IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`C.A. No. 2021-0511-SG
`
`JAMES HARRIS and ADAM
`VIGNOLA, derivatively on behalf of
`FAT BRANDS INC.,
`
`Plaintiffs,
`
`v.
`
`SQUIRE JUNGER, JAMES
`NEUHAUSER, EDWARD H. RENSI,
`ANDREW A. WIEDERHORN, FOG
`CUTTER HOLDINGS, LLC and FOG
`CUTTER CAPITAL GROUP, INC.,
`
`Defendants,
`
`and
`
`FAT BRANDS INC.,
`
`Nominal Defendant.
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`MOTION TO STAY BY THE SPECIAL LITIGATION COMMITTEE OF
`THE BOARD OF DIRECTORS OF FAT BRANDS INC.
`
`The Special Litigation Committee (the “Special Litigation Committee”) of the
`
`Board of Directors (the “Board”) of Nominal Defendant Fat Brands Inc. (“Fat
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`Brands” or the “Company”) hereby moves for an Order staying this derivative action
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`for six months (the “Motion”) to permit the Special Litigation Committee’s
`
`investigation and work.
`
`EFiled: Feb 03 2023 09:40AM EST
`Transaction ID 69064999
`Case No. 2021-0511-SG
`
`
`
`C.A. No. 2021-0511-SG
`
`JAMES HARRIS and ADAM
`VIGNOLA, derivatively on behalf of
`FAT BRANDS INC.,
`
`Plaintiffs,
`
`v.
`
`SQUIRE JUNGER, JAMES
`NEUHAUSER, EDWARD H. RENSI,
`ANDREW A. WIEDERHORN, FOG
`CUTTER HOLDINGS, LLC and FOG
`CUTTER CAPITAL GROUP, INC.,
`
`Defendants,
`
`and
`
`FAT BRANDS INC.,
`
`Nominal Defendant.
`
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`MOTION TO STAY BY THE SPECIAL LITIGATION COMMITTEE OF
`THE BOARD OF DIRECTORS OF FAT BRANDS INC.
`
`The Special Litigation Committee (the “Special Litigation Committee”) of the
`
`Board of Directors (the “Board”) of Nominal Defendant Fat Brands Inc. (“Fat
`
`Brands” or the “Company”) hereby moves for an Order staying this derivative action
`
`for six months (the “Motion”) to permit the Special Litigation Committee’s
`
`investigation and work.
`
`EFiled: Feb 03 2023 09:40AM EST
`Transaction ID 69064999
`Case No. 2021-0511-SG
`
`
`
`PRELIMINARY STATEMENT
`1. Where, as here, a company’s board delegates to a special litigation
`
`committee the power and authority to investigate and determine whether derivative
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`claims are in the best interests of the company and its stockholders, “the right of the
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`independent committee to investigate and report its findings must take priority over
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`any entitlement of the plaintiff to go forward with the pending action.” Abbey v.
`
`Computer & Commc’ns Tech. Corp., 457 A.2d 368, 376 (Del. Ch. 1983). Indeed,
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`when a special litigation committee seeks a stay of derivative litigation to give itself
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`the time needed for its investigation, a stay is almost always “a foregone
`
`conclusion…[o]therwise, the entire rationale of Zapata, i.e., the inherent right of the
`
`board of directors to control and look to the well-being of the corporation in the first
`
`instance, collapses.” Kaplan v. Wyatt, 484 A.2d 501, 510 (Del. Ch. 1984), aff’d, 499
`
`A.2d 1184 (Del. 1985).
`
`2.
`
`On January 31, 2023, the Board created the Special Litigation
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`Committee consisting of Amy V. Forrestal and Lynne L. Collier, both of whom are
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`outside, non-management directors who joined the Board after the events at issue
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`and are not defendants in this action. The Board delegated to the Special Litigation
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`Committee the power and authority to, among other things, “(i) investigate, review
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`and analyze the facts and circumstances surrounding the allegations” in this action,
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`“(ii) determine what, if any, claims the Company may have in connection with the
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`2
`
`
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`allegations advanced” in this action, and “(iii) determine whether or not prosecution
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`of such claims is in the best interests of the Company and its stockholders and what
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`action, if any, the Company should take with respect to” this action and the claims
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`asserted herein. Ex. 1
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`3.
