Free Motion for Partial Summary Judgment - District Court of Colorado - Colorado

Case 1:04-cv-00725-RPM

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DISTRICT COURT, CITY AND COUNTY OF DENVER,COLORADO 1437 Bannock Street Denver, CO 80202
Plaintiff: EDWARD C. SEBESTA, Individually and On Behalf of All Others Similarly Situatcd,

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Defendants: RICHARD E. SCITADEN, RICIIARD F. SCHADEN, FREDERICK H. SCHADEN, MARK. L. BROMBERG, J. ERIC LAWRENCE, JOHN J. TODD, BRAD A. GRIFFIN, and THE QUIZNO'S CORPORATION. ATTORNEYS FOR PLAINTIFF: Robert .I.Dyer I11 (5734) Kip B. Sl~urnan (23593) Jeffrey A. Berens (28007) DYER HUMAN, r,LP 801 East 17th Avenue Denver, CO 8021 8-1417

COURTUSE ONLY

Case Numberbl Courtroom:

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(303) 861-3003 Fax:(303) 830-6920

CLASS ACTION COMPLAINT AND JURY DEMAND
PlaintifT, by his attorneys, alleges upon personal knowledge as to his own acts and upon information and belief as to all other matters, as follows: Ovcrview 1. Defendants are making a mockery of the fiduciary duties owed by corporate

directors to public stockholders. Specifically, the board of directors of The Quizno's Corporation consisiing of certain non-employee directors to represent ("Quizno's") appointed a special co~nrnittee the interest of Quizno's public stockholders in connection with a Quizno's insiders.

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2.

The transaction, which the special committee (a) approved and (b)

recommended that Quizno's public stoclcholders vote in favor of, would result in the equity interests of Quizno's public stockholdcrs being completely extinguished in exchange for $8.50 per share. '['hereafter, Quizno's insiders would own 100% of Quizno's cquity.
3.

The board's special committee continues to recommend the insider squeeze-

out merger notwithstanding that a third party has offered to pay $10.63 per share to those public

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stockholders wishing to sell their Quizno's shares. In other words, these erstwhile fiduciaries for the public stockholders are supporting a proposed transaction which both would provide the public
s stockholders with 25% &

compensation than that offered by a third-party, and would be coercive,

i.e., - the insiders' proposal forces the public stockllolders to surrender their entirc equity interest in Quizno's while the third-party's proposal gives the pub1ic stockholders the option of receiving $10.63 per share in cash or remaining a Quizno's stockholder.

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4.

As befits a transaction where fiduciaries are ignoring their obligations to

public stockholders in favor of acting as sycophants for management insiders, the disclosure provided to the public stockholders is materially misleading. IS Quizno's public stockholders are rcquired to vote bascd on a materially false and misleading proxy statement, their voting rights will be irreparably harmed. 5. Plaintiff brings this action individually and as a class action on behalf of all

persons, other than dcfcndants, who owned, on October 5,2001, the securities of Quizno's and who are similarly situated, to enjoin certain actions of the individual defendants, which arc intended to favor the interests of members of Quizno's management to the detriment of Quizno's public stockholders, as more fully described below.

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6.

In particular, defendants accepted an offcr to take Quizno's private from

defendants Richard E. Schaden and Richard F. Schaden and their affiliates and rejected an offer that was 25% higher made by an unrelatcd third party - Fagan Capital, Inc. ("FCI"). By failing to independently explore the FCI offer, negotiate with FCT, and instead favoring only an offer made by members of management and their affiliates, defendants have breached the i:duciary duties ofduc care, loyalty, and candor owed to Quizno's public stockholders.

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7.

Such action and inaction represent an effort by the individual defendants to

permit insiders to gain complete control over the valuable assets and businesses of Quizno's without paying a fair price to Quizno's public stockholders.

8.

The actions ofthe individual defendants constitute a breach of their fiduciary

duties to maximize stockholder value, to refrain from considering their interests over those oi'the public stockholders, to respond reasonably and on an informed basis to bona fide offers for the public's minority interest in Quizno's, and when providing information to Quizno's public

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stockholders, to provide true and complete disclosure. Parties
9.

