EFiled: Oct 14 2009 5:12PM EDT
Transaction ID 27557493
Case No. 4992IN THE COURT OF CHANCERY OF THE STATE OF DEI ,A WARE
JAMES CARRAZZA,
)
)
Plaintiff,
)
)
)
v.
C.A. No. _ _ _ __
)
MONTEREY GOURMET FOODS , INC.,
CHARLES B. BONNER, ERIC C. EDDINGS,
VAN TUNSTALL, WALTER L. HENNING,
JOHN H. MC GARVEY, VIJI SAMPATH.
MARK C. FRANDSEN, TAMMY G. KATZ,
SCOTT S. WHEELER, PULMUONE U.S.A., INC.,
AND PULMUONE CORNERSTONE
CORPORATION,
)
)
)
)
)
)
)
)
)
Defendants.
)
VERIFIED CLASS ACTION COMPLAINT
Plaintiff, by his anomeys, for his complaint against defendants, alleges upon
personal knowledge with respect to paragraph 2, and upon information and belief as to all
other allegations herein. as follows:
NATURE OF THE ACTION
I.
This is a class action on behalf of the public stockholders of
Monterey Gourmet Foods, Inc. ("MGF" or "the Company") to enjoin a proposed
transaction. announced on October 8, 2009. pursuant to which the Company would be
acquired by Pulmuone U.S.A, Inc. ("Pulmuone") for the grossly inadequate cash price of
$2.70 per share. The Proposed Transaction (defined below) is thc product of a flawed
process that has resulted in a failure to maximize shareholder value. Moreover, the Proposed
Transaction robs MGF's shareholders of the ability to participate in the Company's
favorable long-term prospects.
THE PARTIES
2.
Plaintiff James Canazza has owned shares of 1he common stock of
the Company since prior to the transaction herein complained of and continuously to date.
3.
Defendant MGF engages in the production, distribution, and
marketing of refrigerated gourmet food products in the Dnited States, Canada, the
Caribbean. Latin America, and the Asia-Pacific markets. The company produces and
markets a range of gourmet refrigerated pastas, including borsellini, ravioli, tortellini,
pasta sauces, salsas, bruschettas, dips, hummus. spreads, Sonoma Jack cheeses, tamales,
meals and meal solutions, and po\cnta primarily under the Monterey Gourmet Foods,
;"'1omerey Pasta, Arthur's, CIBO Naturals, Emerald Valley Kitchen, Isabella's Kitchen,
Sonoma Cheese, and Casual Gounnet brands, as well as private labels.
4.
Charles B. Bonner ("Bonner") served as a Director of the
Company from 1993 through January 1995, and was reappointed as a Director effective
September 1995.
Mr. Bonner is Principal and Founder of Pacit1c Resources, Inc., a
mergers and acquisitions advisory firm, a position he has held since September 1989.
5.
Eric C. Eddings ("Eddings") was appointed by the Board of
Directors as President and Chief Executive Officer of Monterey Gourmet Foods in
September 2006. Previously Mr. Eddings was the Chief Operating Officer and minority
shareholder of CIBO Naturals. LLC, which he and his associates purchased in June,
2002. CIBO Naturals was acquired by Monterey Gourmet Foods in January 2004 and
later became part of the Natural Foods Division of Monterey Gounnet Foods.
6.
February 1997.
Van Tunstall ("Tunstall") was elected to the Board of Directors in
He has been a director and Chairman since 1997. Also since 1997 he
has served as President of the Central Coast Group, a strategic consulting and business
services fIrm. Mr. Tunstall has been an independent consultant with a variety of
companies since 1997. He is or has been affiliated with the acquiror, Pulmuone.
2
7.
Walter L Henning ("Henning") was elected to thc Board of
Directors in December 1999 and elected as Vice-Chairman in 2006.
8.
John H. McGarvey ("McGarvey") was elected to the Board of
Directors in February 2006. I Ie served from 1990 to 2007 as an associate and/or partner
of Cybus Capital Markets, LLC, an investment bank specializing in capital placement and
formation services for middle market companies in the food and agribusiness areas. Mr.
McGarvey is an owner and director of McGarvey & AJ1iliates, Inc. a financial consulting
firm.
9.