`
`To carry out its mandate, the Special Litigation Committee seeks a stay
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`of this action for a period of six months. To that end, counsel for the Special
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`Litigation Committee contacted counsel for Plaintiffs shortly after being retained on
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`February 1, 2023 to request a six-month stay. Plaintiffs’ counsel welcomed the
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`appointment of the Special Litigation Committee but expressed frustration over
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`depositions in the action having been previously delayed to facilitate what turned
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`out to be an unsuccessful mediation last week. The following day (i.e., yesterday,
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`February 2), Plaintiffs’ counsel declined to consent to the requested stay given
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`Plaintiffs’ desire to proceed with depositions currently scheduled to commence next
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`week.1 Notably, Plaintiffs’ counsel did not dispute the authority of the Board to
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`appoint the Special Litigation Committee, did not dispute that stays of derivative
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`actions like this one are routinely granted in Delaware as a matter of course, and did
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`not dispute that the six-month stay sought by the Special Litigation Committee here
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`
`1
`Counsel to the various defendants do not oppose the stay sought by the Special
`Litigation Committee.
`
`3
`
`
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`is well-supported by Delaware law. For the reasons discussed herein, the Motion
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`should be granted.
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`FACTUAL BACKGROUND
`Plaintiffs James Harris and Adam Vignola filed this derivative action
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`4.
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`on June 10, 2021. Dkt. 1. Plaintiffs allege, among other things, that the director
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`defendants caused Fat Brands to enter into a series of loans and a merger with Fog
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`Capital Group, Inc. (“Fog Capital”) on unfair terms in breach of their fiduciary duties
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`and that those transactions constituted a waste of corporate assets. Plaintiffs also
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`claim that Fog Cutter Holdings, LLC (“Fog Holdings”) caused Fat Brands to enter
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`into the merger in breach of its fiduciary duty and was unjustly enriched as a result.
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`The Company’s CEO and director, Andrew Wiederhorn, is moreover alleged to have
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`exercised control over the Company through his controlling stake in Fog Capital and
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`Fog Holdings.
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`5.
`
`Defendants moved to dismiss under Court of Chancery Rule 12(b)(6).
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`Dkt. 9. Following briefing by the parties, the Court conducted a hearing on the
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`dismissal motion on February 11, 2022. Dkt. 37. The Court denied the motion in
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`part during the hearing, id., and denied the remainder of the motion on May 25, 2022,
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`Dkt. 47. Document and written discovery followed. On November 18, 2022, the
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`Nominal Defendant filed its Response to the Complaint, Dkt. 61, and the remaining
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`Defendants filed their respective Answers, Dkts. 62-63. The Special Litigation
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`4
`
`
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`Committee understands that the parties participated in an unsuccessful mediation
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`last week before former Vice Chancellor Slights.
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`6.
`
`On January 31, 2023, the Board created the Special Litigation
`
`Committee and empowered it to, among other things:
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`investigate, review and analyze the facts and circumstances
`(i)
`surrounding the allegations advanced in the Litigation and any other
`related actions which may be filed, (ii) determine what, if any, claims
`the Company may have in connection with the allegations advanced in
`the Litigation and any other related actions that may be filed,
`(iii) determine whether or not prosecution of such claims is in the best
`interests of the Company and its stockholders and what action, if any,
`the Company should take with respect to the Litigation and any such
`claims, and (iv) take all other actions that the Special Litigation
`Committee deems necessary, appropriate or advisable in carrying out
`and fulfilling its duties and responsibilities in connection with the
`Litigation and any other related actions that may be filed, including,
`without limitation, prosecution, control, and supervision of the
`Litigation and any other related claims that may be filed by the
`Company (including, if determined to be appropriate, settlement)[.]
`
`Ex. 1. The Board’s enabling resolutions further specify that any determination by
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`the Special Litigation Committee shall be “final” and “shall not be subject to review
`
`or approval by the Board and shall be binding in all respects upon the Company[.]”
`
`Id.
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`7.
