<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 8-K
-------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 8, 1995
-------------
CROWN BOOKS CORPORATION
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-11457 52-1227415
- - ------------------------------- ---------------- ----------------------------
(State or other jurisdiction of (Commission File (IRS Employer
incorporation) Number) Identification No.)
</TABLE>
3300 75th Avenue, Landover, Maryland 20785
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 731-1200
--------------
- - ------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
The discussion under Item 5 of this Current Report is incorporated
herein by reference.
ITEM 5. OTHER EVENTS
On September 14, 1994, Ronald S. Haft filed a lawsuit (the "Options
Lawsuit") against Dart Group Corporation ("Dart") in the Chancery Court of the
State of Delaware seeking a court order that Dart issue to him 197,048 shares
of Class B Common Stock of Dart pursuant to his purported exercise of options
to purchase such shares (the "Options"). On January 19, 1995, Ronald S. Haft
and plaintiffs in a shareholders derivative lawsuit filed in September 1993
(the "Kahn Derivative Lawsuit"), who had intervened in the Options Lawsuit,
entered into what they referred to as a Stipulation and Agreement of
Compromise, Settlement and Release (the "Settlement Agreement"), which was
filed in the Court on January 20, 1995. As part of the putative Settlement
Agreement, Ronald Haft's exercise of the Options would have been allowed.
On March 8, 1995, Dart filed with the Court a brief opposing the
authority of the plaintiffs in the Kahn Derivative Lawsuit to settle the
Options Lawsuit on behalf of Dart (the "Brief"). As an exhibit to the Brief,
Dart filed under seal its Response to Putative Settlement Agreement Between
Plaintiff and Intervenors (the "Memorandum"). On March 10, 1995, the
plaintiffs in the Kahn Derivative Lawsuit withdrew from the Settlement
Agreement. A copy of the Memorandum is attached hereto as Exhibit 99.1 and a
copy of the resolution of the Executive Committee of Dart's Board of Directors
(the "Executive Committee") approving the submission of the Memorandum to
the Court is attached hereto as Exhibit 99.2.
The Memorandum makes reference to a preliminary estimation (which is
subject to change) by Wasserstein Perella & Co., Inc. ("WP&Co.") of the range
of fair value of Dart's outstanding stock. Dart has engaged WP&Co. to estimate
the range of fair value of Dart in connection with the defense of the Options
Lawsuit and with respect to certain other issues of shareholder value
confronting Dart. As part of this engagement, WP&Co. is analyzing the value of
Dart as of the date of the issuance of the Options and as of the date the
report is to be delivered, based upon methodologies and certain assumptions
deemed appropriate by WP&Co. The primary methodology which WP&Co. is utilizing
for purposes of this valuation is a comparable companies analysis, i.e., an
analysis of the current trading values of the stock of certain other public
companies in the same businesses as Dart. WP&Co. is also utilizing, to a
lesser extent, two other methodologies: a discounted cash flow analysis (based
on projected free cash flow over approximately a five-year horizon) and a
comparable acquisitions analysis (based on transaction multiples for selected
recently completed acquisitions of retail companies). In conducting the
discounted cash flow analysis, WP&Co. has been provided with certain very
preliminary internal estimates of future performance of Dart prepared by its
2
<PAGE> 3
management (which were not prepared for this purpose, are subject to change and
have not been independently verified by WP&Co.).
The range of WP&Co.'s preliminary estimated value per share referred
to in the Memorandum exceeds the range within which the shares of Dart's Class
A stock have traded in recent periods. Neither Dart nor WP&Co. make any
representation or prediction as to whether the market price of the shares will
increase to the range of value in WP&Co.'s preliminary estimate or as to
whether any holder of shares would at any time be able to realize an amount in
that range from an investment in the shares.
The Memorandum also states that the Executive Committee "has under
favorable consideration" a liquidation of Dart's interest in Shoppers Food
Warehouse and an extraordinary distribution of cash to shareholders or a share
repurchase. No final decision has been made whether or not Dart will
enter into these transactions, and there can be no assurance as to the timing
or terms of these extraordinary transactions, if they do occur.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Attached hereto as Exhibit 99.1 is a copy of Dart's Response to
Putative Settlement Agreement Between Plaintiff and Intervenors, together
with its index of the following documents attached thereto:
TAB DOCUMENT
1. Dart 10K (1994).
2. Hearing Transcript (Jan. 30, 1995).
3. Plaintiffs' Memorandum of Law in Support of Their Motion for the
Appointment of a Temporary Custodian (Jan. 3, 1995), filed in Kahn
v. Haft, Del. Ch., C.A. No. 13154.
4. Directors' Response to R. Haft Settlement Proposal (Dec. 20, 1994).
5. Press release of Herbert Haft (Jan. 23, 1995).
6. Report of Wasserstein Perella & Co. re: maximization of
shareholder value (Mar. 6, 1995).
7. Standstill Agreement (Sept. 14, 1994).
3
<PAGE> 4
8. Dart Group Corporation 10Q (Oct. 31, 1994).
9. Crown Books Corporation 10Q (Oct. 31, 1994).
10. Letter from Geoffrey Stewart to Douglas Bregman, et al., (Sept. 2,
1994).
11. Hearing Transcript (Jan. 30, 1995).
12. Letter from David J. Hensler to Chancellor Allen (Jan. 26, 1995).
13. Settlement Submission (Jan. 19, 1995).
14. Letter from Mr. Battaglia to Court (Jan. 20, 1995).
15. Schafran Affidavit (Mar. 8, 1995)
16. Dart Group Corporation 10Q (Oct. 31, 1994).
17. Dart Press Release (Feb. 10, 1995).
18. Letter from Ayres to Bonanno (Dec. 29, 1994).
19. Letter from Ayres to Hensler (Dec. 21, 1994).
20. Kahn Affidavit (Jan. 19, 1995).
21. Hearing Transcript (Sept. 14, 1994).
22. Principles of Corporate Governance: Analysis and Recommendations,
2 A.L.I. pt. VII, Reporter's Note, at 9 (1994).
23. Warren Brown & Frank Swoboda, Managing the Culture of Change; At
G.M. New Team Shakes Up Culture From Top Down, Wash. Post (Jan.
31, 1993).
24. Alison Leigh Cowan, The High Energy Board Room, N.Y. Times (Oct.
28, 1992).
25. Doron P. Levin, Shake Up At G.M.; Stempel Quits Job As Top G.M.
Officer In Rift With Board, N.Y. Times (Oct. 27, 1992).
26. Principles of Corporate Governance, 2 A.L.I. pt. VII, Section 7.14
cmt. c, at 184 (1994).
27. Am. Complaint (Jan. 12, 1995), filed in Kahn v. Haft, Del. Ch.,
C.A. No. 13154.
4
<PAGE> 5
28. Agreement between Combined entities and Dart Drug Stores, et al.
(July 6, 1987).
29. Joint Stipulation between Dart Drug Stores, Trak, and Combined
(Oct. 7, 1991), filed in In re Dart Drug Stores, Inc., No.
89-4-2347-PM (Bankr. Md.).
30. Notes from Ronald Haft SLC Interview (June 16, 1994).
31. Notes of Feb. 15, 1994 SLC Meeting at Combined Properties (dated
Feb. 19, 1994).
32. Marshall Affidavit (Feb. 28, 1995).
33. Wolff Affidavit (Mar. 7, 1995).
34. Haft Family Stock Option Charts.
35. Complaint, (Nov. 23, 1993), filed in Haft v. Haft, Del. Ch. C.A.
No. 13268.
36. Marmon Affidavit (Mar. 6, 1995).
37. Ramsey Affidavit (Mar. 7, 1995).
38. Schafran deposition (Feb. 16, 1995).
39. Complaint, (Aug. 10, 1993), filed in Haft v. Haft, D.C. Super. Ct. C.A.
No. DR-2087-93.
40. Memorandum of Robert M. Haft and Linda G. Haft in Opposition to
Defendants' Motion for Summary Judgment, (May 6, 1994), filed in
Haft v. Haft, D.C. Super. Ct. Fam. Div., C.A. No. DR-2087-93.
41. Kara Swisher, Dart's Dilemma, Wash. Post (Jan. 30, 1995).
42. Betsy Pisik, Directors Act to Halt Hafts' Family Feud, Wash. Times
(Sept. 8, 1994).
These documents have been omitted from Exhibit 99.1 attached hereto.
The Registrant agrees to furnish supplementally to the Commission upon its
request, any of the omitted documents.
Attached hereto as Exhibit 99.2 is a copy of the Resolution of the
Executive Committee of the Board of Directors by Unanimous Written Consent,
dated March 7, 1995.
5
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- - ----------- ----------- ----
<S> <C> <C>
99.1 Dart Group Corporation's Response
to Putative Settlement Agreement
Between Plaintiff and Intervenors
99.2 Resolution of the Executive Committee
of the Board of Directors by Unanimous
Written Consent, dated March 7, 1995
</TABLE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CROWN BOOKS CORPORATION
By:/S/ Ronald T. Rice
------------------------------------
Ronald T. Rice
Assistant Vice President
Date: March 14, 1995
6
<PAGE> 1
EXHIBIT 99.1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- - -------------------------------
)
RONALD S. HAFT )
)
Plaintiff, )
)
v. ) C.A. No. 13736
)
DART GROUP CORPORATION, ) (Filed Under Seal)
a Delaware corporation, )
)
Defendant )
)
ALAN R. KAHN and THE TUDOR )
TRUST, derivatively on behalf )
of Dart Group Corporation, )
)
Defendants-Intervenors. )
)
- - -------------------------------
DART GROUP CORPORATION'S RESPONSE TO PUTATIVE
SETTLEMENT AGREEMENT BETWEEN PLAINTIFF AND INTERVENORS
Filed as Exhibit CCC to
DART GROUP CORPORATION'S BRIEF IN OPPOSITION TO
INTERVENORS' AUTHORITY TO AGREE TO SETTLEMENT
Arthur G. Connolly, Jr.
CONNOLLY, BOVE, LODGE & HUTZ
1200 Market Building
Wilmington, Delaware 19801
(302) 658-9141
Stephen J. Brogan
Timothy J. Finn
JONES, DAY, REAVIS & POGUE
1450 G Street, N.W.
Washington, D.C. 20005
(202) 879-3939
Attorneys for Dart Group
Corporation
Dated: March 8, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. SETTLEMENT ON ITS FACE IS UNFAIR TO THE
CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
A. The Offsetting Sale Of Class A Stock Does Not
Cure The Waste Caused Directly By The Class B Option . . . . . . . . . . 9
B. The Promise To Maximize Shareholder Value is
Illusory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. Independent Directors and Fees . . . . . . . . . . . . . . . . . . . . . 18
D. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
III. THE PURPORTED SETTLEMENT DOES NOT ADEQUATELY
PROTECT THE CORPORATE INTEREST FROM THE MULTITUDE
OF HAFT-GENERATED PROBLEMS THAT CURRENTLY CONFRONT
THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
A. Release of Claims by the Corporation . . . . . . . . . . . . . . . . . . 23
1. Haft Family Real Estate Transactions . . . . . . . . . . . . . . . 26
2. Haft Family Options . . . . . . . . . . . . . . . . . . . . . . . . 36
a. Options Granted Under the 1983 Plan . . . . . . . . . . . . . 38
b. Dart/SFW Options . . . . . . . . . . . . . . . . . . . . . . . 40
c. 1987 Options . . . . . . . . . . . . . . . . . . . . . . . . . 43
3. Dart's Potential Personal Holding
Company Liability Arising From Haft
Family Control . . . . . . . . . . . . . . . . . . . . . . . . . . 46
B. Waiver Of Conflict Of Interest Arising From
Ronald Haft's Position With, And Control Of,
Combined Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . 50
IV. THE SETTLEMENT DOES NOT TAKE PROPER ACCOUNT OF THE
LITIGATION RISK TO THE PLAINTIFF OR THE LACK OF
DISCOVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
V. ELIMINATING HERBERT HAFT'S PAST COMPLETE CONTROL
OF THE CORPORATION MAY, IF IT CAN BE ACCOMPLISHED,
BE IN THE BEST INTEREST OF THE CORPORATION BUT
TRANSFERRING CONTROL TO RONALD HAFT WOULD NOT BE
IN THE CORPORATION'S BEST INTEREST . . . . . . . . . . . . . . . . . . . . 57
VI. THERE ARE BETTER ALTERNATIVES AVAILABLE TO THE
CORPORATION TO MAXIMIZE SHAREHOLDER VALUE WHILE
ADDRESSING THE HAFT-GENERATED PROBLEMS CONFRONTING
THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
VII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>
- ii -
<PAGE> 4
TABLE OF AUTHORITIES
CASES
<TABLE>
<S> <C>
Barkan v. Amsted Indus., Inc., Del. Supr.,
- - -----------------------------
567 A.2d 1279 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Gottlieb v. Heyden Chemical Corp., Del. Supr.,
- - ---------------------------------
90 A.2d 660 (1952) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Highlights for Children, Inc. v. Crown, Del. Ch.,
- - --------------------------------------
227 A.2d 118 (1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Hilldun Corp. v. Comm'r,
- - -----------------------
408 F.2d 1117 (2d Cir. 1969) . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Kerbs v. California Eastern Airways, Del. Supr.,
- - -----------------------------------
90 A.2d 652 (1952) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Lewis v. Hirsch, Del. Ch., No. Civ. A. 12532,
- - ---------------
1994 Del. Ch. LEXIS 68 (June 1, 1994) . . . . . . . . . . . . . . . . . . . . . . . 57
In re Maxxam, Inc./Federated Dev. Shareholders Litig., Del.
