Shareholders take Chipotle to court
June 20, 2016
by Erica Shaffer
Chipotle continues to battle public perception and legal issues.
DENVER – Shareholders have filed a lawsuit against Chipotle Mexican Grill on claims that company officials breached their fiduciary duties and unjustly enriched themselves while mismanaging the company, among other claims. Co-CEOs Steve Ells and Monty Moran were named as defendants along with several other top executives.
According to court documents filed in the District Court of Denver, between April 6, 2011 and Dec. 31, 2015, company executives “… abused their control of the Company, and dealt themselves excessive compensation worth hundreds of millions of dollars through a corrupt stock incentive plan...” in which no limits were set on the number of shares granted as part of executive compensation plans.
The lawsuit also alleges that the company misled shareholders by continuously representing that Chipotle restaurants adhered to industry standards of food safety. The lawsuit references the outbreaks and the resulting financial fallout.
Two outbreaks of E. coli O26 (STEC 26) were linked to Chipotle restaurants — an initial outbreak sickened 55 individuals across 11 states, while a second, smaller outbreak sickened five people in three states. In December 2015, an outbreak of norovirus sickened at least 130 individuals at Chipotle restaurant in Boston.
The outbreaks caused Chipotle’s stock to tumble. In April, the company reported its first-ever quarterly loss of $26.7 million. Food safety woes also forced the company to implement more-stringent food-safety protocols including new food safety procedures for suppliers and its central kitchens and restaurants. The company also hired Kansas State Univ. Prof. James Marsden as executive director of food safety. The company’s efforts to regain consumer trust led to significant financial investments by Chipotle.
“As a result of the foregoing, and by failing to properly consider the interests of the Company and its public shareholders, Defendants have caused Chipotle to waste valuable corporate assets, to incur many tens, if not hundreds, of millions of dollars due to overpayment by $84 million for Chipotle’s own stock, legal liability and/or costs to defend unlawful actions, and to lose business from clients, investors, and financiers who no longer trust the Company and its affiliates,” the plaintiffs argued in court documents.
The plaintiffs in the case are seeking unspecified damages and attorneys’ fees in addition to a proposal to strengthen board oversight of operations and provisions that give shareholders more input in board policies and guidelines.