Opinion
Index No. 655686/2020
05-02-2022
CITY OF WARWICK MUNICIPAL EMPLOYEES PENSION FUND, Plaintiff, v. RESTAURANT BRANDS INTERNATIONAL INC., Jose Cil, Matthew Dunnigan, Jacqueline Friesner, Alexandre Behring, Daniel Schwartz, Marc Caira, Martin Franklin, Paul Fribourg, Neil Golden, Ali Hedayat, Golnar Khosrowshahi, Carlos Sicupira, Joao Castro-Neves, Roberto Motta, Alexandre Van Damme, 3G Capital Partners Ltd., 3G Restaurant Brands Holdings LP, Morgan Stanley & Co. LLC, Defendant.
Plaintiff by: Labaton Sucharow LLP, 140 Broadway, New York, NY 10005 Defendants by: Paul Weiss Rifkind Wharton & Garrison LLP, 1285 Avenue of the Americas, New York, NY 10019, O'Melveny & Myers LLP, 7 Times Square, 34th Floor, New York, NY 10036
Plaintiff by: Labaton Sucharow LLP, 140 Broadway, New York, NY 10005
Defendants by: Paul Weiss Rifkind Wharton & Garrison LLP, 1285 Avenue of the Americas, New York, NY 10019, O'Melveny & Myers LLP, 7 Times Square, 34th Floor, New York, NY 10036
Andrew Borrok, J.
The following e-filed documents, listed by NYSCEF document number (Motion 001) 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 32, 33, 34, 35, 37 were read on this motion to/for DISMISS.
Upon the foregoing documents, the defendants’ motion to dismiss the complaint must be denied.
The Relevant Facts and Circumstances
This is a putative securities class action alleging strict liability and negligence claims brought pursuant to Sections 11, 12(a)(2) and 15(a) of the Securities Act of 1933 (the 1933 Act ) against Restaurant Brand International Inc. (QSR ), certain of its senior executives and directors and Morgan Stanley & Co. LLC (the Underwriter ) which acted as underwriter in connection with QSR's secondary public offering commenced on or about August 12, 2019 of 24,000,000 common shares at a price of $73.50 (the August SPO ) and QSR's secondary public offering commenced on or about September 5, 2019 of 16,690,717 common shares at a price of $75.10 (the September SPO; the September SPO, together with the August SPO, hereinafter collectively, the SPOs ). Jurisdiction in this Court is proper and removal is prohibited ( Cyan, Inc. v Beaver County. Emps. Retirement Fund 138 S Ct 1061 [2018] ).
The 1933 Act protects investors by ensuring full and fair disclosure relevant to the public offering of securities and Section 11 imposes liability on issuers in two ways for the contents of a registration statement -- "one focusing on what the registration says and the other on what it leaves out" ( Omnicare, Inc. v Laborers Dist. Council Const. Indus., 135 S Ct 1318, 1323 [2015] ).
This lawsuit is brought on behalf of all persons or entities who acquired QSR's common shares pursuant to QSR's Shelf Registration Statement in connection with the SPOs. As discussed more completely below, the predicate for liability in this lawsuit is not based on what the offering documents said, but, rather, for what they did not say. What they did not say, according to the plaintiffs, is that QSR's business plan to increase customer loyalty and its customer base and sales in the offering documents was based on the Tims Program and Winning Together and both of those programs were failing because the heavy discounting associated with those programs were not offset by an increase in foot traffic. Stated differently, the plaintiffs allege that the offering documents were materially misleading by painting a deceptive positive description of QSRs business plan and outlook and omitting disclosing the very programs which formed the core business plan and the fact that they were not achieving the results that they were otherwise telling the market that they were achieving.
The lead plaintiff is the City of Warwick Municipal Employees Pension Fund. It is alleged to have purchased common shares pursuant to and traceable to the Shelf Registration Statement including shares its purchased in the August SPO from the Underwriter. (NYSCEF Doc. No. 11 ¶ 21).
QSR is the defendant issuer of the shares sold in the SPOs. QSR trades on the New York Stock Exchange under the ticker symbol "QSR," has restaurants located in the United States and more than one hundred other countries, and is incorporated and headquartered in Canada (id. ¶ 22).
The individual defendants are as follows (each, an Individual Defendant , and collectively hereinafter, the Individual Defendants; id. ¶¶ 23-37):
-Jose E. Cil was the Chief Executive Officer and a member of the QSR Board of Directors.
-Matthew Dunnigan was the Chief Financial Officer of QSR.
-Jacqueline Friesner was the Controller and Chief Accounting Officer of QSR.
-Alexandre Behring was the Co-Chairman of QSR and a director of 3G Capital.
-Daniel Schwartz was the Executive Chairman of the Company and Co-Chairman of the QSR's Board of Directors, and the former Chief Executive Officer of QSR since December 2014 and a director of 3G Capital.
-Marc Caira was the Vice-Chairman of QSR.
-Martin Franklin was a member of QSR's Board of Directors until he resigned on October 21, 2019.
-Paul Fribourg was a member of QSR's Board of Directors and lives in New York County.
-Mr. Golden was a member of the QSR's Board of Directors.
-Ali Hedayat was a member of QSR's Board of Directors and lives in New York County.