- - -----------------------------------------------------
Ch., C.A. Nos. 12111, 12353, 1995 Del. Ch.
LEXIS 13 (Feb. 10, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Neely v. United States,
- - ----------------------
300 F.2d 67 (9th Cir.) cert. denied,
------------
369 U.S. 864 (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
In re Pittsburgh & Lake Erie R.R. Co.,
- - -------------------------------------
543 F.2d 1058 (3d Cir. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Revlon, Inc. v. MacAndrews & Forbes Holdings,
- - --------------------------------------------
Del. Supr., 506 A.2d 173 (1986) . . . . . . . . . . . . . . . . . . . . 14, 15, 16, 17
S.E.C. v. General Refractories Co.,
- - ----------------------------------
400 F. Supp. 1248 (D.D.C. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Sohland v. Baker, Del. Supr.,
- - ----------------
141 A. 277 (1927) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
United States v. Bilzerian,
- - --------------------------
926 F.2d 1285 (2nd Cir.), cert. denied,
------------
112 S. Ct. 63 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 61
</TABLE>
- iii -
<PAGE> 5
<TABLE>
<S> <C>
United States v. Kappes,
- - -----------------------
936 F.2d 227 (6th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
United States v. Meuli,
- - ----------------------
8 F.3d 1481 (10th Cir.), cert. denied,
------------
114 S. Ct. 1403 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
United States v. Rooney,
- - -----------------------
37 F.3d 847, 855 (2nd Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . 56
United States v. Swaim,
- - ----------------------
757 F.2d 1530 (5th Cir. 19),
cert. denied, 474 U.S. 825 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . 56
- - ------------
STATUTES AND CODES
------------------
18 U.S.C. Section 1001 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . 56
26 U.S.C. Section 542 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Del. Code Ann. tit 8, Section 157 (1991) . . . . . . . . . . . . . . . . . . . 42, 43
MISCELLANEOUS
-------------
Bryant G. Garth et al., Empirical Research and the
-- --- --------------------------
Shareholder Derivative Suit: Toward a Better-Informed
- - -----------------------------------------------------
Debate, 48 Law & Contemp. Probs. 137 (1985) . . . . . . . . . . . . . . . . . . . . 22
- - ------
John C. Coffee, Jr., The Unfaithful Champion: The Plaintiff
--------------------------------------
as Monitor in Shareholder Litigation, 48 Law & Contemp.
- - ------------------------------------
Probs. 5 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 23
Principles of Corporate Governance: Analysis and
- - ------------------------------------------------
Recommendations, 2 A.L.I. (1994) . . . . . . . . . . . . . . . . . . . . . . . . . 22
- - ---------------
</TABLE>
- iv -
<PAGE> 6
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- - -------------------------------
)
RONALD S. HAFT )
)
Plaintiff, )
)
v. ) C.A. No. 13736
) [Filed Under Seal]
DART GROUP CORPORATION, )
a Delaware corporation, )
)
Defendant )
)
ALAN R. KAHN and THE TUDOR )
TRUST, derivatively on behalf )
of Dart Group Corporation, )
)
Defendants-Intervenors. )
- - -------------------------------
DART GROUP CORPORATION'S RESPONSE TO PUTATIVE
SETTLEMENT AGREEMENT BETWEEN PLAINTIFF AND INTERVENORS
I. INTRODUCTION
By a putative settlement reached with a third party and without the
agreement of the Board of Directors of which he is a member, plaintiff Ronald
Haft proposes to purchase a potentially controlling interest of Dart Group
Corporation ("Dart" or the "Corporation") -- a company with a book net worth
exceeding $208 million -- for a total cash payment to Dart of $985,240, with
Dart lending him about $7.9 million to cover the balance of his remarkable
purchase price.(1)
- - ----------------------------------
(1) Dart is a retail conglomerate that holds approximately 69% of the
outstanding common stock of Trak Auto Corporation, which operates retail
discount auto parts
(continued...)
<PAGE> 7
This settlement would also release Dart's claims against Ronald Haft for his
role in effecting abusive Haft family real estate transactions with Dart. It
would also enable him to continue to drain Dart's wealth into Haft family real
estate enterprises(2) that he owns together with Herbert Haft -- enterprises
that he, rather than Herbert Haft, now controls.(3) As discussed
below, the offered compromise of
- - ----------------------------------
(1) (...continued)
stores ("Trak Auto"), 51% of the outstanding common stock of Crown Books
Corporation, which operates retail discount book stores ("Crown Books"); 50% of
the outstanding common stock of Shoppers Food Warehouse Corp. ("Shoppers Food
Warehouse"), which operates retail discount grocery stores; and 100% of the
common stock of Cabot-Morgan Real Estate Company ("Cabot-Morgan"), which holds
commercial real estate interests. Dart also operates a small start-up chain of
retail discount beverage stores known as Total Beverage.
(2) The Haft family has for many years held through various
partnerships 100% ownership of a large number of commercial real estate
properties, primarily strip shopping centers, which Combined Properties, Inc.
("Combined") manages. Combined has at all times also been wholly owned by the
Hafts, except for the disputed issuance of a small number of shares to non-Haft
employees in September 1994. Since August 1994, all of the Haft's interests in
these real estate partnerships and Combined have been owned by Herbert and
Ronald Haft. Dart and its subsidiaries pay millions of dollars each year to
Haft-owned partnerships for leased facilities, and Combined receives additional
millions of dollars each year for managing properties in which Cabot-Morgan
owns majority interests. See Dart SEC Form 10-K for the period ended Jan. 31,
1994 (Tab 1).
(3) Herbert Haft has filed lawsuits against Ronald Haft alleging that
this control was obtained illegally. Dart takes no position on the merits of
that litigation.
- 2 -
<PAGE> 8
the direct financial benefits provided by his employment contract is not
significant compared to the potential financial consequences to Dart of the
potential control he seeks. Ronald Haft would be given the opportunity to
control Dart(4) even though the intervenors, other members of the Haft family
and the Corporation maintain that his controlling interest in the
Corporation was obtained through waste or fraud.
The accumulation of problems discussed in this memorandum makes the
proposed shift in corporate control more consequential than the intervening
shareholders apparently realize or care. Dart is burdened by a legacy of
- - ----------------------------------
(4) The settlement would eliminate Herbert Haft's voting control by
reducing his voting share from 57% to 34%, while giving Ronald Haft 44% of the
voting rights. It is, of course, not assured that Ronald Haft would gain
absolute voting control, which would require the support of either his mother
or his two siblings. Ronald Haft's counsel indicated at the hearing on January
30 that no voting agreement had been reached with any other Class B
shareholder. Intervenors' counsel has asserted that it was unlikely that
Ronald Haft would gain control. Ronald Haft's counsel disputed this contention
by stating that: "It is extremely likely that Ronald will be able to reach an
agreement with either his mother or siblings to take control of the company."
Hr'g Tr. (Jan. 30, 1995) at 20 (Tab 2). The fairness of the putative
settlement proposed by the plaintiff and the intervenors must, accordingly, be
examined in light of the possible consequences for Dart of a shift in control
from the current Board of Directors to Ronald Haft and a Board chosen by him.
- 3 -
<PAGE> 9
unfair Haft family transactions, many of which involved Combined Properties,
Inc. ("Combined") or other real estate entities under the direction or control
of Ronald Haft. Other of these arrangements involve tens of millions of
dollars of wasteful stock options -- beyond Ronald Haft's Class B stock option
(the "Class B Option") at issue in this case -- provided to various of the Haft
family members. In addition, among other legal issues, the Corporation may now
face personal holding company tax exposure resulting from Haft-motivated and
controlled transactions and Haft-controlled tax filings made by Dart in the
past.
The proposed settlement would remedy neither the past Haft family
abuses nor provide assurance that these abuses would not be repeated. The
immediate consequence of a shift in control to Ronald Haft will likely be the
termination of the efforts -- begun by the Executive Committee for the first
time in Dart's history -- to investigate and address Dart's Haft-generated
abuses of Dart. Acceptance of this settlement would also end the Executive
Committee's efforts to find near-term, realistic ways to maximize shareholder
- 4 -
<PAGE> 10
value for all shareholders(5) in favor of an illusory and unenforceable promise
by Ronald Haft to do the same.(6)
As explained at length in this memorandum, there are strong reasons to
disfavor control of the Corporation by any Haft family member or group. A
regime of corporate governance insulated from the control of either Herbert or
Ronald Haft -- which has been achieved temporarily by virtue of the Standstill
Agreement entered in this case (preventing the removal of directors) and Dart's
submission of disputed matters to an Executive Committee of non-Haft directors
- - -- is clearly required to protect the interests of Dart and all of its
shareholders. If a permanent solution to Dart's governance problem cannot be
achieved, shareholder value could be protected from further diminution by the
sale of Dart's businesses. Such a sale is not, however, assured by the terms
of the settlement proposal, and its conduct should not, if avoidable, be
entrusted to either Ronald or Herbert Haft.
This memorandum is divided into five parts. The first part, following
this introduction, analyzes the major
- - ----------------------------------
(5) See infra part VI.
(6) See infra note 16 and accompanying text.
- 5 -
<PAGE> 11
elements of the settlement proposal.(7) The second part examines the
effect that acceptance of the settlement would have on the multitude of
problems confronting Dart as a result of its history of Haft family control and
self-dealing, and the failure of the settlement to address -- let alone
eliminate -- the circumstances that have led to Dart's depressed Class A stock
value. The third part discusses how the proposed settlement does not take
account of the litigation risk to the plaintiff or the lack of discovery. The
fourth part discusses how eliminating Herbert Haft's control of the
Corporation, if it can be accomplished, may be in the best interest of the
Corporation, but transferring control to Ronald Haft would not be in the
Corporation's best interest. Fifth, and lastly, this memorandum addresses
better alternatives available to the Corporation to maximize shareholder value
- - ----------------------------------
(7) An earlier "outline" of a settlement proposal was advanced by
Ronald Haft to the directors in December 1994. That settlement was termed a
"ransom demand" by the intervenors shortly after it was advanced by Ronald
Haft. Plaintiff's Memorandum of Law in Support of Their Motion for the
Appointment of a Temporary Custodian at 23 (Jan. 3, 1995), filed in Kahn v.
Haft, Del. Ch., C.A. No. 13154 (Tab 3). The directors responded to that
proposal shortly after the outline was presented. The directors' response is
already part of the record in this case but another copy is provided at Tab 4
for the convenience of the Court.
- 6 -
<PAGE> 12
while still addressing the Haft-generated problems confronting the
Corporation.(8)
To this end, upon the recommendation of the Executive Committee, the
Corporation on a Board vote of 3-2 (Ronald and Herbert Haft voting against) has
hired Wasserstein
- - ----------------------------------
(8) The burden of persuading the Court that a settlement proposal is
fair and reasonable rests upon the settlement proponents. Barkan v. Amsted
Indus., Inc., Del. Supr., 567 A.2d 1279, 1285-86 (1989). Where, as here, a
significant party litigant -- the Corporation -- was excluded from the
settlement process, the settlement must be carefully scrutinized because of the
inherent potential for abuse. In re Maxxam, Inc./Federated Der. Shareholders
Litig., Del. Ch., C.A. Nos. 12111, 12353, Jacobs, V.C., 1995 Del. Ch. LEXIS 13,
*53-54 (1995). In In re Maxxam, the Chancery Court refused to approve a
proposed settlement of a lawsuit on the grounds that the proponents of the
settlement had failed to meet their burden of proving that the settlement was
fair and reasonable. In refusing to approve the settlement, the Court noted
"the flawed manner by which the settlement was achieved," stating:
this case has the unmistakable footprint of an effort by the
defendants to negotiate a settlement with an adversary that they
preferred, in order to extinguish claims being pressed by the
adversary whom they disfavored, and to relegate that disfavored
adversary to the status of an objector to the settlement. This
transmutation of the settlement process into an offensive weapon has
been criticized by our Supreme Court . . . . Although the exclusion
of a significant party litigant from the settlement negotiations will
not, in and of itself, invalidate a proposed settlement, that
approach, because of its inherent potential for abuse, will cause the
settlement to be carefully scrutinized.
Id. at *53-54.
- 7 -
<PAGE> 13
Perella & Co. ("WP&C") to examine ways to maximize shareholder value.(9)
Attached at Tab 6 is a report prepared by WP&C (the "Wasserstein Report"). The
Wasserstein Report illustrates that there are ways to accomplish that
objective. For example, it may be possible for Dart to liquidate its interest
in Shoppers Food Warehouse and distribute to shareholders an amount of cash per
share close to the current market price of the Class A stock, without
dramatically affecting the value of that stock (Dart would be left with its
Trak Auto, Crown Books, Total Beverage and Cabot-Morgan businesses as well as
sufficient working capital). Though other ways to achieve the objective may
exist, the one illustrated in the Wasserstein Report is simple and seemingly
achievable in a relatively short period of time, and it is one that the
Executive Committee has under favorable consideration.(10)
- - ----------------------------------
(9) Ronald Haft cites a press release issued by Herbert Haft on Jan.
23, 1995 (Tab 5) praising the Executive Committee for hiring WP&C and its
efforts to "maximize shareholder value." It is true that Herbert Haft
supported the hiring of WP&C in that press release. However, when the
Executive Committee subsequently sought to broaden WP&C's engagement, Herbert
Haft opposed such action.
(10) Obviously, Dart would take any necessary steps to obtain
applicable court approval. See Standstill Agreement (Sept. 14, 1994) (Tab 7).
See infra note 61 and accompanying text.
