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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
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CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 17, 1995
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CROWN BOOKS CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware 0-11457 52-1227415
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
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3300 75th Avenue, Landover, Maryland 20785
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (301) 731-1200
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(Former name or former address, if changed since last report).
The exhibit index appears on page 3.
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Item 1. Changes in Control of Registrant
The discussion under Item 5 of this Current Report on Form 8-K is
incorporated herein by reference.
Item 5. Other Events
On October 17, 1995, Gloria G. Haft, Linda G. Haft and Robert M. Haft
(the "Petitioners") filed a lawsuit captioned Gloria G. Haft v. Larry G.
Schafran, Civ. A. No. 14620 (Del. Ch. filed Oct. 17, 1995), in the Delaware
Court of Chancery for New Castle County naming as defendants Dart Group
Corporation ("Dart"), which is the majority shareholder of Crown Books
Corporation, and all of Dart's directors. The Petitioners seek (i) to remove
all of the directors of Dart and replace them with three individuals (John L.
Mason, Ellen V. Sigal and Michael Ryan) whom the Petitioners purport to have
elected and (ii) a ruling by the court that the shares of Dart Class B Common
Stock placed in a voting trust (the "Trust Shares") by Ronald S. Haft pursuant
to the settlement entered into by Dart and Ronald S. Haft on October 6, 1995
(the "Settlement"), are "treasury shares" owned by Dart and, consequently, are
not entitled to vote under Delaware corporate law. The petition filed in this
lawsuit is incorporated herein by reference and attached hereto as Exhibit
99.1.
Dart's position is that this lawsuit is without merit and that the
purported action by Gloria, Robert and Linda Haft to reconstitute the Board of
Directors is invalid.
Item 7. Financial Statements and Exhibits
Exhibit 99.1 Verified Petition, Gloria G. Haft v. Larry G.
Schafran, Civ. A. No. 14620 (Del. Ch. filed
Oct. 17, 1995).
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: ROBERT A. MARMON
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Robert A. Marmon
Treasurer and
Chief Financial Officer
Date: November 1, 1995
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CROWN BOOKS CORPORATION
Form 8-K
Exhibit Index
Exhibit 99.1 Verified Petition, Gloria G. Haft v. Larry G.
Schafran, Civ. A. No. 14620 (Del. Ch. filed
Oct. 17, 1995).
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EXHIBIT 99.1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
GLORIA G. HAFT, ROBERT M. HAFT, )
and LINDA G. HAFT, )
)
Petitioners, )
)
v. ) Civil Action No. _____
)
LARRY G. SCHAFRAN, BONITA WILSON, )
DOUGLAS BREGMAN, RONALD S. HAFT )
HERBERT HAFT, and )
DART GROUP CORPORATION, )
)
Defendants. )
VERIFIED PETITION
For their petition, petitioners, by their attorneys, Ashby & Geddes
and Hogan & Hartson, allege on knowledge as to themselves and their own acts
and on information and belief as to all other matters, as follows:
I. NATURE OF THE ACTION
1. This is an action brought by the petitioners, as record
stockholders of respondent Dart Group Corporation ("Dart" or the "Company"),
pursuant to 8 Del.C. Section 225 for a declaration that John L. Mason, Ellen V.
Sigal and Michael Ryan (the "Independent Directors") were lawfully elected as
directors of Dart and that the individual respondents were removed from their
positions on the Board. Today the petitioners delivered written consents
signed by the holders of a majority of the Company's stock entitled to vote to
Dart's registered agent, The Corporation Trust Company. Those consents removed
the individual respondents as members of the Board and replaced them with the
Independent Directors. Although the individual respondents have recently taken
action to entrench themselves in office by purporting to issue new shares of
the Company's voting stock to a "voting trust" that is a creation of the
Company, that stock issuance is invalid as a deliberate manipulation of the
corporate machinery and a violation of 8 Del.C. Section 160(c).
2. Based upon the individual respondents' inequitable actions to
date, petitioners believe that the individual respondents will cause Dart to
refuse to recognize the validity
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of the written consents or the removal of the individual respondents from
office and will attempt to prevent the Independent Directors from exercising
their lawful rights as directors of the Company.