-Golnar Khosrowshahi was a member of QSRs Board of Directors and lives in New York County.
-Carlos Alberto Sicupira was a member of QSR's Board of Directors and one of the founding partners of 3G Capital.
-Joao M. Castro-Neves was a member of QSR's Board of Directors, a partner of 3G Capital and lives in New York County.
-Roberto Thompson Motta was a member of QSR's Board of Directors, a founding partner of 3G Capital and lives in New York County.
-Alexandre Van Damme was a member of QSR's Board of Directors.
Each of the Individual Defendants are alleged to have reviewed, contributed to and signed the Shelf Registration Statement.
3G Capital Partners, Ltd. (3G Capital ) and 3G Restaurant Brands Holdings LP (3G Restaurant ; 3G Restaurant, together with 3G Capital, hereinafter, collectively, the 3G Defendants ) were QSRs controlling shareholders who allegedly offloaded almost 10% of their holdings in QSR while failing to disclose that not only were the Tims Rewards program (as described below) failing to grow Tim Horton's existing business but also having a negative impact on sales. (id. ¶10). 3G Capital is headquartered in New York County.
The Underwriter was the underwriter for the SPOs. It is based in New York and has consented to jurisdiction pursuant to the underwriting agreement which indicates that New York law governs the underwriting agreement (id. ¶19).
Specifically, the plaintiffs allege that the Underwriters had access to all relevant confidential corporate information, performed what they determined to be appropriate due diligence, participated in the drafting of the offering documents and caused the Shelf Registration Statement to be filed:
Representatives of Morgan Stanley assisted the Company, the Individual Defendants, and the Controlling Stockholder Defendants in planning the Offerings, and purportedly conducted an adequate and reasonable investigation into the business, operations, products, and plans of the Company, an undertaking known as a "due diligence" investigation. During the course of their "due diligence," Morgan Stanley had continual access to confidential corporate information concerning the Company's operations and financial prospects.
In addition to availing themselves of virtually unbridled access to internal corporate documents, agents of Morgan Stanley met with Restaurant Brands’ and the Controlling Stockholder Defendants’ management and top executives (including the Individual Defendants), and engaged in "drafting sessions" regarding the Shelf Registration Statement in advance of its filing. During these sessions, understandings were reached as to: (i) the strategy to best accomplish the Offerings; (ii) the terms of the Offerings, including the price at which the Company's common shares would be sold; (iii) the language to be used in the Shelf Registration Statement; (iv) what disclosures about the Company would be made in the Shelf Registration Statement; and (v) what responses would be made to the SEC in connection with its review of the Shelf Registration Statement. As a result of those constant contacts and communications between Morgan Stanley's representatives and the Company's management and top executives, at a minimum, Morgan Stanley was negligent in not knowing of the Company's undisclosed existing problems and plans, and the materially untrue statements and omissions contained in the Shelf Registration Statement as detailed herein.
Morgan Stanley caused the Shelf Registration Statement to be filed with the SEC and to be declared effective in connection with offers and sales thereof, including to Plaintiff and the Class
(NYSCEF Doc. No. 11, ¶¶ 44-46).
The controlling shareholders were paid for the securities to be sold by the Underwriter on the New York Stock exchange at the New York offices of Davis Polk & Wardell LLP. Thus, as alleged, the defendants benefited from the SPOs and both jurisdiction and venue are proper here in New York County.
At the time of the SPOs, QSR was engaged in certain purported growth strategies including "Winning Together" and "Tims Rewards". There three pillars to the Winning Together plan were (1) restaurant experience, (2) product excellence and (3) brand communications.
The Shelf Registration Statement told investors that "increasing restaurant sales and profitability" were critical to QSR's success. To obtain that success, QSR employed new product offers to elevate QSR's quality and a loyalty program called Tims Rewards which sought to increase customer traffic, grow Restaurant Brands’ existing customer base and increase sales. (id. ¶¶ 5-6). The Shelf Registration Statement emphasized to investors its commitment to developing new products critical to QSR's long term success and its focus on improving among other things its digital channels and loyalty initiatives. Tims Rewards, for example, was available through the Tim Hortons mobile app.
More specifically, the plaintiff alleges:
90. The Shelf Registration Statement misleadingly touted the success of the Tims Rewards program and failed to disclose that frequent data metrics showed the failure of the Tims Rewards program in driving sustainable growth. In reality, at the time of the Offerings, the loyalty program was dragging sales and generated an unsustainable level of discounting that outweighed customer traffic. As a result, the Shelf Registration Statement contained untrue statements of material facts, omitted to state other facts necessary to make the statements contained in the Shelf Registration Statement not misleading, and was not prepared in accordance with the rules and regulations governing its preparation.
91. For example, the Shelf Registration Statement told investors that the Company "ha[d] created a financially strong company built upon a foundation of three thriving, independent brands with significant global growth potential " based on the following strategies:
• accelerating net restaurant growth;
• enhancing guest service and experience at our restaurants through comprehensive training, improved restaurant operations, reimagined restaurants and appealing menu options;
• increasing restaurant sales and profitability which are critical to the success of our franchise partners and our ability to grow our brands around the world;
• utilizing technological and digital initiatives to interact with our guests and modernize the operations of our restaurants;
• efficiently managing costs and sharing best practices; and
• preserving the rich heritage of each of our brands by managing them and their respective franchisee relationships independently and continuing to play a prominent role in local communities.