Viji Sampath ("Sam path") was elected to the Board of Directors as
ofJanuary I, 2008.
10.
Mark C. handsen ("Frandsen") was elected to the Board of
Directors in 2008.
11.
Tammy G. Katz ("Katz") was elected to the Board of Directors as
of January 1,2009.
12.
Scott S. Wheeler ("Wheeler") joined the company in April 2003 as
Corporate Controller, and \"ras promoted to Chief Financial Oflicer, effective OCTober 27,
2003, a position he currently holds. He was elected as a Board member in June 2004.
13.
Bonner.
Eddings, TnnstalL
Henning,
McGarvey,
Sampalh,
Frandsen, Katz and Wheeler are herein collectively known as the "Director Defendants."
14.
Pulmuone, a California corporation, is the wholly owned U.S.
subsidiary of Pulrnuone Co., Ltd., a Korean corporation, and manufactures natural foods
such as tofu, fresh noodles and other Asian-style products.
15.
Pulmuone Cornerstone Corporation (HPulmuone Cornerstone"), a
Delaware corporation, is a wholly-owned subsidiary of Pulrnuone U.S.A. Inc., and into
which !\1GF will be merged tollowing the completion of the Proposed Transaction.
16.
Together, MGF, the Director Defendants, Pulmuone U.S.A. Inc.,
and Pulmuone Cornerstone are herein referred to as the Dettmdants.
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17,
The Director Defendants are in a fiduciary relationship with
Plaintiff and the other public stockholders of MOf and owe them the highest obligations
of loyalty and due care. Defendants have breached their liduciary duties to MOF's
shareholders, or aided and abetted such breaches of duty, by directly and/or indirectly
causing the Company to enter into the Proposed Transaction, which provides for the sale
of MOF at an unfair, inadequate and artificially low price, and deprives MOF's
shareholders of the maximum value ofMOF's common stock.
CLASS ACTION ALLEGATIONS
18.
Plaintiff brings this action individually and as a class action pursuant
to Rule 23 of the Rules of the Court o[Chancery, on behalf of all MOF stockholders (except
defendants herein and any person, firm, trust, corporation or other entity related to or
affiliated with any of the defendants) and their successors in interest, who are or will be
threatened with injury arising from Defendants' actions as more fully described herein (the
"Class").
19,
ll.
This action is properly maintainable as a class action because:
The Class is so numerous that joinder of all members is impracticable.
There are hundreds. if not thousands, of MOF stockholders other than defendants who are
located throughout the United States; they own over \6.7 million MOF common shares;
b.
There are questions of law and fact that are common to the Class,
including: whether Defendants have failed to maximize shareholder value in connection
with the Proposed Transaction: and whether plaintiff and tbe alher Class members would
be irreparably damaged ifthe Proposed Transaction is not enjoined;
c.
Plaintiff is committed to prosecuting this action and has retained
competent counsel experienced in litigation of Ihis nature. The claims of plaintiff llrc
typical of the claims of the other members ofthe Class and plaintiff has the same interests
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as the other members of the Class. Accordingly, plaintilT is an adequate representative of
the Class and will fairly and adequately protect the interests of the Class;
d.
The prosecution of separate actions by individual members of the Class
would create the risk of inconsistent or varying adjudications with respect to individual
members of the Class that would establish incompatible standards of conduct for
defendants, or adjudications with respect to individual members of the Class which
would, as a practical matter, be dispositive of the interests of the other members not
parties to the adjudications or substantially impair or impede their ability to protect their
interests; and
e.
The defendants have acted, or refused to act, on grounds generally
applicable to, and causing injury to, the Class and, therefore, preliminary and tmal
injunctive relief on behalf of the Class as a whole is appropriate.
SUBSTANTIVE ALLEGATIONS
20.
On October 8, 2009, MOF announced in a press release that it had
entered into a definitive merger agrecmcnt with Pulmuone and Pu\muonc Cornerstone
whereby MOF would be acquired through a cash tcnder offer, [allowed by a merger with
and into Pulmuone Cornerstone, for a price of $2.70 per share in cash (the "Proposed
Transaction"). The Proposed Transaction was valued at approximately $45.8 million. At no
previous time has MOl' or any other Defendant made any public disclosures that the
Company was bdng offered lor sale or had conducted discussions with any parties
concerning such a sale,
21.
