Shareholder litigation puts major restaurant companies in crosshairs

Nation's Restaurant News, March 31, 2008 by Sarah E. Lockyer

ORLANDO, FLA. -- Another flurry of shareholder litigation is sure to break, pundits say, as companies that have suffered a steep drop in stock prices or reduced their earnings expectations for the year ahead are targeted by law firms that specialize in shareholder rights.

This month at least four separate law firms said they intend to file shareholder class-action complaints against Darden Restaurants Inc., accusing the casual-dining operator of misleading shareholders about its performance and outlook for the year ahead after revising its earnings expectations in December.

At press time just one lawsuit actually had been filed with a plaintiff, a plumber and pipefitting union in the Northeast. If class-action status is attained, it would represent Darden stockholders between June 19, 2007, and Dec. 18, 2007. The complaints were filed in a district court in Florida.

Darden said it does not comment on pending litigation, but added, "We are proud of our record of transparency with shareholders and Wall Street."

Shareholder class-action suits typically are sparked by a large drop in a company's stock price, or a significant change in corporate direction, such as a sale or a merger. Many law firms look for occasions when a company might be vulnerable to shareholder complaints--like the filing of financial restatements, the firing of a chief executive or an agreement to a management-led buyout--and then cast a wide net to attain enough plaintiffs to garner class-action standing.

Landry's Restaurants Inc. is facing a class-action complaint surrounding its chairman's offer to purchase the company in a deal valued at $1.3 billion. The announcement from the law firm occurred before Landry's board of directors had even made a statement on the buyout out offer other than to say it was evaluating the proposal.

In the recent past, restaurant companies including AFC Enterprises Inc., Buca Inc., Cosi Inc. and Krispy Kreme Doughnuts Inc. have been hit with shareholder litigation.

In Krispy Kreme's case, the complaints were prompted by a drop in stock price after the company missed its earnings target. That case eventually was settled.

In Cosi's case, allegations of corporate misrepresentation after a steep drop in stock price following the company's initial public offering were dismissed.

With the industry in the midst of a steep downward trend, several public restaurant companies have seen their stocks begin to trade near 52-week lows, and many operators have reduced their per-share earnings expectations in the face of worsening consumer economic trends.

Darden revised its earnings and sales projections Dec. 18 because of reduced customer traffic and increased operating costs. The company's stock fell 21 percent the day after its announcement and was down about 37 percent from its 52-week high prior to the company's third-quarter earnings report on March 18. The day after the company posted a surge in third-quarter profit, Darden's stock rose 6.6 percent to close at $31.83 per share.

The plaintiffs allege that Darden and certain executives inflated the company's share price last year by giving "materially false and misleading statements" about the performance of its core restaurant operations, mainly Red Lobster, Olive Garden and LongHorn Steakhouse. They also alleged that the company was not forthcoming on the negative impact of increased food costs and slowed consumer traffic. The suit names as defendants Darden chief executive Clarence Otis and chief financial officer Brad Richmond.

BY SARAH E. LOCKYER

slockyer@nrn.com

DEAL BOARD

SELECTED MERGER AND ACQUISITION ACTIVITY

TARGET:      Applebee's (41 locations)

ACQUIRER:    Apple American Group LLC

SELLER:      IHOP Corp.

ACTION:      Acquisition agreement; terms undisclosed.
             Purchase agreements include development rights
             for the two separate markets of Southern California
             and Nevada.

STATUS:      Expected to close "in the coming months."

COMMENTS:    Seller has stated plans to sell about 100 corporate
             Applebee's restaurants this year for cash proceeds
             between $90 million and $100 million.

TARGET:      Noble Roman's Inc.

ACTION:      Company said March 19 it would evaluate
             "various strategies to enhance shareholder value,"
             and that it has retained investment bank Roth
             Capital Partners.

COMMENTS:    Franchisor of 1,056 restaurants under the Noble
             Roman's Pizza and Tuscano's Italian Style Subs brands.
             Fiscal 2007 net income totaled $2.5 million on
             revenue of $11.6 million.
             Market capitalization is about $31.5 million.