92. The statements in ¶ 91 were false and misleading statements of material fact when made because they failed to disclose the following material adverse facts, material adverse trends, material uncertainties, or significant risks that existed at the time of the Offerings:
(a) Contrary to the Shelf Registration Statement's claim that the Company had "three thriving, independent brands with significant global growth potential," prior to launching Tims Rewards, the Company was experiencing declining sales;
(b) Tims Rewards and its significant discounting was not increasing profitability as evidenced by daily sales data and weekly sales reports because, as would later be admitted, the program was not increasing new business, could not be supported by existing customer traffic and instead negatively affected sales;
(c) As a result, the Tim Hortons brand was not positioned for growth.
...
93. The Shelf Registration Statement also stated that " [n]ew product development is a key driver of the long-term success of our brands " and that " the development of new products can drive traffic by expanding our customer base, allowing restaurants to expand into new dayparts, and continuing to build brand leadership in food quality and taste. "
94. The statements in ¶93 were false and misleading statements of material fact when made because they failed to disclose the following material adverse facts, material adverse trends, material uncertainties, or significant risks that existed at the time of the Offerings:
(a) Tim Hortons’ new products were often short sighted, launched without much planning and failed due to distribution, marketing, or product quality issues;
(b) As a result, the Company's product offerings were not driving growth or expanding RBI's customer base and, as the Company would later admit, the Company's product offerings resulted in a gap in sales of its sandwiches and wraps; and
(c) Despite its purported "steps to address this part of the menu," the Company was reporting weak year-over-year sales comparisons based on its short sighted product offerings and was unable to compete effectively.....
95. The Shelf Registration Statement falsely represented the purported success of the Tims Rewards program which purportedly sought to attract more customers and increase sales, but actually offered discounting that could not be offset by customer traffic, negatively affecting the Company's sales. As a result, the Shelf Registration Statement contained untrue statements of material facts, omitted to state other facts necessary to make the statements contained in the Shelf Registration Statement not misleading, and was not prepared in accordance with the rules and regulations governing its preparation.
96. Further, the Shelf Registration Statement inaccurately described as potential , certain risks associated with Restaurant Brands’ marketing and advertising programs, which may have an adverse effect on its business, financial condition, and results of operations, rather than disclosing the actual events and trends or uncertainties that had already manifested. The Shelf Registration Statement stated, in pertinent part, that:
Our operating results depend on the effectiveness of our marketing and advertising programs and the successful development and launch of new products.
Our revenues are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and innovative products. Our marketing and advertising programs may not be successful or we may fail to develop commercially successful new products, which may lead us to fail to attract new guests and retain existing guests, which, in turn, could materially and adversely affect our results of operations. Moreover, because franchisees contribute to advertising funds based on a percentage of gross sales at their franchise restaurants, advertising fund expenditures are dependent upon sales volumes at system-wide restaurants. If system-wide sales decline, there will be a reduced amount available for our marketing and advertising programs. Furthermore, to the extent that we use value offerings in our marketing and advertising programs to drive traffic, the low price offerings may condition our guests to resist higher prices in a more favorable economic environment.
In addition, we continue to focus on restaurant modernization and technology and digital engagement in order to transform the restaurant experience. As part of these initiatives we are seeking to improve our service model and strengthen relationships with customers, digital channels, loyalty initiatives, mobile ordering and payment systems and delivery initiatives. These initiatives may not have the anticipated impact on our franchise sales and therefore we may not fully realize the intended benefits of these significant investments.
97. The Shelf Registration Statement inaccurately described as potential , certain risks associated with Restaurant Brands’ competition, which could have an adverse effect on its business, financial condition, and results of operations, rather than disclosing the actual events and trends or uncertainties that had already manifested. The Shelf Registration Statement3 stated, in pertinent part, that:
We face intense competition in our markets, which could negatively impact our business.
The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With few barriers to entry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises, and new competitors may emerge at any time. Furthermore, delivery aggregators and food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urbanized areas. Each of our brands also competes for qualified franchisees, suitable restaurant locations and management and personnel.
Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products, to effectively respond to consumer preferences and to manage the complexity of restaurant operations as well as the impact of our competitors’ actions. In addition, our long-term success will depend on our ability to strengthen our customers’ digital experience through expanded mobile ordering, delivery and social interaction. Some of our competitors have substantially greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to implement their operational strategies more quickly or effectively than we can or benefit from changes in technologies, which could harm our competitive position. These competitive advantages may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share. There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees in the future.
98. The statements reference above in ¶¶ 96-97 were each inaccurate statements of material fact when made because while noting only the potential negative impacts on its business, financial condition, and results of operations, the Shelf Registration Statement failed to disclose the following significant, then-existing material events and adverse trends or uncertainties that Restaurant Brands had already been facing at the time of the Offerings:
(a) The discounting associated with Tims Rewards was not sustainable, Tims Rewards was not increasing new business, and customer traffic was not offsetting the program's discounts;
(b) The Company was not realizing the purported benefit of the loyalty program as evidenced by the negative impact on daily sales data and weekly sales reports in the Company's database;
(c) The Company's short sighted product offerings were similarly not increasing customer traffic, especially as compared to its competitors; and
(d) As a result of the negative effect on Tim Hortons’ sales, the Company was not "maintain[ing] its competitive position."