- 8 -
<PAGE> 14
The Executive Committee is intent on pursuing in the near term a
strategy to maximize value for the Dart shareholders, possibly the strategy
illustrated in the Wasserstein Report. Though the Executive Committee would
prefer to achieve consensus with Herbert and Ronald Haft in determining what
strategy to pursue, obtaining agreement of either of them is not a
precondition.
If the initial strategy outlined in the Wasserstein Report were
implemented, the Board then would be in a position to pursue a strategy of
maximizing shareholder value with respect to the remaining Dart's businesses.
The Wasserstein Report indicates that further steps to "deconglomerate" Dart
might be advisable.
II. SETTLEMENT ON ITS FACE IS UNFAIR TO THE CORPORATION
A. The Offsetting Sale Of Class A Stock Does Not Cure The Waste
Caused Directly By The Class B Option
The proposed settlement seeks to mitigate the dilution of the value of
Dart Class A stock that would otherwise be caused by the sale of 197,048 new
shares of Class B stock at $89.65 per share pursuant to the Class B Option.
There is no dispute that the current market price of Dart's non-voting Class A
stock is substantially below the real
- 9 -
<PAGE> 15
value per share of Dart's assets and businesses.(11) Ronald Haft's counsel has
recognized that Dart share value is "at 50% of the company's break up
value."(12) A conservative value range of $147-$183 per share was recently
estimated for Dart by WP&C. Intervenors have informed the Court that the real
value per share may be about $200 (consistent with the estimated range submitted
to Dart by Salomon Brothers Inc in 1993). Hr'g Tr. (Jan. 30, 1995) at 7 (Tab
11). To partially remedy the dilution caused by the Class B Option, the
proposed settlement would require Ronald Haft to sell 120,000 shares of Class A
stock back to Dart at a price of $80 per share.
- - ----------------------------------
(11) The market's undervaluation of Dart's Class A stock -- reflecting
a discount caused largely by the Haft family management and disputes -- is
obvious just from a review of Dart's published financial statements. Using
the market price of Dart Class A stock to value both Class A and Class B stock,
the market value of Dart's outstanding stock as of the end of the third quarter
of the fiscal year ended January 3, 1995 was (at $86 per share) $151,470,000.
That is $57,300,000 less than Dart's actual published net worth (i.e.,
shareholder's equity). It is equivalent to Dart's cash balances alone, and
these balances do not include Crown Books' merchandise inventory of $127,000,000
which can readily be returned to the publishers for cash. Moreover, Dart and its
affiliates have no substantial debt. See Dart SEC Form 10-Q for the period
ended October 31, 1994 (Tab 8); Crown Books SEC Form 10-Q for the period ended
October 31, 1994 (Tab 9).
(12) Letter from G. Stewart to D. Bregman et al., at 4 (Sept. 2, 1994)
(Tab 10).
- 10 -
<PAGE> 16
Assuming he could deliver the 120,000 shares of Class A stock
purportedly offered by the settlement,(13) the offsetting transaction proposed
would reduce the enormous share value profits that would be directly realized
by Ronald Haft if the Class B Option were enforced. Ronald Haft would still,
however, reap a multi-million dollar windfall from the transaction that is
wholly disproportionate to the part-time work he actually performed for the
Corporation. Even if Dart's Class B stock was valued the same as its Class A
stock and no control premium were added, Ronald Haft would, for example,
realize a profit approaching $5 million from the transaction if the share value
is assumed to be $180 per share (and more, of course, for higher share
values).(14)
- - -----------------------------
(13) Attorneys for Robert and Linda Haft have submitted a letter to the
Court claiming that a large portion of the Class A stock that Ronald Haft would
sell to Dart belongs to them. Letter from D. Hensler to Chancellor Allen (Jan.
26, 1995) (Tab 12). Ronald Haft's attorneys naturally maintain that his legal
title to these shares is beyond dispute, though it appears that in the fall of
1994 Ronald Haft made filings with the Securities and Exchange Commission (the
"SEC") indicating that he owned those shares jointly, presumably with another
member of the Haft family.
(14) Profit realized from the offsetting transactions proposed by the
settlement may be calculated as follows, assuming a share value of $180 for
both Class A stock and Class B stock (which is at the higher end of the WP&C
(continued...)
- 11 -
<PAGE> 17
This analysis understates the direct value to Ronald Haft of the
offsetting transactions, because it ignores the "control premium" that the
block of Class B stock subject to the Class B Option would command. The
non-voting Class A stock offered in the offsetting transaction cannot
realistically be valued the same as a potentially controlling block of Class B
stock. The value of control is especially great for Ronald Haft, because (as
explained infra Section III.A.1.) it will enable him (1) to prevent Dart from
pursuing multi-million dollar claims against him
- - -----------------------------
(14) (...continued)
estimated range and at the lower end of the range advanced by intervenors based
on the Salomon Brothers Inc. estimate):
<TABLE>
<S> <C>
Total value of 197,048 option shares $35,468,640
less:
Amount paid for options 985,240
Exercise price of $89.65 17,665,353
-----------
Profit from option shares $16,818,047
less:
Value given up from 120,000 Class A shares (($180 -
$80) x 120,000)
12,000,000
-----------
NET PROFIT
$ 4,818,047
===========
</TABLE>
- 12 -
<PAGE> 18
and entities which he owns and controls concerning real estate transactions
with Dart and (2) to extract further financial benefits from Dart through such
real estate entities.
In addition, under the terms of the settlement, Dart would still be
required to lend Ronald Haft about $7.9 million to enable him to exercise the
Class B Option -- at the prime interest rate and with no payments due for five
years (unless the shares are sold or employment is terminated). Ronald Haft is
providing no additional cash whatsoever to purchase shares from the Corporation
that would give him the likelihood of effective control. We know of no
precedent for a multi-million dollar loan from a public company to fund fully
(with no repayment due for five years) the purchase of a controlling block of
its own stock under an employment contract option. Moreover, Delaware law
indicates that an issuance of stock for no consideration other than an
unsecured promissory note is voidable.(15)
Thus, the offsetting transaction proposed by the settlement by no
means cures the waste of corporate assets
- - ----------------------------------
(15) Highlights for Children, Inc. v. Crown, Del. Ch., 227 A.2d 118,
122 (1966) (citing Del. C. Ann. Const: art. 9, Section 3); see also, Sohland v.
Baker, Del. Supr., 141 A. 277, 284-287 (1927).
- 13 -
<PAGE> 19
directly caused by Ronald Haft's exercise of the Class B Option. As discussed
below, the value of the offsetting transaction is an order of magnitude less
than the value that could be lost if Dart is remitted to Ronald Haft's control.
B. The Promise To Maximize Shareholder Value is Illusory
The intervenors favor a transfer of control to Ronald Haft because he
has promised to retain an investment banker within 60 days and to use his "best
efforts" to implement a strategy that "will achieve the objective of maximizing
shareholder value."(16) An affidavit submitted by Mr. Kahn contends that Ronald
Haft has assumed obligations imposed by the decision in Revlon, Inc. v.
MacAndrews & Forbes Holdings, Del. Supr., 506 A.2d 173 (1986), through his
promise to select a strategy that would maximize shareholder value.(17) A
letter dated January 20, 1995 submitted to the
- - ----------------------------------
(16) Stipulation and Agreement of Compromise, Settlement and Release,
submitted by Plaintiff and Defendant-Intervenors, Jan. 19, 1995, at 10
(hereinafter "Settlement Submission") (Tab 13). The intervenors also have
noted that the new "salary" structure proposed for Ronald Haft will provide
significant incentive to increase the trading value of Class A stock.
(17) In the Revlon case, the Delaware Supreme Court found that Revlon's
board of directors should not have allowed
(continued...)
- 14 -
<PAGE> 20
Court with the settlement by Mr. Battaglia, counsel to the intervenors,
contends that the settlement agreement requires a value maximizing transaction:
The proposed settlement provides that Dart will engage a
national investment banking firm to recommend a sale,
recapitalization, and/or other transaction or series of
transactions that would maximize shareholder value, as that
term is used in Revlon and its progeny, and that it will act
to implement such a transaction at the earliest feasible
time.(18)
A settlement that imposed a duty to maximize shareholder profit
through a prompt auction would not remedy past damage to Dart but would at
least foreclose future misuse of corporate authority and enable the
shareholders to realize Dart's current value. There is, however, no mention
- - ----------------------------------
(17) (...conituned)
"considerations other than the maximization of shareholder profit to affect
their judgment" after it became clear that the company would be sold. 506 A.2d
at 185. The Court enjoined certain defensive measures taken against a
hostile bidder that had the effect of ending an active bidding contest for the
company. The Court found that once the board recognized that the company was
for sale "[t]he duty of the board had . . . changed from the preservation of
Revlon as a corporate entity to the maximization of the company's value at a
sale for the stockholder's benefit." Id. at 182. In such circumstances,
"[m]arket forces must be allowed to operate freely to bring the target's
shareholders the best price available for their equity." Id. at 184.
(18) Letter from V. Battaglia to Chancellor Allen at 1 (Jan. 20, 1995)
(Tab 14).
- 15 -
<PAGE> 21
in the proposed settlement itself of the Revlon case or of the specific
obligations imposed by Revlon, a fact acknowledged by counsel to Ronald
Haft.(19) Affidavit of L.G. Schafran Paragraph 15 ("Schafran Aff.") (Attached
at Tab 15).
There is no requirement under the proposed settlement agreement that
an auction be held to maximize shareholder profit. Nor is there an agreed-upon
time frame for maximizing shareholder value (indeed, Ronald Haft is given up to
18 months to earn his third $200,000 cash payment). The proposed settlement is
not, therefore, likely to be construed to require a sale but, rather, to
require Ronald Haft to select in good faith "a strategy or strategies"
presented by an investment banker of Ronald Haft's choosing that would, in
Ronald Haft's view, "maximize shareholder value." Ronald Haft might, for
instance, conclude that the value would be maximized by maintaining all of the
existing
- - ----------------------------------
(19) Ronald Haft's counsel has specifically said that the intervenors'
letter to the Court, in referencing to Revlon, spoke only for the intervenors,
not for Ronald Haft. When asked at a meeting with Dart's directors on March 7
about the anticipated timetable for maximizing shareholder value under the
settlement agreement, Mr. Grant responded: "Approval of the settlement
agreement will alone put us on the road. When it ends? I hope the answer is
never." (Schafran Aff. Paragraph 15) (Tab 15). Accordingly, it clearly
appears that there is no "meeting of the minds" on this essential term and
justification for the settlement.
- 16 -
<PAGE> 22
businesses -- through a "turn-around" period or longer -- or by putting Dart's
cash to use in one or more strategic acquisitions. Ronald Haft's chosen
investment banking firm is likely to be responsive to its client in "devising
and recommending" value-maximizing strategies. The "commitment" undertaken by
Ronald Haft does not, accordingly, provide an enforceable basis for imposing a
Revlon auction obligation.
Without the benefit of an enforcement mechanism, the corporate
interest would be wholly dependent upon the discretion of Ronald Haft. Under
such circumstances, it cannot be safely assumed that Ronald Haft would, if he
gains control, choose a sale for the benefit of the Class A shareholders,
rather than choose to exploit the benefits of control of Dart for himself, as
the Hafts have historically done. The incentive to maximize Class A stock
value provided by the new compensation structure set forth in the proposed
settlement would be greatly outweighed by the prospect of Ronald Haft's
personal enrichment through continuing control over both sides of Dart's real
estate transactions -- or through new and more lucrative grants of stock
options to himself and others he favors, as was done in the past by the Haft
family.
- 17 -
<PAGE> 23
It is possible, of course, that Ronald Haft would elect (or would be
compelled by Robert, Gloria and Linda Haft to elect) to sell Dart's businesses
rather than maintain control. Under such circumstances the Board of Directors
must consider whether Ronald Haft and his associates would, in that event, be
well suited to conduct a sale of Dart for the benefit of the non-controlling
shareholders. Such transactions can present opportunities for insiders to
realize unusual profits at the expense of the shareholders (through, for
example, employment "parachutes," option grants, or preferential treatment of
control shares). Moreover, the approach taken by the Corporation toward the
validity of real estate obligations and the legitimacy of outstanding stock
options, as well as the soundness of Dart's interim management in the period
preceding the sale, could greatly affect the amount that could be realized from
a sale.
C. Independent Directors and Fees
Dart's need to maintain an independent Board of Directors cannot be
overstated. The proposed settlement contains no provisions, however, designed
to assure an independent Board that could check abuses of the Corporation by
dominant shareholders. This omission is consistent with
- 18 -
<PAGE> 24
Ronald Haft's hostility to the initiatives taken by Dart's Executive Committee.
It is apparently the intent of the settling parties to end the activist role
assumed by the Executive Committee and allow Ronald Haft to appoint his own
dependent Board on the alleged basis that the move would save the Corporation
money. As it has repeatedly made clear during the past several months,(20) the
Executive Committee is actively reviewing the circumstances surrounding
Haft-family transactions with Dart. Accordingly, a very real effect of
replacing the current Board with a Board chosen by Ronald Haft would be to
prevent the Corporation from recovering money from the Hafts for damage to the
Corporation done by the Hafts.(21)
Governance mechanisms normally available to public shareholders are
limited at Dart. The public shareholders
- - ----------------------------------
(20) Dart SEC Form 10-Q for the period ended Oct. 31, 1994, at 13-15
(Tab 16); Dart Press Release, Dart Group Corporation Sues Hafts over Warehouse
Leases (Feb. 10, 1995) (Tab 17); Letter from K. Ayres to L. Bonanno (Dec. 29,
1994) (Tab 18); Letter from K. Ayres to D. Hensler (Dec. 21, 1994) (Tab 19).