`
`As noted above, the Special Litigation Committee consists of Amy V.
`
`Forrestal and Lynne L. Collier. Ms. Forrestal joined the Board as an outside, non-
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`management director in October 2021 and brings to Fat Brands 30 years of
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`experience working as an executive and investment banker for companies in the
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`5
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`
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`restaurant and franchising industries. Ms. Forrestal currently serves as a Managing
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`Director of Brookwood Associates, an investment banking firm based in Atlanta,
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`where she has spearheaded deals for various restaurant brands. Prior to her work at
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`Brookwood Associates, Ms. Forrestal was a Managing Director in Banc of America
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`Securities’ Mergers and Acquisitions group. Ms. Collier joined the Board as an
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`outside, non-management director in July 2022, and brings to the Company nearly
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`30 years of experience in public capital markets with a focus on the restaurant
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`industry. Ms. Collier currently is the Head of Consumer Discretionary at Water
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`Tower Research and, before that, worked as a Managing Director for fourteen
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`months in the Investor Relations Division of ICR Inc. Prior to that, Ms. Collier had
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`a career in equity research as a sell-side Consumer Analyst, including for Loop
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`Capital, Canaccord Genuity, and Sterne Agee. Neither Ms. Forrestal nor Ms. Collier
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`is a defendant in this action.
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`8.
`
`On Wednesday, February 1, 2023, the Special Litigation Committee
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`retained Ross Aronstam & Moritz LLP (“RAM”) as its independent counsel. That
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`same day, RAM learned from Company counsel that depositions were scheduled to
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`begin next week. RAM thereafter promptly sought Plaintiffs’ consent to stay this
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`case. Although Plaintiffs’ counsel welcomed the formation of the Special Litigation
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`Committee, it expressed frustration over depositions having been delayed to
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`facilitate last week’s unsuccessful mediation. Plaintiffs’ counsel subsequently
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`6
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`
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`informed RAM yesterday that it opposes a stay given its belief that discovery,
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`including the depositions scheduled for next week, should proceed. Plaintiffs’
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`refusal to agree to a stay has necessitated the instant Motion.
`
`I.
`
`ARGUMENT
`THIS DERIVATIVE ACTION SHOULD BE STAYED.
`The derivative claims at issue in this case indisputably belong to Fat
`9.
`
`Brands and fall under the authority of the Board. “[D]irectors of a corporation and
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`not its shareholders manage the business and affairs of the corporation, and
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`accordingly, the directors are responsible for deciding whether to engage in
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`derivative litigation.” Levine v. Smith, 591 A.2d 194, 200 (Del. 1991) (internal
`
`citations omitted), abrogated on other grounds by Brehm v. Eisner, 746 A.2d 244
`
`(Del. 2000). This “managerial decision-making power, which encompasses
`
`decisions whether to initiate, or refrain from entering, litigation, [derives] from 8
`
`Del. C. § 141(a).” Zapata Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981)
`
`(internal citations omitted); see also Spiegel v. Buntrock, 571 A.2d 767, 773 (Del.
`
`1990) (“The decision to bring a lawsuit or to refrain from litigating a claim on behalf
`
`of a corporation is a decision concerning the management of the corporation … [and]
`
`such decisions are part of the responsibility of the board of directors”)
`
`(citations omitted).
`
`7
`
`
`
`10.
`
`Even a “board, tainted by the self-interest of a majority of its members,
`
`can legally delegate its authority [concerning litigation decisions on behalf of the
`
`corporation] to a committee of … disinterested directors.” Zapata, 430 A.2d at 786.
`
`Accordingly, “a special litigation committee of independent board members can
`
`assume the board’s responsibility to decide how best to exploit a litigation asset.”
`
`Wenske v. Blue Bell Creameries, Inc., 214 A.3d 958, 965 (Del. Ch.
`
`2019) (citing Zapata, 430 A.2d at 786). At that point, control of the derivative action
`
`no longer lies with the derivative plaintiffs, but with the “special agents [of the
`
`committee] appointed on behalf of the corporation for the purpose of making an
`
`informal, internal investigation of [the] charges.” Kaplan, 484 A.2d at 509.