(NYSCEF Doc. No. 11, ¶¶ 90-98 [emphasis in original]).
To be clear, the Shelf Registration Statement does not specifically mention either Winning Together or Tims Rewards. The plaintiff's complaint is not predicated on specific representations made in the offering documents about these programs by name. Rather, the gravamen of the complaint alleges that the problem with the offering documents were that they failed to disclose these programs, and that QSR generally, was experiencing a significant decrease in sales and that the discounting and other costs associated with these programs which were fundamental to the business plan touted in the offering documents were negatively affecting QSR's sales and its ability to compete effectively which QSR failed to disclose.
QSR is one of the world's largest fast food companies. It is alleged to have approximately $30 billion in system wide sales and over 25,000 restaurants in more than 100 countries and US territories. QSR consists of three iconic brands — Tim Hortons™, Burger King™ and Popeyes™ (NYSCEF Doc. No. 11, ¶¶ 3 and 50). As of June 30, 2019, QSR owned or franchised 18,008 Burger King restaurants, 4,872 Tim Hortons restaurants and 3,156 Popeyes restaurants. QSR's primary source of revenue is alleged to come from Tim Hortons (id. , ¶ 53). As alleged, in 2018, Tim Hortons generated $2.2 billion in revenue as compared to $75 million generated by Burger King and $79 million generated by Popeyes (id. , Fn 1). Early in 2018, QSR introduced the Winning Together plan as a new growth strategy for Tim Hortons to address challenges the Tim Hortons business was facing and to position the brand for future growth.
The strategy of increasing its customer base through the introduction of new products and technology was critical to QSRs success. According to the well-pled complaint, Tims Rewards and Winning Together were part of the bedrock foundation of this plan. As discussed above, although not mentioned by name specifically in the offering documents, these programs formed the business plan set forth in the offering documents and were otherwise touted during analysts and earnings calls, in their financial reporting documents, press releases and shareholder meetings.
For example, on February 11, 2019, QSR issued a press release announcing its results for the 2018 year and the quarter ending December 31, 2018 and indicating that its performance was tied to these programs: "Tim Hortons comparable sales in Canada accelerates in Q4 to 2.2%, driven by the ‘Winning Together’ plan." Jose Cil said:
I am pleased to report that our business continued to deliver strong system-wide sales growth in 2018, driven by acceleration of net restaurant growth at Burger King and Popeyes and improved momentum in comparable sales at Tim Hortons through our "Winning Together" plan"
(id. , ¶ 57).
On an earnings call the same day, Daniel Schwartz explained that QSR's
momentum in the fourth quarter is an indication that the Wining Together plan that we developed with our franchisees in early 2018 is working.
(id. , ¶ 58). In fact, Mr. Schwartz explained that the Company planned to renovate hundreds of restaurants per year and would finalize the mechanics of the loyalty program and roll the program out nationally through the mobile app later that year.
On April 29, 2019, QSR issued another press release focusing on Winning Together when it announced its first quarter 2019 results, stating that Tim Hortons "continues to deliver on Winning Together Plan" and announcing that the loyalty program launched with strong engagement (NYSCEF Doc. No. 11, ¶ 59). The April 29, 2019 press release further described the loyalty program (i.e. Tims Rewards) as a loyalty rewards program that rewards customers with a free hot coffee or tea in any size or a baked good after every seventh visit, and stated that the program would be available via reusable loyalty cards or through the Tim Hortons mobile app (id. , at 69).
On an earnings call that same day, Mr. Cil said:
[w]hile it's still early, after just the first 5 weeks, approximately 20% of Canada's population has used the loyalty program with almost half of our daily transactions now scanning the loyalty card. For context, we believe this level of participation by Tims’ guests in the first few weeks of the program has more than doubled the participation rate in some of the best-in-class loyalty programs of competitors even several years after their launch.
We believe, longer term, this represents a tremendous opportunity to utilize the insights provided by this guest-centric data to better understand our guests’ behaviors, their needs and wants, to better market to our guests directly and to better inform our business decisions. We look forward to building our base of guests on the loyalty program over the balance of this year and believe this platform will be a valuable asset that allows us to evolve the brand and drive even more innovation over the coming years
(id. , ¶ 70).
On the same call, Joshua Kobza, QSR's Chief Operating Officer, said about Tims Rewards:
[I]t's already changing the way that we look at the business, that we're able to understand the business to be able to look at things on a guest-byguest perspective. And so I think that we're already figuring out how it's going to change, how we look at products and promotions and I think it's going to change the way we manage the business here already this year in 2019
(id. , ¶ 71). Mr. Cil again discussed Tims Rewards:
[T]he loyalty program being launched saw quite a bit of success. It's very much in line with what we saw in the results and the test, and the impact on same-store sales was modestly positive initially, and we think there's huge guest uptick and we feel we're just at the beginning of loyalty and what it could do for the business long term
(id. , ¶ 72).