(21) An affidavit filed by Mr. Kahn claims that the settlement is
intended to "end the duplicate payment for senior management which has been
caused by the unwieldy 'executive committee' that now runs Dart." Affidavit of
Alan R. Kahn Paragraph 20.e., at 10 ("Kahn Aff.") (Attached at Tab 20).
- 19 -
<PAGE> 25
must depend on Dart's Board to protect their interests but have no vote to
assure that their interests are properly represented. Dart's outside directors
are able to pursue their current efforts to protect the Corporation and its
public shareholders without total interference from the Haft family only by
virtue of a unanimous resolution of the Board creating the Executive Committee
and the temporary Standstill Agreement ordered by this Court with the consent
of both Ronald Haft and the Corporation, to which Herbert Haft has, to date,
acquiesced.(22)
In his opening brief, Ronald Haft attacks the Executive Committee's
independence on the ground that the directors can be fired by Herbert Haft.(23)
Herbert Haft's ability to fire the directors arises, of course, from his
control over the voting stock. The proposed settlement makes no provision to
limit the power of the controlling Class B shareholders to fire directors.
Thus, notwithstanding Ronald Haft's proclaimed interest in benefitting the
non-voting shareholders, no provision is made to allow them to elect or appoint
directors. Herbert Haft's ability to fire
- - ----------------------------------
(22) Hr'g Tr. (Sept. 14, 1994) at 7-9 (Tab 21).
(23) Plaintiff's Opening Brief in Support of Defendant-Intervenors'
Standing ("Pl. Br.") at 15-16.
- 20 -
<PAGE> 26
the directors, which Ronald Haft claims disables the directors from acting
independently, will simply be transferred under the proposed settlement from
Herbert Haft to Ronald Haft.
Not only will Ronald Haft still be able to fire the directors, he will
also be able to pay them less money ($8,300 for service on each public company
board, assuming a director serves on the Dart, Crown Books and Trak Auto
boards) and give them less incentive to devote their time to Dart's welfare.
Thus, the settlement proposal does nothing to ensure that Dart's Board will be
able to act with unfettered independence to protect the interests of all
shareholders.(24) To the contrary, the settlement contemplates simply a board
that is elected by Ronald Haft rather than Herbert Haft.
- - ----------------------------------
(24) In recent years, activist boards of outside directors have
increasingly intervened to protect the interests of public shareholders against
inadequate performance by corporate management. Warren Brown & Frank Swoboda,
Managing the March of Change; At G.M. New Team Shakes Up Culture From Top Down,
Wash. Post, Jan. 31, 1993, at H1 (Tab 23); Alison Leigh Cowan, The High Energy
Board Room, N.Y. Times, Oct. 28, 1992, at D1 (Tab 24); Doron P. Levin, Shake Up
At G.M.; Stempel Quits Job As Top G.M. Officer In Rift With Board, N.Y. Times,
Oct. 27, 1992 at A1 (Tab 25).
- 21 -
<PAGE> 27
D. Attorneys' Fees
The settlement would grant attorneys for the intervenors fees of at
least $850,000 that could rise to $5.65 million depending on future movement of
Dart's Class A stock price.
Derivative suits have long been criticized as "'strike suit[s]' that
serve[] no interests other than those of the plaintiff's attorney." Principles
of Corporate Governance: Analysis and Recommendations, 2 A.L.I. pt. VII,
Reporter's Note, at 9 (1994) (Tab 22); see Bryant G. Garth et al., Empirical
Research and the Shareholder Derivative Suit: Toward a Better-Informed Debate,
48 Law & Contemp. Probs. 137, 139 (1985) (derivative litigation is "a potential
gold mine for plaintiffs' attorneys, who in effect become the real parties in
interest").
The settlement stage, in particular, presents serious conflicts of
interests for the plaintiffs' attorney, who has a strong incentive to "exchange
a cheap settlement for a high award of attorneys fees." John C. Coffee, Jr.,
The Unfaithful Champion: The Plaintiff as Monitor in Shareholder Litigation,
48 Law & Contemp. Probs. 5, 23 (1985); Principles of Corporate Governance,
supra, Section 7.14, cmt. c, at 184 (Tab 26). Numerous studies have shown
that
- 22 -
<PAGE> 28
derivative suits "tend overwhelmingly to be resolved through settlements, a
substantial percentage of which produce little tangible benefit for the
corporation." Coffee, supra, at 9. The risk of collusive settlements is
particularly high in the derivative context because:
An absent third party, the corporation, bears the expenses of
both sides. Meanwhile, the litigation is dismissed with
prejudice, and principles of collateral estoppel prevent the
underlying claim from being relitigated by a more faithful
champion.
Id. at 24-25.
III. THE PURPORTED SETTLEMENT DOES NOT ADEQUATELY PROTECT THE CORPORATE
INTEREST FROM THE MULTITUDE OF HAFT-GENERATED PROBLEMS THAT CURRENTLY
CONFRONT THE CORPORATION BEYOND THE UNFAIR EMPLOYMENT CONTRACT OF
RONALD HAFT
--------------------------------------------------------------------
A. Release of Claims by the Corporation
The Kahn action -- in which an amended complaint was recently filed on
January 12, 1995 -- alleges generally that "Herbert Haft and Ronald Haft have
misused their control and dominance of Dart, and through Dart, their control
and dominance of Cabot-Morgan and the Retail Subsidiaries unlawfully and
unfairly to enrich themselves" by "engaging in real estate transactions with
Haft family entities at terms that are unfair to the public companies, paying
to
- 23 -
<PAGE> 29
themselves excessive compensation, and by manipulating corporate machinery to
maintain their control."(25)
As discussed below, there is, in fact, substantial evidence(26) that
Haft family members have repeatedly taken unfair advantage of their control
over Dart. Most critically, (1) tens of millions of dollars in excessive real
estate costs have been imposed on Dart for the benefit of Haft family entities;
(2) the share value of Dart has been unusually diluted by stock options which,
like Ronald Haft's Class B Option, were granted without full disclosure and
were unfair to the Corporation; and (3) the Corporation may have substantial
personal holding company tax exposure resulting from many years of
Haft-motivated and controlled
- - ----------------------------------
(25) Am. Compl. Paragraph 17 (Jan. 12, 1995), filed in Kahn v. Haft,
Del. Ch., C.A. No. 13154 (Tab 27). The amended complaint goes on to recite a
number of specific transactions as examples. The release contemplated by the
proposed settlement is not limited to any specific transactions but appears
intended to release Ronald Haft and his agents and representatives from any
possible claims by Dart or its subsidiaries concerning these and all other real
estate transactions such as those discussed in this memorandum.
(26) Director Bregman has not participated in the Executive Committee's
review of potential claims against Combined and Haft related real estate
entities because Combined and certain Haft related real estate entities are
clients of his law firm. Mr. Bregman's law firm has not done any legal work
for Combined or any Haft related real estate entities in connection with any
transaction between any of them and Dart or any of Dart's subsidiaries.
- 24 -
<PAGE> 30
transactions and tax filings made by Dart. Both Herbert and Ronald Haft (as
well as Gloria and Robert Haft) have been involved in abusive transactions,
leading to the conclusion that any combination of the Hafts are more likely to
continue than remedy these abuses.
Under the proposed settlement agreement, however, Dart would be
required to provide a broad, ill-defined release to Ronald Haft and all of his
unnamed present or former "agents" or "representatives" from any claims by the
Corporation or its subsidiaries
in connection with, or that arise out of or relate to, the
subject matter of the Kahn Derivative Action, or any of the
acts, facts, transactions, occurrences, representations or
omissions alleged in any pleading or proposed pleading filed
by any party in the Kahn Derivative Action, or which has been,
could have been, or in the future could be asserted against
the Released Parties in connection with the Kahn Derivative
Action(27). . . .
No disclosure is made in the settlement of what possible claims may have been
alleged in any "proposed pleading"(28) that the provision seeks to release, nor
is the scope of
- - ----------------------------------
(27) Settlement Submission Paragraph (i)(B), at 13 (emphasis added)
(Tab 13).
(28) Dart has not been provided a copy of the proposed pleading
apparently referred to in this release language.
- 25 -
<PAGE> 31
claims that "could have been" made defined or limited. In light of the nature
of the claims discussed below (as well as other potential claims not set forth
below), such a release of Ronald Haft and all his unnamed "present or former
agents" or "representatives" is not only unwarranted but a surrender of
significant corporate assets in the form of claims for injury to the
Corporation.
1. Haft Family Real Estate Transactions
Dart and its subsidiaries have entered into numerous leases and
property management services agreements with Combined and other entities owned
by the Haft family. Since the creation of the Executive Committee, information
has come to the Executive Committee's attention that has led to a thorough
review a number of these transactions. Though the review is still ongoing, it
is apparent that Dart's interests have frequently suffered in transactions with
Haft-related entities. The information brought to the attention of the
Executive Committee -- much of which was not available or relevant to the
Special Litigation Committee (the "SLC") -- reveals self-dealing by the Haft
- 26 -
<PAGE> 32
family.(29) First, Dart is currently paying Haft-owned partnerships several
million dollars a year for unoccupied and untenantable warehouse space.
Second, Dart is paying unfair rents for retail space at Haft-owned shopping
centers and for warehouse space leased from Haft-owned entities. Third, Dart's
wholly-owned subsidiary, Cabot-Morgan, is a partner of several Haft-owned
partnerships in several joint ventures on commercially unreasonable terms,
managed by Combined on commercially unreasonable terms, which maximize the
return of the ventures to Combined and the Haft entities at Dart's expense.
Dart has frequently not had the benefit of real arm's length
negotiations in its dealings with Combined and Haft
- - ----------------------------------
(29) The special counsel to the Corporation that investigated the
Pennsy Drive Warehouses leases discovered that a number of significant documents
were not contained in the Corporation's lease files. See, e.g, Tabs 28 & 29 .
The SLC relied instead on misrepresentations of Ronald Haft and the Combined
staff. For example, it was Ronald Haft who informed the SLC that Combined leased
the warehouses to Dart as an accommodation." Notes from Ronald Haft's SLC
Interview at 22-23 (attached as Tab 30). In addition, Donald Bourassa, Chief
Operating Officer of Combined, repeatedly informed the SLC that the transactions
between Dart and Combined were "arms-length" and "almost antagonistic." Notes
of Feb. 15, 1994 SLC Meeting at Combined, dated 2/18/94, at 4 (attached as Tab
31). The documents discovered subsequent to the SLC's report illustrate that
nothing could be further from the truth.
- 27 -
<PAGE> 33
family entities.(30) In many cases, this has disadvantaged Dart in ways that
are not easily perceived -- and ways that have, it appears, been systematically
hidden from certain outside directors by the Hafts, often through the device of
third-party comments misleadingly characterized as "fairness opinions."
Material facts have not been disclosed to -- or were actively concealed from --
outside directors. So-called third-party opinions failed to analyze (and were
not requested to analyze) instances in which the rates were excessive compared
to the price paid by the Hafts for the property or which in the rate structure
contained a "speculative" or "risk" element in favor of the Hafts where no such
risk to the Hafts existed. The Hafts also never disclosed to the outside
directors apparent conflicts of interest affecting third-party appraisers, who
also did work for Combined and for the Haft family. And, there are instances
in which related party transactions were approved by the Board subject to the
Board's subsequent review of the applicable "fairness opinions," but there is
no evidence in
- - ----------------------------------
(30) Affidavit of Ron Marshall Paragraph 9 ("Marshall Aff.") (Attached
at Tab 32).
- 28 -
<PAGE> 34
the corporate records that those reviews were ever done. In some cases, the
abuse has been flagrant.(31)
For instance, in a number of instances Haft entities purchased
low-priced Dart store leases from third-party landlords which were then
terminated (for no apparent reason) years before their expiration and replaced
by leases with startlingly higher rental rates.(32)
- - ----------------------------------
(31) For example, in November 1988, Ronald Haft on behalf of the
Haft-owned landlord and Robert Haft on behalf of Dart signed a lease for a 2.6
acre wooded lot next to Dart's Landover headquarters. The lease provides for
payment of approximately $30,000 per year for 30.5 years. The land is of no
benefit to Dart, and Dart has no plans to use the land in the future. Even
more strangely, this lease of an unused wooded lot was by its terms made
retroactively effective by 13 months to October 1987. It is hard to understand
why Dart, or indeed any tenant, would sign a lease for land or space that it
does not need and cannot use, and then go further and make that lease
retroactively effective even though the tenant had not used the land or space
in the interim. Finally, the records of Dart indicate that this lease was
never submitted to the Dart Board of Directors for approval or made the subject
of a so-called "fairness opinion." Indeed, Dart's staff was unaware of the
existence of this lease until sometime in February 1989, when Combined sent
Dart a letter about it. Because this lease was not mentioned in the Kahn
lawsuit, it was not investigated by the SLC.
(32) For example, Crown Books had leased space in Greenway shopping
center for a regular Crown Books store from an independent landlord for
approximately $8 per square foot. A joint venture between Cabot-Morgan and a
Haft-owned entity then bought the property before the lease expired. Although
Crown Books could have renewed the lease for three additional five-year terms
at the same rate, in May 1990 it
(continued...)
- 29 -
<PAGE> 35
The most prevalent examples of this occurred in the late 1980's and
early 1990's when the independent Dart Drug/Fantle's chain was going bankrupt.