Plaintiff has been a conti~~uous owner of shares of Quizno's common stock

at all relevant times described herein.

10.

Defendant Quizno's is a Colorado corporation with its principal offices

located at 1415 Larimer Street, Denver, Colorado 80202. At October 5, 2001, Quizno's had approximately 2,300,000 shares of conlmon stock outstanding. Quizno's principal business is the operation and licensing of franchise restaurants ,and food servicc.

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11.

Defendant Richard E. Schaden, at all times material hereto, has been the

President, Chief Executivc Officer, and Chairman of the Board of Directors of Quizno's. 12. Defendant Richard F. Schaden, at all timcs material hereto, has been the Vice

President, Secretary, and a director of Quizno's. 1 3. Defendants Frederick 1-1. Schaden, Mark I,. Rromberg, J. Eric Lawrence, Brad

A. Griffth, and John J. Todd are directors of Quizno's. Both Messrs. Bromberg and Lawrence serve

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as directors of Quizno's pursuant to a contractual arrangement with a lender to Quizno's.
14.

The individual dcfendants, by reason of their corporate directorship andlor

executive positions, arc fiduciaries to and lor Quizno's stockholders, which fiduciary relationship requires them to exercise their best judgment, to act in a prudent manner and in the best interests of Quizno's stockholdcrs, and to maximize stockholder value.
15.

Each defendant is sued individually as a conspirator and aider and abettor, as

well as in his capacity as an officcr andlor director of Quizno's, and the liability of each arises from

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the fact that he has cngagcd in all or part of the unlawful acts, plans, schemes, or transactions complained of herein. Class Action Alle~ations
16.

Plaintiff brings this action individually on his own behalf and as a class action,

on behalf of all stockholders of Quizno's (except the 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").

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17.
18.

This action is properly maintainable as a class action. The Class is so numerous that joinder of all members is impracticable. The

public stockholders hold hundreds of thousands of shares of Quizno's common stock.

I 9.

There is a well-defined community of interest in the questions of law and fact

involved affecting the members of the Class. Among the questions of law and fact which are common to the Class, and which predominate over questions affecting any individual Class member

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are, inter alia, the following:
(a)

whether the individual defendants have breached their fiduciary and

other common law duties owed by them to plaintiff and other members of the Class; (b) value; and
(c)

whether defendants wrongfully failed to maximize public stockholder

whether plaintiff and the other members of the Class would be

irreparably damaged if the squeeze-out merger was not enjoined.

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20.

Plaintiff is amember of the Class and is committed to prosecuting this action.

Plaintiff has retained competent counsel experienced in litigation of this nature. T'he claims of plaintiff are typical of the claims of other members of the Class, and plaintiff has the same interests as the other members of the Class. Plaintiffdoes not have interests antagonistic to or in conflict with those he seeks to represent. Plaintiff is an adequate representative of the Class.
21.

The likelihood of individual Class members prosecuting separate actions is

remote due to the relatively small loss suffered by cach Class member as compared to the burdcn
and expense ofprosecuting litigation of this nature and magnitude. Absent a class action, defendants

are likely to avoid liability for their wrongdoing, and Class members are unlikely to obtain redress -5-

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for the wrongs alleged herein. There are no difficulties likely to bc encountered in the mmagemcnt of the Class claims. 'l'his Court is an appropriate forum for this dispute. Substantive Allegations 22. Quizno's was Sounded 1991 by defendants Richard E. Schaden and Richard

F. Schaden. In February 1994, Quizno's became a public corporation when it sold 1,150,000 shares

of its common stock at $5.00 per share. Pollowing completion of Quizno's initial public offering, the Schadens still maintained absolute control over Quizno's by virtue of their holding approximately 59% of the outstanding shares.
23.
In October 1999, Quizno's began a share repurchase program that resulted in