MOF shares rose mort: than 17% on the news of the Proposed
Transaction, surging to a 52-week high of $2.79 per share during trading hours on October
9,2009, before closing at $2.69 per share that day,
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22.
'lbe purpose ofthe Proposed Transaction is to enable the Defendants
to sell one hundred percent ov,ucrship of the Company and its valuahle assets at the expense
ofthe Company's public stockholders who will be deprived of their equity investment and
the benefits thereof, including, among other things, the expected growth in the Company's
profitability and the beneficial results of the Company's recent strategic initiatives.
Unfair Price
23.
Shares of MGF consistently traded ahovc the $2.70 acquisition price
in the Proposed Transaction.
The $2.70 consideraTion to be paid to the Company's public
stockholders in the Proposed Transaction is grossly unfair and inadequate. The Proposed
Transaction does not reflect either the near-term or long-term prospects of MGF. The offer
is aimed at stockholders vulnerable from disappointing reversals in the equity markets.
24.
Upon the completion of a series of acquisitions in 2004-2006, MGF
undertook a comprehensive strategic remodeling of its production facilities, workforce,
product lines and distribution channels, positioning itself to capitalize on the emerging
consumer demand for fresh, locally sourced gounnet food products as the global economy
continues to rebound from its unprecedented trough.
25.
As reported on Seeking Alpha:
Monterey sells its products to 65 U.S. grocery chains including Safeway
Inc. Albertson's, Costeo Wholesale Corporation and Wal-Mart Stores Inc. '5
Sam's Club division, and also has overseas distribution to Canada, Korea,
Mexico and Taiwan. Total distribution has gro'WTI from 20 stores in 1989 to
mon: than 10,000 today. While this growth retlects a growing consumer
demand for all kinds of prepared foods that will save time in the kitchen, it
also shows Monterey's skill at navigating this fiercely competitive prepared
food market, where rivals include everyone from the multi-billion dollar
conglomerate Kraft Foods Inc., to tiny local food producers. The company
thaI was founded as a pasta maker managed to survive the low-carb diet
craze by introducing multiple new food lines, from sandwiches 10 soups and
cheeses, while also continuing to successfully distrihute pasta by launching a
healthier, whole wheat pasta hrand.
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26,
A Smallcap Investor analyst report issued August 17, 2007 noted;
Monterey Gourmet Foods Inc, has over the past 18 years transformed itself
from a local purveyor of fresh pastas sold out of a Monterey, Calif.,
storefront to a publicly traded diversified prepared foods business that enjoys
steadily growing revenues from a number of major food chains in the United
States and abroad,
******
ClearLy, there have been some challenges over the past year, most notably an
aggressive realignment in which sales and marketing operations for the
company's multiple brands were consolidated and manufacturing was
streamlined, Costs associated with this realignment helped produce a $3.1
million loss next year.
******
Along with consistent revenue growth. there are many other encouraging
signs for this company, including a track record of smart acquisitions, a
proven t1exibility to adapt to changing consumer tastes, and a solid
distribution network,
******
After completing four acquisitions in rapid succession between 2004 and
2006, the company stepped back and began devoting more efiert to
consolidating the asset, it had bought. Today it says that it still needs to
further lower operating expenses, which have limited its net income.
Perhaps it's those modest earnings of late as well as the company's small
size that kept investors in the sidelines and limited analyst interest in the
company,
But those who are watching Monterey see promise.
27,
On April 24, 2008, MGF issued a press release announcing it had
secured 100% managing control and ownership of Sonoma Foods efrective \1arch 31, 2008.
Pursuant to the transaction, MGF wrote down intangible assets. severance and inventory,
expected 10 total $2.4 million for the first quarter of 2008, and implemented cost savings
antidpaled to yield $700,000 annually in benefits, MGF's President and CEO stated: "We
are very pleased to have gained full control of the popular Sonoma Cheese hrand, Sonoma
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Cheese brdlld equity has grown among our customers: however, critical production and
procurement decisions created operating losses. Theretore, similar to our successful
turnaround of our Casual Gounnet brand, we intcnd to focus Sonoma Foods on our core
cheese business and return the unit to positive cash flow before we extend the product line."