Crown Books and Trak Auto had subleased stores from Dart Drug/Fantle's going
back to the early 1980's. In 1988, Haft-owned entities Retail Lease
Acquisition Limited Partnership, CP Acquisitions Limited Partnership and CP
Acquisitions II Limited Partnership bought 12 of those leases from Dart
Drug/Fantle's and thereby obtained the sublandlord's position under those
subleases. The subleases had years to run, and many had years (in some cases,
dozens of years) of renewal options available. Nevertheless, in 1990 Crown
Books and Trak Auto agreed to terminate the subleases and enter new ones with
Retail Lease Acquisition Limited Partnership, CP Acquisitions Limited
Partnership and CP Acquisitions II Limited Partnership for apparently the same
stores at double, triple, quadruple or quintuple the prior rent and usually
with significantly less favorable term
- - ----------------------------------
(32) (...continued)
instead decided to expand into a Super Crown Books store at a rental rate of
$19.85 per square foot -- an increase of approximately 150% in one year --
despite the fact that large tenants usually pay less per square foot than small
tenants.
- 30 -
<PAGE> 36
lengths and renewal options.(33) By contrast, when non-Haft
- - ----------------------------------
(33) For example:
* Trak Auto No. 633, Lee & Harrison Plaza
Original non-Haft rate: $7.13/sf through 2021.
Haft rate: $15.13/sf, rising to $21.36 by 2005.
* Super Trak No. 642, Penn Daw Shopping Center
Original non-Haft rate: $3.87/sf through 2000
Haft rate: $12.50/sf, rising to $17.64, by 2006
* Trak Auto No. 615, Aspen Manor Shopping Center
Original non-Haft rate: $2.65/sf through 2031.
Haft rate: $15.00/sf, rising to $21.17 by 2006.
* Trak Auto No. 656, Fairfax Circle Plaza
Original non-Haft rate: $9.88/sf through 2000.
Haft rate: $11.59/sf, rising to $16.37 by 2005.
(The new lease entered into in 1990 is
actually a prime lease with a Haft-owned shopping
center landlord, not a sublease, because the
Haft-owned partnership that acquired Dart
Drug's/Fantle's interest assigned that interest
to the Haft-owned shopping center landlord.)
* Trak Auto No. 632, White Flint Plaza
Original non-Haft rate: $9.10/sf through 2036.
Haft rate: $16.50/sf, rising to $23.29 by 2005.
(The new lease entered into in 1990 is
actually a prime lease with a Haft-owned shopping
center landlord, not a sublease, because the
Haft-owned partnership that acquired Dart
Drug's/Fantle's interest assigned that interest
to the Haft-owned shopping center landlord.)
* Super Trak No. 630, Rolling Valley Mall
Original non-Haft rate: $2.99/sf rising to $3.21 by 2029
Haft rate: $13.00/sf, rising to $18.35 by 2005.
* Super Trak No. 614, Enterprise Shopping Center
Original non-Haft rate: $2.65/sf through 2029.
(continued...)
- 31 -
<PAGE> 37
purchasers acquired 27 leases from Dart Drug/Fantle's where Trak Auto
or Crown Books subleased the store, only three subleases were
terminated and replaced with less favorable subleases, and those three
were terminated by the new sublandlord pursuant to specific
contractual provisions found in those three subleases. In all other
cases, Trak
- - ----------------------------------
(33) (...continued)
Haft rate: $12.50/sf, rising to $17.64 by 2005.
* Super Trak No. 610, College Plaza
Original non-Haft rate: $3.17/sf through 2029.
Haft rate: $16.89/sf, rising to $30.87 by 2017.
* Super Trak No. 609, Chantilly Plaza
Original non-Haft rate: $2.72/sf through 2028.
Haft rate: $13.42/sf, rising to $18.94 by 2008.
* Super Trak No. 605, Pickett Shopping Center and Fair City Mall
Original non-Haft rate: $7.09/sf through 2034.
Haft rate: $10.00/sf, rising to $14.12 by 2005.
(The new lease entered into in 1990 is
actually a prime lease with a Haft-owned shopping
center landlord, not a sublease, because the
Haft-owned partnership that acquired Dart
Drug's/Fantle's interest assigned that
interest to the Haft-owned shopping center
landlord.)
* Super Trak No. 619, Silver Hill Plaza
Original non-Haft rate: $1.77/sf through 2022.
Haft rate: $10.00/sf, rising to $16.77 by 2010.
(The new lease entered into in 1990 is
actually a prime lease with a Haft-owned shopping
center landlord, not a sublease, because the
Haft-owned partnership that acquired Dart
Drug's/Fantle's interest assigned that
interest to the Haft-owned shopping center
landlord.)
- 32 -
<PAGE> 38
Auto and Crown Books continued to enjoy the original rental rates and renewal
terms under those third-party subleases.
The proposed settlement agreement will prevent Dart from seeking
remedies for past and future damage incurred from these and other unfair real
estate transactions with Haft-owned entities. The settlement expressly waives
any Dart claims against Ronald Haft and his agents or his representatives.
Though the settlement preserves claims against other parties, it cannot be
expected that Ronald Haft will pursue claims on behalf of Dart against Combined
or other entities in which he has interests or concerning transactions in which
he or Combined were involved. Combined and the Haft-owned real estate entities
have been, for many years, and continue to be managed by Ronald Haft, who is
currently President of Combined and its largest shareholder.(34) In addition,
Ronald and Herbert Haft recently received, pursuant to a family settlement,
assignment of the interests of Robert, Linda and Gloria Haft in the family real
estate partnerships, which benefit from these one-sided transactions.
- - ----------------------------------
(34) By reason of actions at Combined in September 1994 and again in
February 1995, Ronald Haft has taken total control of Combined. See supra note
3.
- 33 -
<PAGE> 39
The intervenors would argue that they have maintained the right to sue
anyone other than Ronald Haft and his representatives in derivative actions
concerning abusive real estate transactions. It is not, however, realistic to
rely on the intervenors to remedy Dart's injury through derivative litigation
if the proposed settlement becomes effective. The losses imposed in Dart's
real estate transactions cannot be fully understood by the intervenors, as they
have little incentive or ability to gain a full understanding of the scope and
kind of abuse that has occurred. Moreover, the proposed settlement suggests
that the intervenors and their counsel are more interested in achieving profits
through cooperation with Ronald Haft than in possibly arduous litigation
against Combined or the Haft-owned entities that Ronald Haft has been managing.
By contrast, the current outside directors have demonstrated their
commitment to pursue such claims on behalf of the Corporation. In late October
1994, the Corporation retained the Washington law firm of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker to examine perhaps the most egregious of the
warehouse leases.(35) Following that
- - ----------------------------------
(35) Affidavit of Marshall S. Wolff ("Wolff Aff.") Paragraph 2
(Attached at Tab 33).
- 34 -
<PAGE> 40
law firm's investigation, the Board authorized and filed an action against
Herbert, Ronald, Robert and Gloria Haft relating to the Pennsy Drive
Warehouses, the most financially burdensome of the abusive lease
transactions.(36)
- - ----------------------------------
(36) See Brief of Defendants-Intervenors in Support of the Proposed
Settlement Ex. G; Wolff Aff. Paragraphs 4-6 (Tab 33).
All but two of the warehouses leased by Dart and its subsidiaries
are leased from Haft-owned and controlled entities. (Haft entities have no
warehouse tenants other than the Dart companies.)
Dart's warehouse leases with the Haft-owned entities are typically
characterized by terms commercially unreasonable in length. In contrast to the
20- to 30.5-year terms of the leases with Haft-owned landlords, Dart's two
warehouse leases with non- Haft landlords are for only 5- or 10- year terms.
The extraordinarily long terms of the leases with Haft entities, coupled with
unreasonably high rent payments (all entered into without competitive bidding),
allow the Haft entities, at the expense of Dart, to recapture the purchase or
construction price of the property in a very short time, leaving the majority
of the rent stream for the remainder of the lease term as pure profit.
Specifically:
* Ontario, California warehouse (a warehouse twice the size Trak
Auto needs in a less desirable location than its predecessor
warehouse): the Haft entity's purchase price will be
recaptured in approximately 10.3 years of the 20- year lease.
* Bridgeview, Illinois warehouse: the Haft entity's purchase
price will be recaptured in only approximately 6.2 years of
the 30.5-year lease.
* Landover, Maryland, headquarters and warehouse: the Haft
entity's original construction price will be recaptured in
only approximately 4.5 years of
(continued...)
- 35 -
<PAGE> 41
2. Haft Family Options
Through the years, members of the Haft family have received
unsupportably generous awards of stock options from Dart. While some of the
stock options granted to the Hafts were part of qualified stock option plans
which had broad participation by Dart employees, the most significant and
valuable options were non-qualified stock options granted exclusively or
primarily to the Hafts.
The outstanding stock options held by the Hafts represent a very
substantial dilution of the equity value held by Dart's public shareholders.
The total outstanding non-qualified stock options held by members of the Haft
- - ----------------------------------
(36) (...continued)
the 30.5-year lease.
After allowance for any financing costs which the landlord may have incurred
(which, in the case of the Bridgeview warehouse and possibly the Landover
headquarters and warehouse, were below market bonds issued due to
credit-worthiness and job creation of Dart) and for any improvements made by
the landlord, the overwhelming balance of rents received over the terms of
those leases would be pure profit for the Haft family because the Dart tenant
is responsible for all maintenance, repairs, insurance, taxes, and other
operating expenses on each of those leases. In all cases, the Haft-entity
landlord enjoys the further advantage of being able to then sell a fully
depreciated property for additional profit at the end of the lease term. Thus,
Dart and its subsidiaries pay for the warehouses several times over but have no
asset to show for it, and all residual value is held by the Haft-family
landlords.
- 36 -
<PAGE> 42
family (excluding Ronald Haft's Class B Option which Dart has challenged)
currently have intrinsic value (based upon current stock market prices and the
reduced exercise prices provided under Haft-defined "Major Business Change"
terms, discussed below) of approximately $27 million. Based upon a $180 per
share valuation of Dart Class A stock (which is within a valuation range
estimated by WP&C), these non-qualified options held by the Hafts have a value
exceeding $75 million. The charts at Tab 34 summarizes these outstanding
non-qualified stock options and their value.
Robert Haft has recently filed a new action(37) to enforce his exercise
rights with respect to all three sets of non- qualified stock options held by
the Hafts: (1) options pursuant to a 1983 plan for Dart Class A stock granted
to, inter alia, Herbert Haft (10,000 shares), Robert Haft (120,000 shares),
Gloria Haft (2,000 shares) and Linda Haft (2,000 shares) which are alleged to
have an exercise price of $20 (purportedly reduced from $82.50) per share; (2)
options granted to Herbert and Robert Haft to purchase shares constituting a
full 20% of the equity of Dart/SFW Corp., the subsidiary that holds Dart's
interest in Shoppers
- - ----------------------------------
(37) Robert M. Haft v. Dart Group Corp., C.A. No. 95-82 (D. Del. filed
Feb. 10, 1995).
- 37 -
<PAGE> 43
Food Warehouse (Herbert Haft has conveyed his portion of these options equally
to Ronald and Linda Haft); and (3) options for Dart Class A stock granted to
Herbert and Robert Haft in 1987 (each received options for 99,750 shares),
which are alleged by Robert Haft to have an exercise price of $16.40
(purportedly reduced first from $148.50 and then from $68.25) per share.(38)
a. Options Granted Under the 1983 Plan
Options were granted to Herbert and Robert Haft and other executives
under Dart's 1983 Executive Non-Qualified Stock Option Plan (the "1983 Plan")
to purchase a total of 177,500 shares of Dart Class A stock at a price of
$82.50 which, pursuant to the terms discussed below, was
- - ----------------------------------
(38) Under Delaware law, a corporate fiduciary has the burden to show
that options were approved by fully informed, disinterested directors or that
the terms of the options are intrinsically fair to the corporation. Gottlieb
v. Heyden Chemical Corp., Del. Supr., 90 A.2d 660, 663 (1952). It is doubtful
that the Hafts can satisfy that burden of proof with respect to any of these
option grants (or for the real estate transactions previously discussed).
Options may also be invalidated if, as appears to be the case for each of these
options, they are a waste of corporate assets because they are not structured
to provide Dart reasonable consideration. Kerbs v. California Eastern Airways,
Del. Supr., 90 A.2d 652, 659 (1952). Robert Haft claims that he provided
valuable services to Dart in exchange for and in reliance on these options and
that these options were approved by disinterested directors and acknowledged by
Dart in its SEC filings.
- 38 -
<PAGE> 44
purportedly reduced a few months after the grant to a price of $20.00 per share
as a result of a sale of Dart's drug store business completed in May 1984. Of
these options, 134,000 are held by Haft family members, principally Robert Haft
and Herbert Haft.
The Dart minute books fail to show that all material facts relating to
the terms of these options were disclosed to the two disinterested directors
who apparently approved them or that the terms of these options were fair to
Dart.(39)
- - ----------------------------------
(39) For example, the Dart minute books do not include any evidence of
discussion by the directors, of expert advice or even of a rationale for the
central feature of these options that gives them great value: the reduction of
the exercise price from $82.50 to $20 per share. The Hafts' "definition" of a
"Major Business Change," which triggered the price reduction, was so broad as
to make its occurrence a virtual certainty or at least something the optionees
could cause to occur. A "Major Business Change" was defined to include a sale
of "a significant amount of assets" or "a material merger ... or other material
business transaction," as well as "any other similar event which would have,
directly or indirectly, a material effect on the Company or its subsidiaries."