On May 15, 2019, QSR held an Investor Day. In his opening remarks, Mr. Cil described Tims Rewards as "incredibly powerful" and said that the program was "fulfilling a critical gap in [its] digital offering as a high-frequency coffee chain" (NYSCEF Doc. No. 11, ¶ 73).
Alexandre Macedo, the President of Tim Hortons, stated:
[B]eyond a doubt, the largest driver for long-term sales growth under the restaurant experience pillar is our new loyalty program.
To set this up, you need to know that Canadian consumers love their loyalty programs. On average, every Canadian holds 12 loyalty memberships and is an active user of 8 loyalty programs at any given time. This is significantly more activity that we see in other countries.
Second, Tims already has the highest frequency of visit of any [quick service restaurant] in Canada, yet we have never used a structural program to influence frequency and drive incremental traffic, purchase or attachment rate.
Third, it's a fact that we're in a very competitive market, and we are the undisputed market leader. We can't take our leadership for granted and need to give our guests a strong indication that we value their loyalty.
So you can think about our strategy as being both on offense the drive incremental sales through one-to-one customized marketing as well as defense to protect our strong market position, particularly in brewed coffee. And we tested a number of loyalty mechanics. And in the end, our guests helped us to pick a very simple mechanic to kick off the program. Just the choice of a free product, coffee, tea or doughnut after 7 visits.
We launched our loyalty program nationally towards the end of Q1. So with 6 weeks under our belt, how are we doing so far. Simply put, the reaction of our guests has totally exceeded our expectations. In the last 6 weeks, over 20% of the population of Canada has used our loyalty program. And now around 50% of our guests scan loyalty in our restaurants each and every day, and this data point is very powerful. Other global brands operating in the same space as we are have taken years to achieve levels of adoption that we were able to secure after only 6 weeks. This is a testament to the nature of our loyal and frequent guests.
More importantly, we have seen improvement to our restaurant traffic in all regions of the country. Loyalty has been the biggest driver of incremental traffic of anything we've done in the last few years. And it's only beginning........
The program is already the fastest-growing loyalty program in the history of Canada.
(id. , ¶ 74).
On an earnings call on August 2, 2019, Mr. Cil said:
After a rapid ramp-up phase over the course of about a month, approximately half of all transaction swipe were click Tims Rewards. This reflects very strong adoption and buy-in with more than 7 million people using the program every month after just a few short months. We're really pleased with the level of engagement from our guests and believe we're establishing an exciting platform that we can use to drive improve guest experience and sales growth in the future. As we've talked about before, the overall impact of Tims Rewards on our comparable sales so far has been neutral, however, it has helped us drive an encouraging level of incremental traffic, bringing more guests into our restaurants more often. Our next step is to use the powerful insights we're gathering from the program to offer our guests rewards and promotions tailored to their purchasing interests. We believe this will provide a solid basis and valuable program for driving incremental sales across our large customer base over time.
(NYSCEF Doc. No. 11, ¶ 75). On the same call, Mr. Kobza said of Tims Rewards that "it's been roughly neutral on sales, [for] the time being" but that it is "just the start of our loyalty program and we're working on ways to evolve the program over the next coming quarters and years to figure out how to make it work even better" (id. , ¶ 76). Mr. Cil said on the call that Tims Rewards was "doing exactly what we thought it would do and it's giving us confidence that we can do much more over the long haul" (id. , ¶ 77).
QSR generates revenue from (i) franchise royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees, (ii) property revenues from properties leased or subleased to franchisees, and (iii) sales at restaurants owned by QSR. Additionally, Tim Hortons generates revenues from sales from its supply chain operations to the franchisees (id. , ¶ 51).
QSR monitored sales and inventory weekly. Sales and inventory were reported by franchisees using a system called Clearview. Franchisees would then input the Clearview data into another data base called Tapp. QSR's corporate team members had access to TAPP. The same point-of-sale system was used at Tim Hortons franchise and company owned restaurants (id. , ¶ 61).
Additionally, and significantly, Tim Hortons sales were tracked granularly and in almost real time — i.e., from each restaurant, in each region, province and country and QSR's executes received and reviewed weekly sales reports. When the numbers were down, "corporate conducted daily calls with regional employees to discuss why the numbers were down" (id. ¶ 62). Indeed, Mr. Schwartz explained that QSR tracks trends in its Tim Hortons restaurants down to the week (id. , ¶¶ 64-65) and Mr. Dunnigan explained at a UBS Global Consumer and Retail Conference on March 7, 2018 that "[e]verything we do at the company is extremely methodical, it's data-driven and analytical" (id. , ¶ 66).
