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Claims Against Kraft Heinz and 3G Capital Arising From Unprecedented $15.4 Billion Writedown Proceed to Discovery

August 19, 2021

On August 12, 2021, The Honorable Robert M. Dow, Jr., of the U.S. District Court for the Northern District of Illinois sustained the entirety of Plaintiffs’ claims arising from the 2015 merger of Kraft Food Group, Inc. with The H.J. Heinz Company to form the Kraft Heinz Company.

Plaintiffs Sjunde AP-Fonden and Union Asset Management Holding AG allege that the merger was orchestrated by Brazilian private equity partnership 3G Capital Partners, which is known for deploying strategies to slash costs in traditional retail businesses that it takes over, to grow margins, issue more dividends and pursue greater share buybacks. 3G proceeded to install its partners as the senior-most executives of the newly formed company. Investors at the outset were skeptical that this strategy could work for Kraft Heinz which required investment in brands to ensure it stayed competitive and were concerned that 3G’s strategy would sacrifice long term growth for short term cash. However, 3G and Kraft Heinz told investors that they would not pursue an indiscriminate cost-cutting strategy but would increase margins through synergies between Kraft and Heinz, and reinvest the savings in brand development. In truth, despite their public assurances, 3G and Kraft Heinz had actually implemented a devastating cost-cutting strategy that decimated the Company’s supply chain, customer and vendor relationships, and brands. In February 2019, Kraft Heinz wrote down the value of its goodwill in its major brands (e.g. Oscar Mayer, among others) by $15 billion, one of the largest impairment charges in corporate history. The bad news continued from there, as the fraud was further revealed through, among other things, the disclosure of an SEC investigation and termination of senior executives. All told, in response to this news, Kraft Heinz’s stock price declined over 53%, wiping out approximately $36 billion in market capitalization.

In a 50-page published opinion, Judge Dow held Plaintiffs adequately pled that Defendants made numerous material misrepresentations or omissions with scienter throughout the Class Period, including about the Company’s financial results and projections, business relationships, cost-savings programs, and goodwill analyses and impairment. The Court also sustained Plaintiffs’ insider trading claim against Defendant 3G based on 3G’s sale of approximately $1.2 billion in KHC stock just before the fraud was revealed, which Plaintiffs allege 3G made while in possession of material, non-public information. The case is now in discovery.