Under the version of the 1983 Plan adopted in September 1983, the Directors had
no discretion to determine whether a price reduction was justified by any such
"Major Business Change." Although an amended version of the 1983 Plan adopted
in March 1987 gave the Board that discretion, no Board decision was made
pursuant to that provision. Moreover, it is not a legally recognized
justification to reduce the strike price of an option because there has been a
"Major Business Change."
There is also no evidence in the Dart minute books that when the two
disinterested directors allegedly approved the
(continued...)
- 39 -
<PAGE> 45
b. Dart/SFW Options
Options (the "Dart/SFW Options") were purportedly granted in 1989 to
Herbert and Robert Haft to purchase 10 shares each of Dart/SFW Corp., the
subsidiary of Dart that holds Dart's 50% interest in Shoppers Food Warehouse, a
company with more than $700 million in annual sales.(40) Herbert Haft's
interest in these options was subsequently
- - ---------------------------------
(39) (...continued)
relevant plan in May of 1983 and approved its amendment in September 1983 they
were provided with all material information then available to Robert and
Herbert Haft regarding the prospective sale of Dart's drug store business.
That sale completed in Spring 1984 was "deemed" a "Major Business Change,"
producing a $7.5 million reduction in the exercise price of Robert Haft's
options.
Regardless of whether adequate disclosures were made to disinterested
directors, the option grant was not structured to provide Dart with reasonable
consideration. The minute books provide no explanation of why Robert Haft's
employment at the time of the grant was adequate consideration for these
extraordinarily valuable options. Moreover, the options extend for an
unusually lengthy 15-year term, do not require continued employment, and are
not provided pursuant to a vesting schedule that might provide incentive to
remain employed. Finally, there are procedural defects in the grant of these
options inconsistent with the requirements of Delaware law. See Del. Code Ann.
tit 8, Section 157.
(40) Dart/SFW Corp. holds 50% of the common stock of Shoppers Food
Warehouse (previously known as Jumbo Food Stores, Inc.), which was purchased in
1989 for approximately $17.4 million net of a purchase price adjustment. The
other 50% of the common stock of Shoppers Food Warehouse is owned by the
Kenneth M. Herman family, which is otherwise unaffiliated with Dart. Members
of the Herman family manage the day-to-day operations of this business.
- 40 -
<PAGE> 46
conveyed to Ronald and Linda Haft. The exercise price of the Dart/SFW Options
was set at $192,687.50 per share, which equalled the per share price paid by
Dart for the 80 shares of Dart/SFW Corp. for which it subscribed. The effect
of the Dart/SFW Options (if they are valid) was to divert to Ronald, Robert and
Linda Haft a full 20% of the upside potential return from Dart's $17.4 million
investment in Shoppers Food Warehouse without requiring them to bear any of the
risk. Based upon the current value of Dart/SFW Corp. estimated by WP&C, the
Dart/SFW Options have an intrinsic value totalling approximately $21 million.
The Dart/SFW Options are of questionable validity because there is no
evidence whatsoever that they were approved by the Board of Directors of
Dart/SFW Corp., and it does not appear that they were approved by adequate
action of the Dart Board of Directors. Section 157 of the Delaware General
Corporation Law is clear that grants of stock options must have specific
authorization by the Board of the issuing corporation and must "be evidenced by
or in such
- 41 -
<PAGE> 47
instrument or instruments as shall be approved by the board of directors."(41)
The Dart/SFW Options do not meet these requirements: the minute books
of Dart/SFW Corp. reflect no authorization or approval of the Dart/SFW Options.
This alone should end the inquiry, but there is additional evidence of
irregularity. The "stock option agreements" purportedly granting the Dart/SFW
Options are dated "August 30, 1989" -- more than one month before Dart/SFW
Corp. was first incorporated on October 5, 1989.(42)
- - ---------------------------------
(41) Section 157 states further:
The terms upon which, including the time or times which
may be limited or unlimited in duration, at or within which,
and the price or prices at which any such shares may be
purchased from the corporation upon the exercise of any such
right or option, shall be such as shall be stated in the
certificate of incorporation, or in a resolution adopted by
the board of directors providing for the creation and issue
of such rights or options, and, in every case, shall be set
forth or incorporated by reference in the instrument or
instruments evidencing such rights or options.
Del. Code Ann. tit 8, Section 157.
(42) The Hafts could try to cite as authority for the Dart/SFW Options
the following general resolution by the
(continued...)
- 42 -
<PAGE> 48
c. 1987 Options
Dart's 1987 Executive Non-Qualified Stock Option Plan provided options
for 199,500 shares of Dart's Class A stock, divided equally between Herbert and
Robert Haft. Originally, the exercise price for these options was $148.50, but
this was reduced to an exercise price of $68.25 per share after the stock
market crash of October 1987 solely to permit the Hafts to avoid the
consequences of that crash even though no provision was made to readjust the
- - ---------------------------------
(42) (...continued)
Board of Dart -- which was not the issuer of the options -- two years earlier
on September 10, 1987:
RESOLVED, that the Board believes it is appropriate for
Herbert H. Haft and Robert M. Haft each to have the option to
participate individually in acquisitions of other companies by
the Corporation, either (i) on the same terms and conditions
as management of the acquired company participates, (ii) by
the rights of each to acquire a 10% interest in the
acquisition company on an equivalent basis as the Corporation,
or (iii) an equitable combination of (i) and (ii) . . . .
Though this resolution might have been sufficient authority for Herbert and
Robert Haft to have claimed 20% of the opportunity presented by the Shoppers
Food Warehouse acquisition for themselves by putting $3.8 million of their own
funds at risk along with Dart's investment, it cannot be read -- especially in
light of Section 157 -- to authorize or approve the Dart/SFW Options.
- 43 -
<PAGE> 49
exercise price upward if the stock price rebounded. As in the 1983 Plan, the
exercise price is further reduced to $16.40 in the event of a "Major Business
Change," broadly defined to include any "material merger, consolidation or
other material business transaction involving the company or its subsidiaries"
as well as "any other similar event which would have, directly or indirectly, a
material effect on the company or its subsidiaries." Robert Haft claims that
Dart's 1988 acquisition of a 50% interest in Shoppers Food Warehouse and his
own termination as an officer and director of Dart in 1993 each constitute a
"Major Business Change" that triggers the price reduction.
The validity of these options necessarily depends upon issues such as
the information provided to the disinterested directors at the time, the
consideration received by Dart for the options and the fairness to Dart of the
option terms. Robert Haft's claim that Dart's acquisition of a 50% interest in
Shoppers Food Warehouse just a few months after these options were granted
triggered the price reduction raises a question whether the disinterested
directors were informed by Herbert and Robert Haft of their plans for that
transaction at the time the options were approved. The price reduction term
is, again, unfair to Dart, and there is
- 44 -
<PAGE> 50
not evidence that the disinterested directors understood the price reduction
term to be as broad as Robert Haft now claims. Moreover, the options vested in
full just four months after the date of grant and were to be exercisable for a
period of 15 years, without any regard to whether Herbert and Robert Haft
continued to be employed by Dart subsequent to the date of vesting. The
consideration provided to Dart is, thus, plainly inadequate.
* * *
Ronald Haft would have no financial incentive to challenge these
options held by other family members. As he now owns 25% of the Haft family's
Dart/SFW Options, he would have no incentive to challenge those options, which
are estimated conservatively to be worth more than $5 million to him
personally. In addition, to gain absolute control of Dart Ronald Haft would
need the support of either his mother or his siblings. It is inevitable that
this support would be predicated on an agreement to honor the family's options.
Moreover, because of this litigation Ronald Haft has a motive not to question
any of the Haft family options since such a challenge would raise issues in
conflict with his own claim that his Class B Option should be honored.
- 45 -
<PAGE> 51
3. Dart's Potential Personal Holding Company Liability
Arising From Haft Family Control
-------------------------------------------------
Robert Haft alleged in his derivative action complaint that the grant
of the Class B Option "converts Dart into a 'personal holding company' ("PHC")
under the Internal Revenue Code and has serious adverse tax consequences for
the Company."(43) This assertion is true insofar as the grant of the Class B
Option, if valid, would make the Corporation's PHC status clear. It may be,
however, that various of the Dart corporations were already PHC's before the
Class B Option was granted.(44)
A corporation is a PHC if (1) five or fewer individuals own, directly
or indirectly, more than 50% in value of the corporation's stock, and (2) at
least 60% of the corporation's adjusted ordinary gross income constitutes PHC
income (which, generally, is passive income, including interest and
dividends).(45) For purposes of the stock
- - ---------------------------------
(43) Compl. Paragraph 36(i)(v), Haft v. Haft, Del. Ch., C.A. No. 13268
(filed Nov. 23, 1993) (Tab 35).
(44) The validity of other Haft family options could decisively affect
Dart's PHC tax status apart from the Class B Option at issue in this case.
(45) 26 U.S.C. Section 542 (1988).
- 46 -
<PAGE> 52
ownership test, an individual is deemed to own any stock that he has an option
to acquire.
For the years prior to 1994, it appears that Dart hoped to avoid PHC
status by relying on the argument that the stock ownership test was not met
because the per share value of the Class B stock was less than the per share
value of the Class A stock. This argument cannot be sustained, however,
because only the Class B stock has voting rights. It thus commands a control
premium and is worth more on a per share basis than the Class A stock.(46) In
any event, the PHC ownership test appears to be satisfied even if it is
- - ---------------------------------
(46) The argument for valuing Class B stock less than Class A stock is
predicated on applying a "liquidity discount" to the Class B stock (since it is
not publicly traded) and on assigning premium value to the dividend preference
given to the Class A stock. The five Class B shareholders could, however,
easily remedy the absence of liquidity in Class B stock (e.g., by voting to
cause their stock to be registered), and the Class A stock dividend preference
is of de minimis value. (The Class A stock is entitled to a 30# per share
noncumulative dividend preference and is then subordinate to a 30# per share
noncumulative dividend preference payable on the Class B stock. Otherwise, the
Class A stock and Class B stock participate equally in dividends.) WP&C has
indicated that the voting Class B stock has a higher value than the non-voting
Class A stock. Certainly considered as a controlling block, the Class B stock
held by the five Hafts would command a substantial control premium and must be
valued on a per share basis above the Class A stock.
- 47 -
<PAGE> 53
assumed simply that the per share values of the Class A stock and Class B stock
are equal.
It thus appears that various Dart subsidiaries could have liability
for unpaid PHC tax as alleged by Robert Haft and could be subject to related
penalties and interest charges approximately equal to the unpaid tax. The
unpaid tax (but not any penalties and interest) could be eliminated through the
payment of a "deficiency dividend." This would likely involve the payment of a
dividend by various Dart subsidiaries to Dart and then by Dart to its
shareholders.
This potential PHC tax issue has arisen because the Hafts have used
Dart as their "incorporated pocketbook." That is, they have caused Dart to
retain a large horde of cash which has generated substantial passive income
(interest) and have refused to allow Dart's other shareholders to benefit
directly from the cash through dividends. The PHC tax rules are designed to
penalize precisely this sort of arrangement by preventing parties in the
position of the Hafts from realizing any tax benefits as a result of the
arrangement. See, e.g., Hilldun Corp. v. Commissioner, 408 F.2d 1117, 1122 (2d
Cir. 1969) ("The legislative history [of the PHC provisions] shows that . . .
- 48 -
<PAGE> 54
the tax is aimed primarily at the 'incorporated pocketbook'").
If the proposed settlement is approved, Dart is more likely to be
deemed a PHC and the PHC problem would be more difficult to cure. Furthermore,
the settlement rewards Ronald Haft for his participation in a course of conduct
in which his self-interests were pursued without regard for the possible
adverse tax consequences imposed on the Corporation. Moreover, the proposed
settlement would place resolution of the Corporation's past and future PHC tax
issues under the control of Ronald Haft, whose personal tax interests may not
be consistent with those of the Corporation and its public shareholders.
It is clear that this tax exposure is not fully understood by the
intervenors. This exposure could, however, complicate any sale that may be
pursued to maximize shareholder value. The manner in which this potential
exposure is addressed and cured is of great consequence to Dart and its
shareholders and ought not to be remitted to the control of any of the Hafts,
whose shares, options and control have caused the problem.
- 49 -
<PAGE> 55
B. Waiver Of Conflict Of Interest Arising From Ronald Haft's
Position With, And Control Of, Combined Properties, Inc.
-----------------------------------------------------------
The settlement would replace the provision in Ronald Haft's employment
agreement waiving conflicts of interest with a new provision. This provision
states, in a manner similar to the old provision, that nothing in the
employment agreement shall prohibit Ronald Haft from engaging in activities
with other businesses
including, but not limited to Combined Properties,
Incorporated ("Combined") and any or all of its affiliated
partnerships and corporations . . . provided that such
activities or any of them do not interfere with the Employee's
performance of his duties for Employer. (47)
Thus, the new provision effectively achieves what the old provision did while
omitting the unnecessarily sweeping language in the existing contract by which
Dart explicitly "waives any conflict of interest that may currently exist or
may arise in the future."(48)
- - ---------------------------------
(47) Settlement Submission at 15 (Tab 13).
(48) Ronald Haft Compl. Ex. A, cl. 1. The proposed new provision would
also require Ronald Haft to present any corporate opportunity "other than
opportunities involving real estate" that arises from "his employment by or
ownership of Combined or otherwise" to a committee of independent Dart
directors before the opportunity is
(continued...)