Following the SPOs, in what the complaint alleges was a complete market shock given the offering documents positive business outlook, on October 28, 2019, QSR held another earnings call where it was announced that QSR missed analysts’ expectations for quarterly revenue (NYSCEF Doc. No. 11, ¶ 99). A representative of QSR stated on that call:
Now jumping into a bit more detailed results for each of our brands. As I mentioned, in Q3, Tims’ comparable sales were weaker than planned coming in at negative 1.4% globally and negative 1.2% in Canada. In Canada, softness in comparable sales reflected a tough year-over-year comparison as we lapped the launch of Breakfast Anytime in 2018. In particular, we saw softness in our lunch food offering, where we continued to see a gap in sales of our sandwiches and wraps
(id. , ¶ 100). And, on this call, and despite the previous proclamations of positive results and the positive outlook on the business plan contained in the offering documents, Mr. Cil specifically identified Tims Rewards as part of the reason for the disappointing results and now indicated that it would take a long time for QSR to reap the benefits of the loyalty programs:
Our retail and CSR benchmarks indicated that it would take something like 12, 18 months or even multiple years as was the case for some of the competitors that we benchmark against to build a meaningful guest adoption of our loyalty program and this would be a period of time that — it was going to require some investment and ongoing investment on our part. But as you all know, and we've mentioned many times, it took us just a few months before we had a substantial number of guests join and start using the Tims Rewards program.
During this time we saw incremental traffic, which offset the planned discounting in the program. So we saw we had an initial, kind of, neutral impact on sales but after the expected initial increase in traffic, which we saw at the beginning of the program, the discounting is slightly more than offsetting the traffic levels, which is causing a little bit of softness in sales ...
(id. , ¶ 102). Over the two days of trading following the October 28, 2019 earnings call, the share price in QSR fell from $68,45 to $64.86 per share (id. , ¶ 104).
On February 10, 2020, QSR held an earnings call, where Mr. Cil acknowledged that "system-wide sales dropped slightly in 2019 as our performance in Canada came in below our expectations" (NYSCEF Doc. No. 11, ¶ 106). He attributed this to QSR's investment in Tims Rewards:
Our year-on-year decline in comparable sales of negative 4.6% in Canada was primarily driven by the investments in our Rewards program we're making to attract millions of Canadians to join and participate in our Tims loyalty program, which contributed approximately negative 3% to our reported comparable sales figure
...
As we have previously noted, we've attracted far more guests to our loyalty program far more quickly than we had planned, and we currently have about 25% of these guests who have registered and shared their contact information with us. Our second phase of loyalty will encourage much higher levels of registration by making most of the menu accessible for redemptions and adding exciting, tailored offers based on your purchase history. We're shifting from a visits program to a points program, where each purchase occasion earns you points that you can redeem for most of our menu items. Our central priority in the second phase is to drive digital registration and unlock powerful tools like sales intelligence and one-to-one marketing that we'll use to develop stronger relationships with our guests and drive incremental sales over time
(id. ). This led to a further drop in the share price of QSR shares (id. , ¶ 108).
The plaintiffs sued, alleging violation of the 1933 Act. Critically, as alleged above, the plaintiffs allege that these programs formed the basis for the business plan contained in the offering documents and that the steep discounting and declining sales were known and not disclosed at the time of the SPOs. This, they allege violated Section 11 of the 1933 Act (first cause of action), violated of Section 12(a)(2) of the 1933 Act (second cause of action), and violated Section 15 of the 1933 Act (third cause of action). Additionally, the plaintiffs allege that QSR failed to comply with (i) 17 CFR § 230.408(a), requiring the addition of further material in a registration statement as necessary to make the required statements, in light of the circumstances in which they are made, not misleading, (ii) 17 CFR § 229.303 (Item 303 ), requiring the disclosure of events or uncertainties, including known trends that have had or are reasonably likely to cause the issuer's financial information to not be indicative of future results, and (iii) 17 CFR 229.105 (Item 105 ), requiring that Shelf Registration Statements furnish, among other things, a discussion of the most significant factors that make an offering speculative or risky.
The defendants moved to dismiss and, among other things, in sum and substance pose the question of whether the plaintiffs must argue that the programs were ultimately not successful because they were long term programs for QSR. The answer is they do not. The statements contained in the offering documents must be true when made — i.e., at the time of the offering (In re Netshoes Sec. Litig. , 64 Misc 3d 926, 932 [Sup Ct, NY County 2019] ). At this point, as alleged, the defendants knew or should have known that the company strategy which was disclosed in the offering documents was not working, the cost of discounting was far outweighing the increase in foot traffic and sales, and that the sales numbers would not meet expectations. This they had an obligation to disclose so that the investors were not shocked and the SPO settling price reflected the actual business as it was known to exist at the time of the SPOs. The failure to disclose this information is exactly the harm that the 1933 Act is designed to address.
DISCUSSION
On a motion to dismiss pursuant to CPLR 3211, the court must afford the pleading a liberal construction and accept the facts as alleged in the complaint as true, according the plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit any cognizable legal theory ( Leon v Martinez , 84 NY2d 83, 87-88 [1994] ).
It is well settled that to survive a motion to dismiss brought pursuant to CPLR 3211, a claim brought under the 1933 Act need not satisfy the heightened pleading standard of CPLR 3016 (b) and must only satisfy CPLR 3013 ( Feinberg v Marathon Patent Group Inc. , 193 AD3d 568, 570-571 [1st Dept 2021] ; In re Netshoes Sec. Litig. , 68 Misc 3d at 794-795 ; In re PPDAI Group Sec. Litig. , 66 Misc 3d 1226[A], at *6 ; In re Uxin Limited Sec. Litig. , 2020 WL 1146636, at *6 [Sup Ct, NY County 2020] ).
