the Kraft Heinz defendants and also alleges control person liability under Section 20(a) against 3G Capital. The defendants filed motions to dismiss. On August 21, 2021, the court denied the defendants motion to dismiss. The case then headed into discovery. While discovery was underway, the parties engaged in mediation. As a result of the mediation, the parties negotiated a settlement. On March 14, 2023, the parties executed a Term Sheet setting out their agreement in principle.
On May 5, 2023, the parties filed the fully executed settlement agreement with the court. Among other things, the settlement agreement sets out that the parties had agreed to settle all claims in the case for a cash payment “by Defendants and their insurers of $450 million in cash for the benefit of the Settlement Class.”
The settlement agreement further recites that the Settlement Amount “will be allocated amongst the Kraft Heinz Defendants, 3G Capital, and Defendants’ insurers, pursuant to a confidential agreement entered into by the Defendants which shall not be filed with the Court and its terms shall not be disclosed in any other manner unless the Court directs otherwise.” The settlement is subject to court approval.
This settlement is large enough to make this list of all-time top settlements, but at the same time, as massive as this $450 million settlement it, it only qualifies as 41st largest settlement. (In making this statement, I am referring to the ISS Securities Class Action Services List of Top 100 Settlements, discussed here).
From the settlement stipulation’s reference to the defense and insurer agreement to divvy up the settlement costs it is clear that insurance is funding only a portion of the settlement, but it is not clear what portion. The wording suggests that 3G Capital itself is also contributing to the settlement, in addition to insurers. It isn’t clear whose insurance is contributing. It is a fair assumption that Kraft Heinz’s insurers are contributing. But the settlement stipulation refers to Defendants’ insurers, leaving open the possibility that 3G Capital’s insurers are also contributing to the settlement as well.
The extent of Kraft Heinz’s insurers contribution is a key question for the company and for its executives as related shareholder derivative litigation remains pending (although in March 2023, the court dismissed the derivative lawsuit pending in the Northern District of Illinois).
The Warren Buffett Angle: One of the important actors in the Kraft Heinz merger was Warren Buffett. Buffett’s investment in Kraft Heinz through Berkshire Hathaway was an unusual arrangement, especially given the involvement of 3G Capital. 3G Capital is a private equity firm known for its aggressive cost-cutting strategies, which often involve significant layoffs and restructuring. This approach is very different from Buffett’s “value investing” philosophy, which focuses on identifying undervalued companies with strong fundamentals and holding them for the long term.
Despite this difference in approach, Berkshire Hathaway had a longstanding relationship with 3G Capital. In 2013, Berkshire and 3G teamed up to acquire H.J. Heinz, a food company known for its ketchup and other condiments. The two firms then merged Heinz with Kraft Foods in 2015 to form Kraft Heinz, with Berkshire and 3G each owning about 26% of the company.
However, the Berkshire investment in Kraft Heinz did not go well. After the company’s February 2019 announcement of the goodwill impairment and of the SEC investigation, the company’s stock price plummeted, and Berkshire Hathaway’s investment in the company lost billions of dollars in value.
Buffett later admitted that he had overpaid for Kraft Heinz and that he had made a mistake by relying too heavily on 3G Capital’s cost-cutting strategies. He also acknowledged that he had been slow to react to the changing consumer preferences that were affecting the packaged food industry.
Nevertheless, Berkshire Hathaway continues to hold Kraft Heinz shares, although the number of shares has changed over time. Buffett has said that Kraft Heinz had made progress in improving its operations and reducing its debt, and he continues to like the company.