28,
On May 5, 2008, MGF issued a press release announcing it had
completed improvements for Monterey Pasta Company brands and Sonoma Cheese,
:vionterey Pasta Company launched four new organic items and introduced two of the
proven category leaders into new channels of distribution, MGF's President and CEO
stated: "Our vision is to otTer quality, healthy food products at a reasonable price to support
long-term growth. Monterey Pasta was originally created in response to the public's
growing interest in healthy gourmet foods. With continued high demand for organic foods
and regionally sourced ingredients, we extended the brand by bringing more variation to the
'healthy for you' selections. We believe these new products exemplifY our tradition of
quality and innovation and give us an edge in the market." The Company's CFO added:
"Based on competitive analyses, in March, we were able to increase prices for some SKUs.
Additionally. we cut expenses with our repackaging program, which we expect to positively
impact margins in the second quarter of 2008, We believe these actions deliver a win-win
situation for our customers and our shareholders."
29,
On May 28, 2008, MGF issued a press release announcing it was
expanding its distribution relationship with one of the nation's largest supermarket retailers
to sell and market its Sonoma Cheese line of premium quality flavored Jack cheeses to
nearly 400 more stores, Additionally, the brand would appear in several other chains in the
Southwest and one of the nation's premier upscale mass merchandisers. This availability in
a wide nlllge of national specialty food distributors servicing over 20,000 retail outlets
ofTered Sonoma Cheese unprecedented gro'.';th opportunities,
30.
On July 17, 2008, MGF issued a press release alll10uncing it was
parmering with Acosta Sales and Marketing Company to rcpn:scnt its flagship Monterey
Pasta Company brand of premium refrigerated raviolis and pastas in the retail grocery
channel. MG/"s President and CEO stated: "We are very pleased to create this partnership
with North America's leading sales and marketing agency 10 take our business to the next
level." Acosta's President and COO added: "Monterey Gounnet Foods is led by a team of
exceptional industry professionals. We believe this company is well posirioned for growth in
the refrigerated gounnet food products category. and we look forward to producing results
for this exciting brand."
31.
On November 18, 2008, MGF issued a press
relea~e
reporting
highlights of its new facility in Kent, Washington. The Company's President and CEO
stated: "We are excited about the positive impact our Kent faeiliLY is already having on the
company. The new facility provides us with the flexibility to accommodate multiple
production lines as well as the capacity to capitalize on additional opportunities, such as the
private label business. We are looking forward to continue reaping the benefits of having all
employees in one central Washinglon location and a1l products developed and produced
within one
state-ol~the-art
facility. In addition, our perfonnance in September and October
demonstrated the company is gaining momentum as sales and protitability increased over
the same period last year. Gross margins also improved during the period and we are being
positively impacted by relief in commodity costs. All this bodes well as we continue to
expect (0 ship several new products to customers during the fourth quarter."
32.
On February 6, 2009, MOl< issued a press release announcing it had
entered into a multi-year licensing agreement with Aidells Sausage Company, Inc. to use the
Company's Casual Gounnet brand on certain protein products in return for licensing fees.
MGF's President and CEO stated: "Our Casual Gourmet sausages have been a popular item.
However, the increasing production costs at our volume level have resulted in losses for
years. We are excited we
along with Aidells Sausage - were able to construct an
innovative solution. In this win-win simation, Aidells can leverage ils production facilities
and benetil from the brand equity we built, and Monterey Gounnet Foods can earn license
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fees and focus on core business prospects in pastas. This agreement is part of a series of
strategic initiatives aimed at leveraging our core competencies to take advantage of our
~Irong
brands, exceed customer expectations and provide value to our shareholders."
33.
In connection with the February 24, 2009 MOF press release
announcing the Company's tinancial resllits for its fourth quarter and twelve months ending
December 31,2008, MOPs president and CEO stated: "As previously announced, fourth
quarter results were below our expectations: however, we have taken action to position the
company to meet the challenges of the economy, exceed our customers' expectations, and
provide value to our shareholders." "Our pasta sales under our Montetey Pasta Company
brand continue to demonstrate its strength as its sales increased 15 per(;cnt for the quarter
over the prior year and 19 percent for the full year. In addition, we are tightening our fveus
on our core competencies in natural fOOll; and fresh pastas and are exiting non-core
businesses."