Section11 of the Securities Act is a strict liability statute that holds issuers liable for the contents of a registration statement, both for what it includes and for what it omits ( Omnicare, Inc. v Laborers Dist. Council Const. Industry Pension Fund , 575 US 175, 186-191 [2015] ; In re Uxin Limited Sec. Litig. , 2020 WL 1146636 at *7 ). To be actionable, statements or omissions must be supported by concrete allegations that the issuer knew that such statements or omissions were false or misleading when made (In re Netshoes Sec. Litig. , 64 Misc 3d 926, 932 [Sup Ct, NY County 2019] ).
Item 303 requires the disclosure of "trends or uncertainties ... that the registrant reasonably expects will have a material ... unfavorable impact on ... revenues or income from continuing operations’ " ( Litwin v Blackstone Group, L.P. , 634 F3d 706, 716 [2d Cir. 2011] ). Item 105 requires a discussion of the most significant risk factors making the offer risky or speculative and disclosure where events have occurred which have a material impact on the registrant ( Citiline Holdings, Inc. v iStar Financial Inc. , 701 F.Supp.2d 506, 514 [SD NY 2010] ).
As this Court has previously discussed, Section 12 imposes liability on any person who offers or sells securities of a prospectus containing material misstatements ( Mahar v. General Electric , 65 Misc 3d 1121, 1129 [Sup Ct, NY County 2019], affd 188 AD3d 534 [1st Dept 2020], citing In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 [2d Cir. 2010] ). The list of potential defendants in a Section 12(a)(2) claim is governed by judicial interpretation of the Section 12 known as the "statutory seller" requirement (In re Morgan Stanley Info. Fund Sec. Litig., citing Pinter v. Dahl, 486 US 622, 643-47 & n.21, 108 S.Ct. 2063, 100 L.Ed.2d 658 [1988] and Wilson v Saintine Exploraiton & Drilling Corp., 872 F.2d 1124, 11255-26 [2d Cir. 1989]). To be a statutory seller, a defendant must have either "(1) passed title, or other interest in the security, to the buyer for value, or (2) successfully solicited the purchase of security, motivated at least in part by a desire to serve his own financial interests or those of the security owner" (id., [internal quotation omitted], citing Pinter v Dahl, 486 US 622, 647, 108 S.Ct. 2063, 100 L.Ed.2d 658 [1988] ; Perry v Duoyuan Printing, Inc., 2013 WL 4505199, at * 10 [SD NY Aug. 22, 2013]. Whether a defendant qualifies as "statutory sellers" is generally a question of fact that cannot be properly decided on the pleadings (see Degulis v LXR Biotechnology, Inc., 1997 WL 20832, at * 6 [SD NY Jan. 21, 1997] ["whether a defendant is a ‘seller’ under Section 12(2) is a question of fact"]; In re Scottish Re Grp. Secs. Litig. , 524 F. Supp. 2d 370, 400 [same]).
Neither accurate statements about past performance, nor expressions of puffery and corporate optimism are actionable under the securities laws ( Netshoes , 64 Misc 3d at 926 ; Rombach v. Chang, 355 F.3d 164, 174 [2d Cir. 2004] ; Nadoff v. Duane Reade, Inc. , 107 F. Appx. 250, 252 [2d Cir. 2004] ). Statements of puffery and/or corporate optimism are also inactionable ( Rombach, supra, 355 F.3d at 174 ).
The defendants’ argument that allegations based on Tims Rewards or Winning Together are not actionable simply because they were not mentioned in the offering documents, or because the general statements contained in the offering documents about the loyalty based business plan were couched in terms of the magic words "we believe" or that the statements were mere puffery fails. As discussed above, liability under the 1933 Act may be ground based on the failure to disclose accurate material information at the time of the offering. Unquestionably, as pled, these programs were material to QSRs business plan and required disclosure. Additionally, to the extent that these programs were causing a material adverse effect on sales, this also needed to be disclosed. It does not matter that these programs were long term programs. Disclosure of these programs and their current effect on sales was required such that the offering documents did not paint an overly optimistic picture of QSRs business. Nothing prevented QSR from disclosing the current drop in sales and that they anticipated that this program would ultimately drive sales higher (if in fact this was the case at the time of the SPO). This they could have done. What they could not do is hide the current performance and fail to disclose the programs driving the business plan disclosed in the offering documents and their current level of success or lack thereof. Had they done this, investors could have properly assessed the risks associated with this business plan at the time of the SPOs. By failing to do this, investors were deprived of material relevant information needed to assess the risks -- the very concern that the 1933 Act is designed to address. Put another way, the defendants can not avoid liability by waiving a magic wand and uttering the magic words "we believe" without disclosing the relevant risks to their belief which included the current sales information which they knew at the time of the offering plan based on their granular sales reporting described above. Lastly, and for the avoidance of doubt, the cases which indicate that puffery is inactionable also do not provide protection here because with the knowledge as alleged this was not mere puffery and nothing here bespoke caution.