`
`11.
`
`“During the time period reasonably needed for the [special litigation
`
`committee] to perform its investigation and decide on its course of action, [it] has
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`primacy in controlling this litigation on behalf of [the company].” In re Oracle
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`Corp. Deriv. Litig., 808 A.2d 1206, 1207 (Del. Ch. 2002). As such, stays sought by
`
`special litigation committees are almost always “a foregone conclusion…
`
`[o]therwise, the entire rationale of Zapata, i.e., the inherent right of the board of
`
`directors to control and look to the well-being of the corporation in the first instance,
`
`collapses.” Kaplan, 484 A.2d at 510; see also In re InfoUSA, Inc. S’holders Litig.,
`
`2008 WL 762482, at *2 (Del. Ch. Mar. 17, 2008) (“[T]his Court has routinely
`
`granted reasonable stays to allow SLCs to complete their investigations.”); Oracle,
`
`8
`
`
`
`808 A.2d at 1211 (“[T]his court has acknowledged its duty to stay derivative actions
`
`at the instance of [an SLC], pending investigation and report of the Committee ….”)
`
`(internal quotation marks and citation omitted); Katell v. Morgan Stanley Grp., Inc.,
`
`1993 WL 390525, at *4 (Del. Ch. Sept. 27, 1993) (“Delaware law requires that all
`
`proceedings in this action be stayed pending the Committee’s investigation.”); In re
`
`Insys Therapeutics Deriv. Litig., C.A. No. 12696-JTL, at 56 (Del. Ch. Mar. 26, 2019)
`
`(Transcript) (recognizing that granting a reasonable stay is the “default” rule and
`
`observing that “[p]art of the idea of giving the SLC the first chance to decide what
`
`to do with the case, or a meaningful chance to decide what to do with the case, is
`
`that there are potential advantages to having the SLC control the litigation”) (Ex. 2).
`
`12.
`
`There is nothing about this case that undercuts these well-established
`
`principles. The claims in the case are indisputably brought derivatively on Fat
`
`Brand’s behalf, and the elected members of the Board properly appointed and
`
`authorized the Special Litigation Committee to manage and control the litigation
`
`asset. The members of the Special Litigation Committee are experienced outside,
`
`non-management directors who joined the Board after the events at issue and are not
`
`defendants in this action. They are ready to start their work on the Company’s behalf
`
`pursuant to the authority granted to them by the Board.
`
`13.
`
`Plaintiffs have opposed a stay given their belief that discovery should
`
`continue. But this approach would subvert the Board’s authority to manage its
`
`9
`
`
`
`litigation asset and “the entire rationale of Zapata” itself. Kaplan, 484 A.2d at 510;
`
`see also Pompeo v. Hefner, 1983 WL 20284, at *2-3 (Del. Ch. Mar. 23, 1983)
`
`(staying discovery pending special litigation committee investigation because “the
`
`derivative plaintiff should not be permitted to intermeddle or act coextensively with
`
`the independent arm of the board of directors”); Abbey, 457 A.2d at 375 (“If a
`
`derivative plaintiff were to be permitted to depose corporate officers and directors
`
`and to demand the production of corporate documents, etc. at the same time that a
`
`duly authorized litigation committee was investigating whether or not it would be in
`
`the best interests of the corporation to permit the suit to go forward, the very
`
`justification for the creating of the litigation committee in the first place might well
`
`be subverted.”).
`
`14.
`
`In addition, permitting discovery would be duplicative of the Special
`
`Litigation Committee’s investigation and cost unnecessary time and expense. See
`
`Abbey, 457 A.2d at 375 (“In many cases where the Zapata procedure is invoked,
`
`what amounts to a duplication of discovery may well prove to be inevitable. But
`
`this provides no basis for permitting simultaneous, dual investigation and discovery
`
`of the derivative allegations in all such cases.”). Unless a stay is entered, the dual
`
`burdens of cooperating in the Special Litigation Committee’s investigation and
`
`participating in litigation would unduly expend Company resources and impose
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`additional and potentially unnecessary burdens on the Court.
`
`10
`
`
`
`II.