- 50 -
<PAGE> 56
The revised provision in the proposed settlement agreement remains
objectionable because the circumstance in which Ronald Haft has placed himself
is so irredeemably conflicted. Thus, it still permits Ronald Haft to devote
less than full-time attention to Dart while maintaining his substantial
involvement with organizations that have interests which clearly conflict with
Dart's. As discussed above, members of Dart's Executive Committee are now
aware -- as a result of recent investigations -- of substantial evidence that
the Haft family has treated Dart unfairly in transactions involving Combined
and Haft-family
- - ---------------------------------
(48) (...continued)
presented elsewhere. Settlement Submission at 15. While this is offered as an
improvement over the existing provision (which states that Dart has no claim to
any corporate opportunities arising from Ronald Haft's other employment), it is
not. It is highly unlikely that any corporate opportunities of significance to
Dart, other than those involving real estate, which is specifically exempted
from the clause, could come to Ronald Haft through his work with Combined or
other Haft family entities. Accordingly, this "improvement" is also illusory.
In light of current knowledge of Haft-related real estate
transactions, the provision is also objectionable because it appears by
implication to waive Dart's rights to corporate opportunities involving real
estate that come to Ronald Haft's attention. As noted previously, several
instances have been discovered in which the Hafts purchased real estate that
was then leased to Dart for rates that were disproportionally high compared to
the purchase price and for terms so long that Dart probably should have
purchased the real estate.
- 51 -
<PAGE> 57
entities under the management of Ronald Haft and of the need to keep Combined
at arms' length.
This was demonstrated, for example, in the recent dispute between
Combined and Total Beverage at Bull Run Plaza.(49) The directors are also aware
of Ronald Haft's
- - ---------------------------------
(49) This public controversy between Combined and Total Beverage over
the closing of the Total Beverage store in the Bull Run Plaza graphically
demonstrates the emptiness of Ronald Haft's claim to be the protector of the
interests of Dart's public shareholders.
The Total Beverage store at Bull Run was costing the Corporation more
than $1 million per year. On December 20, 1994 the necessity of prompt action
to stem the hemorrhaging losses was discussed at a Dart Board meeting. The
Board was informed of the recommendation of the Dart's Chief Financial Officer
to close Total Beverage/Bull Run if possible by the end of the year, but in any
event by no later than the end of January 1995. Ronald Haft was present at
that meeting and at no point expressed any opposition to the closure decision.
Affidavit of Robert A. Marmon Paragraph 25 ("Marmon Aff.") (Attached at Tab
36).
Total Beverage/Bull Run did in fact close for business on December 31,
1994. Within days Total Beverage employees began to remove inventory in order
to transfer it to another store. Combined promptly moved to interfere with
these activities by:
(a) parking three semi-trailers in and across the loading
dock so as to completely deny access to it;
(b) chaining the handicapped access gate in the railing
which surrounds the front of the store in order to
deny access to the parking lot from the front door;
(continued...)
- 52 -
<PAGE> 58
- - ---------------------------------
(49) (...continued)
(c) causing a towing company to initiate without warning
the removal of a Total Beverage truck from the
parking lot;
(d) having Combined-hired security guards take pictures
of Total Beverage employees who were doing the job in
an apparent attempt to intimidate them; (Affidavit of
Robert Ramsey Paragraph 4 ("Ramsey Aff.") (Attached
at Tab 37)) and
(e) initiating action for injunctive relief to prevent
the removal of inventory or equipment by Total
Beverage despite explicit, contrary instructions from
Dart's subsidiary Cabot- Morgan, the 51% owner of the
partnership which owns Bull Run shopping center.
(Marmon Aff. Paragraphs 21-25) (Tab 36).
Combined's motion for injunctive relief was promptly denied after oral
argument in Prince William County Court. Id. at Paragraph 24. (Tab 36)
Shortly thereafter, Donald Bourassa, executive vice-president of
Combined, claimed in a letter to Robert Marmon, Dart's Chief Financial Officer,
that Ronald Haft bore no responsibility for these events by virtue of a
"Chinese wall" at Combined which insulated him from all Dart-related
transactions. (Marmon Aff. Paragraph 25) (Tab 36). The disingenuous character
of this after- the-fact construction is an explicit recognition of the horrible
conflict Ronald Haft has placed himself in. This episode also exemplifies
Ronald Haft's "dog in the manger" approach to his role at Dart. Often he has
interposed no objection to a decision when made, only later to attack in
litigation the very same decision. This approach to management, at once highly
(continued...)
- 53 -
<PAGE> 59
neglect of Dart matters in favor of his other business activities.(50) In light
of this knowledge, it is not possible to justify an agreement to a provision
expressly allowing Ronald Haft to maintain his interests and managerial role in
Combined and other real estate entities doing business with Dart. It is not
fair to Dart to allow Ronald Haft to serve as Dart's President and Chief
Operating Officer, as well as a director, while at the same time serving as the
President of Combined, one of its two directors and its controlling claimant
shareholder.
IV. THE SETTLEMENT DOES NOT TAKE PROPER ACCOUNT OF THE LITIGATION RISK TO
THE PLAINTIFF OR THE LACK OF DISCOVERY
--------------------------------------------------------------------
The circumstances surrounding how Ronald Haft acquired his interest in
Dart are such that the settlement should not be supported until the facts can
be determined, or at least adequate discovery on those facts has been taken.
A principal argument advanced by the intervenors and Ronald Haft in
favor of the settlement is that to continue
- - ---------------------------------
(49) (...continued)
disruptive and wholly lacking in candor, has played a major role in the
creation of continuing turmoil at Dart.
(50) Deposition of L.G. Schafran ("Schafran Dep.") at 82-83, 96-99
(Attached at Tab 38); Marmon Aff. Paragraphs 33, 34 (Tab 36); Marshall Aff.
Paragraph 14-15 (Tab 32).
- 54 -
<PAGE> 60
the litigation is wasteful. Courts have recognized, however, that litigation
cost is seldom by itself an adequate justification for settlement of a
corporation's claims. E.g., In re Pittsburgh & Lake Erie R.R. Co., 543 F.2d
1058 (3d Cir. 1976) (rejecting a settlement where the principal benefit to the
corporation, relied upon by the District Court, was the avoidance of further
expense and inconvenience caused by the suit). The costs of discovery are
particularly inconsequential compared to what could be at issue here --
potential control of Dart -- and in light of the defense advanced by the
Corporation -- that the transaction that supposedly gave rise to the Class B
Option and the related stock transfer were both the product of fraudulent
conduct by Herbert and Ronald Haft.(51)
Such a fraud on the Board and the Corporation would not only involve
traditional civil law issues that would require rescission of the transaction,
but could also present issues
- - ---------------------------------
(51) Moreover, it is not just the Corporation that has advanced the
position that the putative Class B Option grant and the related stock transfer
were fraudulent. Am. Compl. Paragraphs 35-41 (Jan. 12, 1995), filed in Kahn v.
Haft, Del. Ch., C.A. No. 13154 (Tab 27); Compl. Paragraphs 34-37, Haft v.
Haft, Del. Ch., C.A. No. 13268 (filed Nov. 23, 1993) (Tab 35); Compl. Paragraph
58 (Tab 39) and Memorandum of Robert M. Haft and Linda G. Haft in Opposition to
Defendants' Motion for Summary Judgment at 8-9, filed in Haft v. Haft, D.C.
Super. Ct. Fam. Div., C.A. No. DR208793d (Tab 40).
- 55 -
<PAGE> 61
of possible violation of criminal law(52) by Herbert and Ronald Haft as well as
possible securities law consequences for the Corporation by reasons of their
conduct.
In the face of these allegations -- advanced by the intervenors
themselves -- it can hardly be argued that it is in the Corporation's interest
to turn over control of itself
- - ---------------------------------
(52) See United States v. Bilzerian, 926 F.2d 1285 (2nd Cir.)
(affirming a conviction under 18 U.S.C. Section 1001 for false and
misleading statements in a Form 13D), cert. denied, 112 S.Ct. 63 (1991). To be
guilty of concealment under Section 1001, the defendant must (1) knowingly and
willfully; (2) conceal by trick, scheme or device; (3) a material fact; (4) in
any matter within the jurisdiction of a federal agency. See id.; United States
v. Swaim, 757 F.2d 1530, 1533 (5th Cir.), cert. denied, 474 U.S. 825 (1985).
There are two distinct offenses under Section 1001: submitting a false
statement, and concealing a material fact. United States v. Rooney, 37 F.3d
847, 855 (2nd Cir. 1994). Moreover, it is well established that Section 1001
applies even to information not required by another statute to be provided to
the government. See, e.g., United States v. Meuli, 8 F.3d 1481, 1484 (10th
Cir.), cert. denied, 114 S.Ct. 1403 (1994); United States v. Kappes, 936 F.2d
227, 231-32 (6th Cir. 1991); Neely v. United States, 300 F.2d 67, 71 (9th
Cir.), cert. denied, 369 U.S. 864 (1962).
The omission of a material fact in a Form 13D may also be punishable
under the antifraud provision of Section 10(b), Securities Exchange Act of
1934. See Bilzerian, 926 F.2d at 1298.
The true nature of the stock sale between Herbert Haft and Ronald Haft
is material. Materiality "encompasses any fact which in reasonable and
objective contemplation might affect the value of the corporation's stock or
securities." S.E.C. v. General Refractories Co., 400 F. Supp. 1248, 1257
(D.D.C. 1975).
- 56 -
<PAGE> 62
to one of the two individuals alleged to be involved in the fraudulent conduct
without even questioning those individuals under oath with respect to the
circumstances of the transaction.(53)
V. ELIMINATING HERBERT HAFT'S PAST COMPLETE CONTROL OF THE CORPORATION
MAY, IF IT CAN BE ACCOMPLISHED, BE IN THE BEST INTEREST OF THE
CORPORATION BUT TRANSFERRING CONTROL TO RONALD HAFT WOULD NOT BE IN
THE CORPORATION'S BEST INTEREST
-------------------------------------------------------------------
The intervenors argue that the proposed settlement should be preferred
to the resumption of Herbert Haft's control. They have asserted that Herbert
Haft's continuing control over Dart is viewed with disfavor by the capital
markets and his removal would, in itself, help increase share prices. This
reasoning ignores, however, that Ronald Haft's control of Dart may well be more
dangerous than Herbert Haft's control at this time, because Ronald Haft also is
in control of Combined, is so young as to be potentially in control of Dart for
several decades, and has greater incentive to use Combined as a means to drain
cash
- - ---------------------------------
(53) See, e.g., Lewis v. Hirsch, Del. Ch., C.A. No. 12532, Hartnett,
V.C., 1994 Del. Ch. LEXIS 68 (June 1, 1994) (Court refused to approve
derivative settlement because plaintiff had not adequately investigated certain
claims and had failed to take crucial depositions which were necessary for the
Court to evaluate the reasonableness of the proposed settlement).
- 57 -
<PAGE> 63
from Dart. This argument also ignores Herbert Haft's contribution to building
Dart, its subsidiaries and affiliates to over $1 billion in sales. Thus,
Herbert Haft's ability to make a contribution to the Corporation has been
proven in the past and cannot be totally ignored because of the personal enmity
of his son Ronald Haft. By contrast, Ronald Haft has no record of positive
contribution to the Corporation during his term as President.(54) In fact,
certain of his most visible actions -- such as his opposition to the exercise
of vested stock options previously granted to rank and file employees -- has
contributed to an atmosphere of hostility and suspicion that is not in the
Corporation's interest, let alone conducive to professional, reasoned
decisionmaking.(55)
Moreover, Ronald Haft never held a retail management position(56)
before becoming President and Chief Operating Officer of Dart. His only other
significant work experience
- - ---------------------------------
(54) See Marshall Aff. Paragraphs 14-15 (Tab 32); Marmon Aff.
Paragraphs 31-46 (Tab 36).
(55) Id.
(56) His current visits to Dart and communications with senior
management appear calculated to enmesh senior officials in the current
litigation and to obstruct their effective job performance. Marmon Aff.
Paragraphs 34-46 (Tab 36).
- 58 -
<PAGE> 64
is as president of another company founded by his father, where Ronald Haft
replaced his brother-in-law when the brother-in-law became estranged from
Ronald Haft's sister.
There is no advantage to Dart in trading the 75-year-old Haft, who
built Dart, for an inexperienced, 35-year-old Haft, with clear conflicts of
interest. The purported settlement provides no protection for the Corporation
against a continuation of the Haft's conduct which has been so injurious to the
Corporation, beyond Ronald Haft's unenforceable promise that he is "a new breed
of Haft."(57)
VI. THERE ARE BETTER ALTERNATIVES AVAILABLE TO THE CORPORATION TO MAXIMIZE
SHAREHOLDER VALUE WHILE ADDRESSING THE HAFT-GENERATED PROBLEMS
CONFRONTING THE CORPORATION
----------------------------------------------------------------------
The proposed settlement is inadequate because it seeks to pass control
to Ronald Haft under circumstances where there are strong reasons to disfavor
control of the Corporation by any Haft family member or group. The Corporation
need not, however -- and should not -- resign itself to determining the less
dangerous Haft.
The market's recognition of value destruction by reason of Haft-family
control is further supported by the fact that
- - ---------------------------------
(57) Kara Swisher, Dart's Dilemma, Wash. Post, Jan. 30, 1995
(Washington Business) at 12 (Tab 41).
- 59 -
<PAGE> 65
public announcements of events appearing to signal the possible breakdown of
Haft family control over Dart are associated with significant stock price
activity such as those in the period surrounding the creation of the Executive
Committee.(58) This indicates that movements away from Haft-family control and
toward the restructuring or sale of the Corporation would benefit its
shareholders by increasing the value of their stock.