34.
On August 4. 2009, MGII reported its financial results for its second
quarter ended June 30. 2009. The August 4, 2009 press release stated in part as follows:
"During the quarter the shipment schedules of two new non-branded
products were pushed out, causing volume in our Salinas plant to fall
below inkrnal plan. As a result, lower overhead absorption overshadowed
the benefits of lower raw material costs and production efficiencies, as
well as gross margin improvement in our Sonoma Foods segment.
Subsequent to the quarter close, however, we began shipping and are now
on track to achieve our customer's targeted volumes of these non-branded
products," said Eric C. Eddings, president and CEO.
"We continued to advance our strategy of focusing on our core, further
penetrating the non-branded and Food Service channels and deVeloping
irmovative items that address both consumer preferences for fresh,
restaurant-quality specialty items for at-home preparation and the
consumer shift in demand toward value-oriented products," Eddings
added. "Based on the high quality of our products, we won several bids to
distribute non-branded products to our retail and club customers and
increased our share of the Food Service channel. As more retail customers
evaluate their categories and pricing strategies in response to the economic
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downtunl. we are creating opportumtles to further leverage our high
quality branded products in the ~lrowing non-branded channeL
"During the quarter we continued to invest in branding and innovation
resources to drive long term growth. For example. we began initiatives to
better communicate the restaurant-quality attributes and value proposition
of our branded products and strengthen our retail pasta program. These
investments advance our position as a leader in fresh at-home solution
categories. Our performance for the first half of 2009 demonstrates the
effectiveness of OUf growth strategy and OUf operational excellence.
35.
On September 9, 2009. MGF issued a press release arUlouncing it
would deliver five new pasta items for distribution in 250 Super Target Store, nationwide,
beginning in late September. MGF's President and CEO stated: "This new distribution of
our innovative and on-trend filled pasta speaks directly to the SuperTarget guest's demand
for fresh, restaurant-quality ravioli and tortelloni for home preparation. This new distribution
demonstrates the effectiveness of our investments in innovation and branding as well as our
initiatives to better communicate the restaurant-quaiity attributes or our fresh pasta
products."
36.
The consideration to be paid to Class members in the trdnsaction is
unfair and inadequate because, among other things and as described above, the intrinsic
value of MGY's common stock is materially in excess of the amount offered for those
securities in the proposed acquisition given the stock's current trading price and the
Company's prospects for future growth and earnings.
37.
The offcr is aimed at stockholders vulnerable from disappointing
reversals in Ule equity markets.
uurair Process
38.
Three of the Director Defendants continue to serve on the Board well
past the Company's own stated tenure policies. MGF's Proxy Statement, filed on Schedule
14A with the SEC on April 28, 2009, slates, among other things:
II
In 2003, in order to encourage rejuvenation of the Board, the Board of
Directors eliminated its fonner mandatory director retirement policy and
adopted instead a guideline, to which the Board may make exceptions when
appropriate, that outside directors retire from the Board at the cnd of any
director's arulUal tenn first ending after either serving 10 years (or five years
irom adoption of the policy, whichever period should be longer) on the
Board or reaching the age of 72. The Nominating Committee under the
direction of the Board has established criteria for new Board members and
continues to identity and interview potential candidates.
Pursuant to the guideline, the Board has voted to extend Mr. Bonner's
eligibility to serve until December 31, 200t) and Mr. Tum,tall's eligibility
until December 31.2010. When these directors leave the Board, the Board
expects to follow the aforementioned retirement guideline.
39.
ML Bonner has served as a Director since 1995; Mr. Tunstall has
served as a Director since 1997; ML Henning has served as a Direetor since 1999. The
length of this cumulative Board service. materially in excess of the plain language of the
Board's guideline. concentrates power and control ofMGF in the Director Defendants to the
detriment ofthe Company's stockholders.
40.
On or about August. 200t), the Company fonned a Strategic
Opportunity Review Committee (the "SORC"), consisting of three Directors, to review
proposals relating to the sale of the Company and other strategic alternatives. There was no
public announcement at the time of the creation of the SORe. Defendant Tunstall. one of
the excess-tenured Board members, was named to the SORe. MGF has been entirely silent
on its process for. consideration
ot~
and decisions regarding the Proposed Transaction and
has consistently refused to respond to a major shareholder's requests regarding these
matt.:rs.