`
`A SIX-MONTH STAY IS REASONABLE.
`15. A six-month stay is appropriate here because special litigation
`
`committees like the Special Litigation Committee should have a “reasonable time”
`
`to complete its investigation. See, e.g., Abbey, 457 A.2d at 375. “[C]ourts generally
`
`allow SLCs between six and ten months to investigate and report on pending
`
`derivative actions.” Silverstein v. Larson, 2005 WL 435241, at *3 (D. Minn.
`
`Feb. 25, 2005) (applying Delaware law); see also, e.g., Franchi v. Barabe, 2021 WL
`
`1390485, at *1 (Del. Ch. Apr. 12, 2021) (ORDER) (granting SLC six-month stay);
`
`In re Expedia Grp. Consol. S’holders Litig., 2020 WL 118618, at *1 (Del. Ch.
`
`Jan. 9, 2020) (ORDER) (granting SLC six-month stay); In re Oracle Corp. Deriv.
`
`Litig., 2018 WL 3575992, at *1 (Del. Ch. July 24, 2018) (ORDER) (granting SLC
`
`six-month stay); Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 835
`
`(Del. 2011) (nine-month period for SLC’s investigation and report); Charal Inv. Co.
`
`v. Rockefeller, 1995 WL 684869, at *1, 5 n.2 (Del. Ch. Nov. 7, 1995) (ten-month
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`period for SLC’s investigation and report).
`
`16.
`
`The stay requested here is consistent with the foregoing precedent and
`
`is reasonable under the circumstances. A thorough investigation of the events
`
`challenged in this action will—at minimum—require the collection and review of
`
`relevant documents, interviews with numerous Fat Brands directors and officers, and
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`an examination of the circumstances surrounding the loans and merger at issue.
`
`11
`
`
`
`The Special Litigation Committee will provide interim status reports to the Court
`
`every two months during the stay and will finish its work sooner if the scope of its
`
`investigation permits. And if the Special Litigation Committee anticipates needing
`
`more time to complete the investigation, the Special Litigation Committee will
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`request an extension from the Court, with the consent of all parties, if possible,
`
`before the stay expires.
`
`CONCLUSION
`For the foregoing reasons, the Special Litigation Committee respectfully
`
`requests that the Court enter an Order staying all proceedings in this action for
`
`six months.
`
`ROSS ARONSTAM & MORITZ LLP
`
`/s/ Bradley R. Aronstam
`Bradley R. Aronstam (Bar No. 5129)
`S. Michael Sirkin (Bar No. 5389)
`Elizabeth M. Taylor (Bar No. 6468)
`A. Gage Whirley (Bar No. 6707)
`Hercules Building
`1313 North Market Street, Suite 1001
`Wilmington, Delaware 19801
`(302) 576-1600
`
`Attorneys for the Special Litigation
`Committee of the Board of Directors of
`Fat Brands Inc.
`
`February 3, 2023
`
`Words: 2,564
`
`12
`
`
`
`CERTIFICATE OF SERVICE
`
`I, Bradley R. Aronstam, hereby certify that on February 3, 2023, I caused a
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`true and correct copy of the foregoing Motion to Stay to be served through File
`
`& ServeXpress on the following counsel:
`
`Stephen E. Jenkins
`Richard D. Heins
`ASHBY & GEDDES
`500 Delaware Avenue, 8th Floor
`P.O. Box 1150
`Wilmington, Delaware 19899
`
`Brock E. Czeschin
`Samuel J. Gray
`RICHARDS, LAYTON
` & FINGER, P.A.
`One Rodney Square
`920 North King Street
`Wilmington, Delaware 19801
`
`Martin S. Lessner
`Elisabeth S. Bradley
`Kevin P. Rickert
`YOUNG CONAWAY STARGATT
` & TAYLOR, LLP
`1000 North King Street
`Wilmington, Delaware 19801
`
`K. Tyler O’Connell
`MORRIS JAMES LLP
`500 Delaware Avenue, Suite 1500
`P.O. Box 2306
`Wilmington, Delaware 19801
`
`/s/ Bradley R. Aronstam
`Bradley R. Aronstam (Bar No. 5129)
`
`
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