144,005 shares of publicly-held stock being acquired. This repurchase program increased the Schadens' shareholdings on a percentage basis. 24. In November 2000, Quizno's began a tcnder offer for any and all shares of

publicly held stock at $8.00 per share. By December 12,2000, Quizno's had repurchased 1,699,439 of its common stock, including certain options and warrants to acquire shares of common stock. This again resulted in increasing the Schadens' ownership of Quizno's on a percentage basis. The tender offer was financcd through a loan from Lcvine Leichtman Capital Partners IT, L.P. ("Levine Leichtman"). 25. On April 1 1,2001, the Quizno's board unanimously concluded that it should

consider another transaction that would permit Quizno's to be taken private. Even though a specilk proposal was not madc, thc board expected that thc Schadens would make such an offer and formed a special committee to considcr such an offer.

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26.

The special committee that was formed in April 2001, consisted of Mark

Brombcrg, Eric Lawrence, and John Todd (thc "Special Committee"). Members of the Special Committee receive $7,500 per month. 27. Contrary to accepted practices, the Special Committee chose financial and

legal advisors, both of which were conflicted through prior representation of Quizno's and its management. Brobcck, Phleger & Harrison, LLP, the Special committee's counsel, had been advising Quizno's and management regarding the proposed going private transaction and thus was incapable of providing independent advice to thc Special Committee.
28.

I ikewise, Tucker Anthony Sutro Capital Markets ("Tucker Anthony" ), the

Special Committee's financial advisor, had been advising Quizno's and its management regarding the going private transaction. Moreover, Tucker Anthony's parent has an outstanding loan to Richard E. Sclnaden, which loan is guaranteed by Quizno's and has acted as the brolterldealer for Quizno7sprior share rcpurchase program, all of which prevented it from impartially advising the

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Spccial Committee.
29.

On May 21, 2001, the Special Committee received a proposal fiom the

Schadens and their newly formed company, Fircnze Corp. ("Firenze") pursuant to which Firenze would acquire the remaining publicly-held stock.
30.

On June 6,2001, the Special Committee and the Schadens agreed on a price

of $8.50 per share.

31.

On June 8, 2001, Kichxd E. Schaden belatedly notified the Spccial

Cornrnittcc that he had previously received a letter Srom FCI expressing interest in making an offer to acquire all of the public's shares in Quizno's. III a subsequent telephone conference with FCI, the

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Schadens advised FCI that they would be unwilling to sell their shares to it or jointly acquire the minority stock that was publicly held. 32. On June 21,2001, after receiving a "fairness" opinion from Tucker Anthony,

both the Special Committee and the entire board of directors unanimously approved the proposed transaction with the Schadens, and recommended that the public stockholders vote to approve the transaction.

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33.

On September 4,200 1, FCI sent a letter to Quizno's management stating that

it was prcparcd to makc a formal offer to acquire any or all of Quizno's public minority shares. 34. On September 21, 2001, FCI lormally offered to purchase any or all of

Quizno's outstanding public minority shares for $10.63 per share - approximately 25% more than the squeeze-out merger transaction proposed by the Schadcns. The FCI offer was not contingent on

any minimum number of sharcs bcing tendered or any financing contingency. 'The only requirement

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was the inclusion of a "fair market put option" similar to that which existed already with Levine Leichtman. It was spccifically stated that the put option could be deferred for five years or more so as to not interfere with the existing Levine Leichtman put option.

35.

K I ' s September 21st letter was followed by a letter dated October 2,2001.

The October 2nd letter provided specific information about the FCI offer and the fair market put option. This letter pointed out that FCI is willing to structure the put option on terms no different that the Levine Leichtman option.
36.

Despite FCI's rcpcated willingness to mcct and negotiate the terms of its offer,

on Octohcr 22, 2001, thc Special Committee reaffirmed its support of the $8.50 offered by the Schadens and suggested that FCI n~cct with Levine Leichtman to negotiate terms of a put option.

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37.