The defendants’ claim that the plaintiffs have failed to allege standing under Section 12 is equally unavailing. To wit, the defendants argue that because the Underwriters borrowed existing shares from unnamed and undisclosed shareholders and took the new shares and traded those shares for the already issued shares that they "borrowed", the plaintiffs can not have standing to bring these claims because they did not purchase "new shares." The argument fails.
This Court addressed a similar argument in Mahar v General Electric (Mahar v. General Electric , 65 Misc 3d 1121, 1129 [Sup Ct, NY County 2019], affd 188 AD3d 534 [1st Dept 2020] ). The plaintiffs in Mahar had participated in the GE Direct plan which allowed investors to purchase shares of General Electric Company (GE ) stock through a plan administrator. The plan administrator could acquire shares from GE directly or from the open market. Thus, the defendants in that case argued, among other things, that the plaintiffs could not establish standing. This Court disagreed:
The fact that a security may be historic (i.e., previously issued pursuant to a prior registration) does not forever immunize it from being subject to a Section 11 claim if the security is subsequently reacquired by the issuer, or for the benefit of the issuer, and then offered in connection with allegedly materially misleading statements. Under the circumstances, the relevant issue is one of time — i.e., whether the plaintiffs purchased securities contemporaneously with, and traceable to, the allegedly materially misleading Registration Documents. As the plaintiffs allege that they did, the plaintiffs have sufficiently alleged Section 11 standing to survive a motion to dismiss.
Put another way, the plaintiffs allege that they purchased stock pursuant to GE's Plan and based on the allegedly misleading Registration Documents. The fact that a Plan Administrator was involved is of no moment. It is the same as if GE had bought the stock itself and reissued the stock pursuant to the Registration Documents
The Plan Administrator purchasing for the plaintiffs’ Plan account (i.e., and not for its own account) necessarily means that it should be disregarded as a separate entity for purposes of Section 12 standing analysis. As the plaintiffs correctly argue ‘GE is liable as a statutory seller because it hired an agent, the Plan administrator, to act on its behalf and sell shares of common stock on its behalf It is beyond cavil that, here, GE ‘successfully solicitated the purchase of a security, motivated at least in part by a desire to serve [its] own financial interests’ and, thus, even if direct title in the securities passed to the plaintiffs through the Plan Administrator, GE qualifies as a statutory seller ( In re Morgan Stanley Info. Fund. Sec. Litig., 592 F.3d at 359 ). The plaintiffs here are not ‘remote purchasers’ trying to ‘recover against [their] seller's seller ( Pinter, 486 US at 644 n. 21, 108 S.Ct. 2063 ). To hold otherwise would amount to putting form over substance twisting the statutory seller requirement beyond all logic.
(id. ).
Like in Maher, the ruse described by the defendants here must be disregarded for Section 12 standing analysis because this scheme effectively (1) passed title, or other interest in the security, to the buyer for value, or (2) successfully solicited the purchase of security, motivated at least in part by a desire to serve his own financial interests or those of the security owner. To wit, the Underwriters who were employed and paid by the issuer acquired securities at the behest of the issuer and 3G Defendants to facilitate the offering of securities to these plaintiffs in connection with the SPOs. Under the undisputed circumstances, it is the same as if the issuer acquired the stock as treasury stock and re-offered it. As such, the shares that the plaintiffs purchased were, as they allege, shares purchased pursuant to and traceable to the August SPO from the Underwriters ( Plumbers, Pipefitters & MES Local Union No. 392 Pension Fund v Fairfax Financial Holdings, Ltd. , 886 F.Supp.2d 328, 339 [SD NY 2012] ). This is sufficient to establish standing at this stage of the proceeding ( Mahar v Gen. Elec. Co. , 188 AD3d 534, 535 [1st Dept 2020] ; PPDAI Group Sec. Litig. V XXX , 66 Misc 3d 1226[A], * 5 [Sup Ct, NY County 2020] ). Holding otherwise would be to ignore the transaction itself.
The court notes that the structure of this scheme was not disclosed in the offering documents and as such, the plaintiffs purchased their share pursuant to and traceable to the offering documents.
Finally, the defendants’ additional argument that because the plaintiffs purchased shares from the Underwriter, the Individual Defendants and 3G Defendants cannot be considered statutory sellers also fails. The definition of a statutory seller includes a party who solicits the purchase of securities ( Perry, 2013 WL 4505199, at * 10 ). The well-pled complaint alleges that the Individual Defendants and the 3G Defendants marketed the shares in connection with the SPOs, actively solicited investors to purchase shares at the SPOs and profited from the sale of the shares (NYSCEF Doc. No. 11, ¶¶ 39, 130). Thus, the plaintiffs sufficiently state a Section 12(a)(2).
To state a claim under Section 15, "a plaintiff must allege (i) a primary violation by a controlled person and (ii) control by the defendant of the primary violator" ( In re Netshoes Sec. Litig. , 68 Misc 3d at 805 ). Based on the allegations described above, the Individual Defendants well satisfy these requirements.
Accordingly, it is hereby
ORDERED that the motion to dismiss is denied in its entirety; and it is further
ORDERED that the defendants shall have 20 days from the date of this order to file an Answer; and it is further
ORDERED that the parties shall appear for a preliminary conference on May 18, 2022 at 12:30pm.