41.
To date Board had conducted no analyses of the stand-along values
or protltability of any of the Company's three reporting segments: Gounnet Foods, Further
Processed Protein Products (Casual Gourmet brand) and Sonoma Cheese.
42.
Defendants have failed to respond to a shareholder's request to have
the Company undertake a thorough investigation through an unaffiliated third party as to the
12
nature and extent of Defendant Tunstall's affiliation with any bidding entity in order to
detenninc if he should be a member of the SORC.
43.
Defendant Tunstall had a prior or continuing affiliation with an entity
that was bidding to acquire the Company (Pulmuone) that created an immediate and
continuing conflict of interest compromising Mr. Tunstall's ability to faithfully discharge his
fiduciary duties (including the duty of loyalty) to the Company and its stockholders.
44.
Mr. TlUlstall additionally acts as Chainnan of the Corporate
Governance Committee, which is responsible for overseeing matters of corporate
governance, including the evaluation of the performance and practices of the Board of
Directors.
This position renders aU of the other Director Defendants beholden to the
conflicted TunstalL
COUNT I
Breach of Fiduciary Duties Against the Company and the lndividual Defendants
45.
Plaintiif incorporates each and every allegation set forth as if fully set
46.
The Company and the Individual Defendants have thus violated their
forth herein.
fiduciary duties by entering into a transaction "'ith Pulmuone without regard
to
the fairness
of the transaction to MGF's shareholders or the maximization of shareholder value.
47.
As alleged herein, the Individual Defendants breached their duties of
loyalty and care owned to the
shareholder~
of MGF because they failed to maximize
shareholder value and to properly consider strategic alternatives available to the Company.
4&.
Unless enjoined by this Court, the Company and the Defendants will
continue to breach their fiduciary duties owed to Plaintifl' and the members of the Class and
will in all likelihood consummate the Proposed Transaction, to the irreparable harm of the
members of the Class.
49.
Plaintiff has no adequate remedy at law
COUNT II
13
Aiding and Abetting Against Defendants Pulmuone and Pu\mnone Cornerstone
5{),
Plaintiff incorporates each and every allegation set forth as if fully set
51.
Defendants Pulmuone and Pulmuone Cornerstone are
forth herein,
~ued
herein as
aides and abettors of the breaches of fiduciary duties as alleged herein above,
52,
As a direct participant in the Proposed Transaction, Defendants
Pulmuone and Pulmuone Cornerstone knew of, and in fact, actively encouraged and
participated in the breaches of fiduciary duties alleged herein.
53.
As a result of the unlawful actions of Defendants Pulmuone and
Pulmuone Cornerstone in aiding and abetting the Directors Defendants' breaches of
fiduciary duties, plaintiff and the other members of the Class have been and will be
damaged in that they have been and will be prevented from maximizing the value of their
investment in MOF.
54.
Plaintiff has no adequate remedy at law
WHEREFORE, plaintiff demands judgment as follows:
A.
Declaring this to he a proper class action and certifYing plaintiff as a
Clas, representative;
B.
Enjoining, preliminarily and permanently, the acquisition under the
terms ofthe Proposed Transaction;
To the extent if any, that the transaction complained of is
C.
consummated prior to the entry of this Court's final judgment, rescinding the same or
awarding rescissory damages to the Class;
D,
damages caused
10
Directing that defendants account to plaintiff and the Class for all
them and account for all profits and any special benefits obtained hy
defendants as a result llftheir unlawful conduct;
14
F.
Awarding to plaintiff
th~
costs and disbursements of this action,
including a reasonable allowance for the fees and expenses of plaintifrs attorneys and
experts; and
F.
Granting such other and further relief as the Court deems appropriate.
ROSENTHAL, MONHArT & GODDESS, P.A.
I!/ Jessica Zeldin
Jessica Zeldin (Dcl. Rar No. 3558)
919 North Market Street, Suite 1401
Wilmington, Delaware 19899
(302) 656-4433
(302) 658·7567
Attorneys for Plaintiff
OF C01JNSEL:
ABBEY SPANIER RODD & ABRAMS, LLP
212 East 39th Street
New York, New York 10016
(212) 889·3700
October 14,2009
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