The Board resolution creating the Executive Committee has allowed the
Executive Committee to pursue the best interests of the Corporation. Though
this Executive Committee is temporary in nature, other arrangements might be
structured -- either by agreement with the voting shareholders or, if
necessary, through court order -- that would allow Dart to continue to be
managed in the best interests of the Corporation. The risks and benefits of
Ronald Haft's proposed control should, then, be compared, not solely to a
resumption of control by Herbert Haft, but to the possibility of control, at
least for an interim period, by directors insulated from interference from the
- - ---------------------------------
(58) See, e.g., Betsy Pisik, Directors' Act to Halt Hafts' Family Feud,
Wash. Times, Sept. 8, 1994 ("Some market observers think the latest moves at
Dart may help sustain the rally in its stock.") (Tab 41).
- 60 -
<PAGE> 66
Hafts and with the intent to maximize shareholder value. As discussed above,
the transfer of control contemplated by the settlement fails to provide
assurance that (1) past abuses of the Corporation will be remedied or (2) that
similar, value-destroying abuses of the Corporation will not be repeated.
The current Board, pursuant to the resolution creating the Executive
Committee, is working to resolve the problems created by the Hafts' governance
structure of Dart, and the resulting management and operating problems that
have developed from them and have destroyed rather than created value. While
somewhat insulated from direct control by Herbert and Ronald Haft, the
Executive Committee has some freedom to take major actions that would help to
resolve the problems, limit the damage, and recover value for the shareholders.
To that end the Executive Committee has engaged WP&C to provide advice
on short term and longer term strategies to maximize value for the Dart
shareholders. The attached Wasserstein Report (Tab 6 ) makes three initial
points:
* Dart's Class A stock trades at a price well below the inherent
value of the Corporation;
* The low trading price of Dart's Class A stock results from a
number of key factors relating to
- 61 -
<PAGE> 67
the Corporation's business and operations, the Haft family's
control and the conglomerate structure of the Corporation;
* This situation presents Dart with a number of opportunities to
increase shareholder value.
The Executive Committee asked WP&C to identify sensible, realistic
ways that Dart could maximize value for all shareholders. The Wasserstein
Report illustrates that there are ways to accomplish that objective. One way
is to distribute an amount of cash per share close to the current market price
of the Class A stock, which might be accomplished without dramatically
affecting the price of that stock and would still leave Dart with its Trak
Auto, Crown Books, Total Beverage and Cabot-Morgan businesses, as well as
sufficient working capital. As previously observed, Dart has large, unused
cash reserves.
Though other ways to achieve the objective may exist, the one
illustrated in the Wasserstein Report is simple and seemingly achievable in a
relatively short period of time by the Executive Committee without further
approval from others. The Executive Committee has this proposal under
favorable consideration. Moreover, by including Dart's excess cash in the
proposed distribution to shareholders, this transaction also would respond
responsibly to the
- 62 -
<PAGE> 68
continuing personal holding company tax exposure that various Dart subsidiaries
may have.
The Wasserstein Report is more detailed, but the objective described
above could be achieved in two steps:
* First, Dart would raise additional cash by liquidating its 50%
interest in Shoppers Food Warehouse, either by selling it to
the other owners or by buying out the other owners and selling
the entire company to a third party. WP&C estimates
conservatively that either approach would yield, after taxes,
net proceeds of approximately $77 million for Dart.
* Second, Dart would utilize that $77 million plus another
approximately $53 million excess cash already available within
Dart, to fund a distribution of almost $130 million to its
shareholders either through a special dividend or, to achieve
more favorable tax consequences, a repurchase of shares.
WP&C estimates that after Dart makes a cash distribution of that magnitude
(i.e., $74 per share) to its shareholders, the value of its Class A stock would
be near to its price today. In short, after an extraordinary $130 million cash
dividend or share repurchase program, Dart shareholders would retain their
stock without any meaningful loss of value. This result is possible because
the transaction
- 63 -
<PAGE> 69
would address key factors that now depress the market price of Class A stock so
terribly.(59)
The Executive Committee is intent on pursuing in the near term a
strategy to maximize value for the Dart shareholders, which may include the
strategy illustrated in the Wasserstein Report. Though the Executive Committee
would prefer to achieve a consensus with Herbert Haft and Ronald Haft in
determining what strategy to pursue, obtaining the agreement of either of them
is not a precondition. It is noteworthy that the transactions comprising the
strategy outlined in the Wasserstein Report -- a sale of Dart's Shoppers Food
Warehouse stake and a distribution of cash to shareholders -- could be approved
by majority vote of the Board of Directors, without the need for shareholder
approval.(60)
- - ---------------------------------
(59) As noted in the Wasserstein Report (Tab 6), the results
illustrated from this transaction assume substantial dilution from the
Dart/SFW Options held by the Hafts. If Dart's challenge to the validity of
those options were successful, the cash distribution to shareholders
illustrated in the Wasserstein Report would increase from almost $130 million
to more than $140 million. As indicated in the Wasserstein Report, the
potential dilutive effect of the other options held by the Hafts could, if
those options are enforced, reduce the amount of cash distributable to Dart's
public shareholders from the proposed transaction.
(60) As indicated supra note 10, Dart would seek court approval as
required. See Standstill Agreement (Tab 7).
- 64 -
<PAGE> 70
If the initial strategy outlined in the Wasserstein Report were
implemented, the Board then would be in a position to pursue a strategy of
maximizing shareholder value with respect to the rest of Dart's businesses.
The Wasserstein Report suggests that further steps to "deconglomerate" Dart
might be advisable. The precise course of action and the timing of any
transactions involved in pursuing that strategy would depend on a variety of
factors, such as the stage of each subsidiary in its business plan, tax
considerations and external market conditions.
VII. CONCLUSION
The settlement proposal seeks to remedy the dilution of share value
that would result from enforcement of the Class B Option according to its terms
(assuming, of course, that Ronald Haft actually owns the 120,000 shares of
Class A stock he has offered to sell to Dart). The dilution of share value and
the direct financial costs of Ronald Haft's employment/agreement are not,
however, the sole considerations in evaluating the settlement proposal advanced
by Ronald Haft and the intervenors, and those considerations are outweighed by
the issues discussed in this submission.
- 65 -
<PAGE> 71
For the reasons set forth above, a regime of corporate governance
insulated from the control of either Herbert or Ronald Haft is clearly required
to protect the interests of Dart and all of its shareholders. If a permanent
solution to Dart's governance problem cannot be achieved, shareholder value
could be protected from further diminution by the sale of Dart's businesses.
Such a sale is not, however, assured by the terms of the settlement proposal,
and its conduct should not, if avoidable, be entrusted to either Ronald or
Herbert Haft.
Accordingly, the proposed settlement should be put aside in favor of a
better settlement or a trial on the merits to determine the actual
circumstances of the Class B Option grant and related stock transfer, to
determine whether a potential change of control was truly intended or lawfully
carried out. Until that time, the Executive
- 66 -
<PAGE> 72
Committee will take steps within its power to maximize value of all
shareholders along the lines described above and through other reasonable means
as and when they may develop.
/s/ ARTHUR G. CONNOLLY, ESQ.
------------------------------
Arthur G. Connolly, Esq.
Connolly, Bove, Lodge & Hutz
1220 N. Market Street
Wilmington, Delaware 19801
(302) 658-9141
/s/ STEPHEN J. BROGAN, ESQ.
------------------------------
Stephen J. Brogan, Esq.
Timothy J. Finn, Esq.
Jones, Day, Reavis & Pogue
1450 G Street, N.W.
Washington, D.C. 20005
(202) 879-3939
- 67 -
<PAGE> 73
DART GROUP CORPORATION'S RESPONSE TO PUTATIVE
SETTLEMENT AGREEMENT BETWEEN PLAINTIFFS AND INTERVENORS
APPENDED DOCUMENTS
TAB DOCUMENT
1. Dart 10K (1994).
2. Hearing Transcript (Jan. 30, 1995).
3. Plaintiffs' Memorandum of Law in Support of Their Motion for the
Appointment of a Temporary Custodian (Jan. 3, 1995), filed in Kahn v.
Haft, Del. Ch., C.A. No. 13154.
4. Directors' Response to R. Haft Settlement Proposal (Dec. 20, 1994).
5. Press release of Herbert Haft (Jan. 23, 1995).
6. Report of Wasserstein Perella & Co. re: maximization of shareholder
value (Mar. 6, 1995).
7. Standstill Agreement (Sept. 14, 1994).
8. Dart Group Corporation 10Q (Oct. 31, 1994).
9. Crown Books Corporation 10Q (Oct. 31, 1994).
10. Letter from Geoffrey Stewart to Douglas Bregman, et al., (Sept. 2, 1994).
11. Hearing Transcript (Jan. 30, 1995).
12. Letter from David J. Hensler to Chancellor Allen (Jan. 26, 1995).
13. Settlement Submission (Jan. 19, 1995).
14. Letter from Mr. Battaglia to Court (Jan. 20, 1995).
15. Schafran Affidavit (Mar. 8, 1995)
16. Dart Group Corporation 10Q (Oct. 31, 1994).
17. Dart Press Release (Feb. 10, 1995).
18. Letter from Ayres to Bonanno (Dec. 29, 1994).
19. Letter from Ayres to Hensler (Dec. 21, 1994).
20. Kahn Affidavit (Jan. 19, 1995).
21. Hearing Transcript (Sept. 14, 1994).
<PAGE> 74
TAB DOCUMENT
22. Principles of Corporate Governance: Analysis and Recommendations,
2 A.L.I. pt. VII, Reporter's Note, at 9 (1994).
23. Warren Brown & Frank Swoboda, Managing the Culture of Charge; At
G.M. New Team Shakes Up Culture From Top Down, Wash. Post
(Jan. 31, 1993).
24. Alison Leigh Cowan, The High Energy Board Room, N.Y. Times
(Oct. 28, 1992).
25. Doron P. Levin, Shake Up At G.M.; Stempel Quits Job As Top G.M. Officer
In Rift With Board, N.Y. Times (Oct. 27, 1992).
26. Principles of Corporate Governance, 2 A.L.I. pt. VII, Section 7.14
cmt. c, at 184 (1994).
27. Am. Complaint (Jan. 12, 1995), filed in Kahn v. Haft, Del. Ch., C.A.
No. 13154.
28. Agreement between Combined entities and Dart Drug Stores, et al.
(July 6, 1987).
29. Joint Stipulation between Dart Drug Stores, Trak, and Combined
(Oct. 7, 1991), filed in In re Dart Drug Stores, Inc., No. 89-4-2347-PM
(Bankr. Md.).
30. Notes from Ronald Haft SLC Interview (June 16, 1994).
31. Notes of Feb. 15, 1994 SLC Meeting at Combined Properties (dated 2/19/94).
32. Marshall Affidavit (Feb. 28, 1995).
33. Wolff Affidavit (Mar. 7, 1995).
34. Haft Family Stock Option Charts.
35. Complaint, (Nov. 23, 1993), filed in Haft v. Haft, Del. Ch. C.A. No.
13268.
36. Marmon Affidavit (Mar. 6, 1995).
37. Ramsey Affidavit (Mar. 7, 1995).
38. Schafran deposition (Feb. 16, 1995).
39. Complaint, (8/10/93), filed in Haft v. Haft, D.C. Super. Ct. C.A. No.
DR-2087-93.
- 2 -
<PAGE> 75
TAB DOCUMENT
40. Memorandum of Robert M. Haft and Linga G. Haft in Opposition to
Defendants' Motion for Summary Judgment, (May 6, 1994), filed in Haft v.
Haft, D.C. Super. Ct. Fam. Div., C.A. No. DR-2087-93.
41. Kara Swisher, Dart's Dilemma, Wash. Post (Jan. 30, 1995).
42. Betsy Pisik, Directors' Act to Halt Hafts' Family Feud, Wash. Times
(Sept. 8, 1994).
- 3 -
<PAGE> 1
EXHIBIT 99.2
DART GROUP CORPORATION
Resolution of the Executive Committee
of the Board of Directors by Unanimous Written Consent
WHEREAS, plaintiff Ronald S. Haft and intervenors Alan R. Kahn and The Tudor
Trust have submitted a proposed settlement of Haft v. Dart Group Corporation,
C.A. No. 13736 (Del. Ch.) in which Ronald S. Haft sued to enforce the stock
option contained in his employment agreement and Dart counterclaimed for
recision of his agreement;
WHEREAS, this proposed settlement has been reviewed extensively by the
Executive Committee members in consultation with legal counsel;
WHEREAS, counsel for plaintiff has repeatedly requested that the Executive
Committee explain any reasons it may have for believing that the proposed
settlement is not in Dart's best interests, even though the Court has not
scheduled consideration of the merits of the proposal; and
WHEREAS, the Executive Committee favors a settlement of this action, if
possible, and wants the parties to understand fully the reasons why it cannot
accept the settlement proposed;
IT IS HEREBY RESOLVED,
(1) that the Executive Committee has determined that the
settlement proposed by plaintiff and intervenors is not in the best interests
of Dart;
(2) that the attached submission sets forth the reasons for the
Executive Committee's rejection of this proposed settlement; and
(3) that this Resolution and submission should be disclosed to the
parties and the Court at this time to further understanding of the issues
implicated by the settlement proposal and facilitate efforts to resolve this
action.
<TABLE>
<S> <C>
APPROVED: DATE:
/S/ Douglas M. Bregman March 7, 1995
- - -------------------------- --------------------------
Douglas M. Bregman
/S/ Larry G. Schafran March 7, 1995
- - -------------------------- --------------------------
Larry G. Schafran
/S/ Bonita A. Wilson March 7, 1995
- - -------------------------- --------------------------
Bonita A. Wilson
</TABLE>