Defendants' hiding behind the skirts of the Levine Leichtrnan put option is

ludicrous for a number of reasons. First, the put option cannot serve as an excuse not to negotiate with FCI because Levine Leichtman's loan matures in only approximately four years. Second, evcn if a way around the Levine Lcicht~nan option was not available, the put option's mere existence put cannot justify a recommendation to accept an offer which is 25% lower than an offer from a thirdparty. There is no better indication of value than a third-party offer.

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38.

Defendants have breached their fiduciary duty to maximize stockholder value

by continuing to support management's offer while rejecting a bona fide higher and non-coercivc offer from FCI. By doing so, stockholders will be receiving $2.13 per share less than they could have had the Special Committee entered into meaningful discussion and negotiation with FCI.

39.

On Novcrnber 5 , 2001, defendants filed a definitive proxy statement that

purported to describe the terms and background to the proposed transaction and set a special stockholder meeting for November 30, 2001 to vote on the proposed transaction (the "Proxy

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Statement"). 40. The Proxy Statement is materially false and misleading because it omits

material information and fails to include all material information to which stockholders are entitled to prior to making their determination whether to vote in favor or against the management's proposed squeeze-out merger.

41.

Specifically, thc Proxy Statement is materially false and misleading in a

number of respects, including the following:

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a.

it fails to disclose that the Special Committee refused to negotiate with

FCI but instead, by letter dated October 22,200 1, directed FCT to negotiate with Levine Leichtman,

a firm which owes no fiduciary duty to Quizno's public stockholders;
b.

the Proxy Statement's statement that FCI would offer $10.63 per share

"only if [it] were granted a put option from [Quizno's] on terms similar to those in the Levine Leichtman loan" materially misstates FCI's letter which said that it was merely "contemplating" such

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a put option which left substantial room for negotiations had the Special committee been inclined to fulfill its fiduciary duties by ncgotiating with FCI; and
c.

the Proxy Statement repeatedly describes the Special Committee's

legal and financial advisors as being "independent" when they clearly are not. 42. Defendants, in breach of their fiduciary duty of candor, have stranded

Quizno's stockholders without the information necessary to make an informed decision concerning the fairness and adequacy of the consideration that is being offered to them by management.

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43.

By virtue of the acts and conduct alleged herein, the individual defendants,

who control Quizno's actions, have carried out a preconceived plan and scheme to place management's personal interests ahead of the interests of the public stockholders of Quizno's. 'The individual defendants have violated their fiduciary duties owed to plaintiff and the Class in that they have not and are not exercising independent business judgment and have acted and are acting to the detriment of Quizno's public stockholders.

44.

As a result of the actions of the individual defendants, plaintiff and thc other

members of the Class have been and will continue to be damaged in that they have not and will not

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be given the opportunity to make an informed decision and ultimatcly may be unable to receive their
fair proportion of the value of Quizno's assets and businesses.
45.

Ry reason of all olthe foregoing, defendants herein have willfully participated

in unfair dealing toward the plaintiff and the other members of the Class and have engaged in and substantially assisted and aided and abetted each other in breach of the fiduciary duties owed by them to the Class.
46.

Unless enjoined by this Court, defendants will continue to breach their

fiduciary duties owed to plaintiff and the Class, and will succeed in their plan to enrich management by excluding the Class from its fair proportionate share of Quimo's's valuable assets and businesses, all to the irreparable harm of the Class. 47. The plaintiff and the Class have no adequate remedy of law.

WHEREFORE, plaintiff prays for judgment and relief as follows:
(a) dcclaring that this lawsuit is properly maintainable as a class action

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and certifying the plaintiff as proper representative of the Class;

(b)

ordering the individual defendants to carry out their fiduciary duties

to plaintiff and the other members of the Class; (c) preliminarily and permanently enjoining defendants and their counsel,

agents, employees, and all persons acting under, in concert with, or for them, from proceeding with the proposed transaction without first making all material disclosures to Quizno's stockholders; (d) awarding compensatory damages against defendants, jointly and

severally, in an amount to be determined at trial, together with prejudgment interest at the maximum rate allowable by law;
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