II. THE PARTIES
3. Dart is a Delaware corporation, with its principal place of
business at 3300 75th Avenue, Landover, Maryland. Dart is a publicly traded
corporation, but the public stockholders hold only non-voting Class A Common
shares. Dart's only voting stock is its Class B Common shares, which until the
events described hereafter, were solely held by members of the Haft family, who
founded the Company. As noted previously, Dart's registered agent for service
of process in Delaware is The Corporation Trust Company ("CT"), 1209 Orange
Street, Wilmington, Delaware 19801.
4. The petitioners are the holders of record of either a
majority, or all, of the Company's outstanding stock entitled to vote. The
consents were also executed by Mary Z. Haft and New Frontier Investments
L.L.C., which hold certain rights in certain of the shares the petitioners hold
of record. A copy of the consents they executed and delivered are attached
hereto as Exhibit A.
5. The individual respondents were the members of Dart's Board
until they were removed from office by the petitioners and replaced by the
Independent Directors. Mr. Schafran, Ms. Wilson and Mr. Bergman were, until
their replacement by the Independent Directors, operating as Dart's "Executive
Committee" and thereby running its day to day affairs.
6. The tenure of the Executive Committee members has been highly
lucrative for them, but marked by huge losses for the stockholders. Although
theoretically an outside director, Mr. Schafran has apparently been paid over
$1 million during the past two years. The stockholders, however, have not
fared as well. Although Dart was formerly a highly profitable enterprise,
under the stewardship of the Executive Committee it lost approximately $74
million after tax last year, and on a pro forma basis, over $10 million for the
first six months of 1995.
III. BACKGROUND
7. Until October 1995, all of the Company's Class B Common shares
were held by members of the Haft family. As of September 1995, there were
approximately 302,024 shares of Class B stock issued and outstanding. Robert
Haft and Linda Haft each held of record 25,246 shares and Gloria Haft was the
record owner of 54,484 shares. In addition, respondent Ronald S. Haft held of
record 172,730 shares, which were subject to an irrevocable proxy
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held by Herbert Haft, plus an additional 25,246 shares for which no proxy was
given. Ronald's right to ownership of the 172,730 shares is subject to a
counterclaim by Herbert Haft pending in an action brought by Ronald Haft in
this Court (C.A. No. 14425). In addition, Ronald held an option to acquire
197,048 Class B shares, which was subject to challenge in a derivative action
brought in this Court entitled Kahn v. Haft, C.A. No. 13154 (the "Kahn"
action).
8. On Saturday, October 7, 1995, The Washington Post reported
that Dart, Ronald Haft and the Kahn petitioners had reached an agreement to
settle all litigation between Ronald and the Company, including the Kahn
litigation. According to a Form 8-K filed by Dart with the Securities and
Exchange Commission, on Sunday, October 8, 1995 that settlement was approved by
the individual respondents, acting as Dart's directors, over the objection of
Herbert Haft, and was purportedly put into effect even though as a settlement
of derivative litigation it required prior approval by this Court.
9. In reality, the settlement is a subterfuge in which the
members of Dart's Executive Committee used Company funds to transfer control of
Dart from the Class B stockholders to a "voting trust" controlled by the
Company. The Executive Committee achieved this inequitable result by paying
tens of million dollars of the stockholders' money to Ronald Haft in purported
settlement of claims Dart had previously called "worthless." As part of this
settlement, Ronald Haft was given $37.9 million in cash (it is disguised as a
loan to Ronald, but a complex put/call arrangement on the stock held as
collateral will ensure that Ronald will simply keep the money), another $11.6
million in escrow, and various real estate properties for which Dart paid over
$50 million and releases from claims that Dart estimates are worth tens of
millions of dollars. For his part, Ronald, agreed to resign as a director upon
approval of the settlement, surrendered his positions with the Company and
agreed to give up or modify certain comparatively minor rights he held. Far
more importantly, in return for the cash and real estate given to him by the
Company he allowed the Company to repurchase the 172,730 shares of Class B
stock on which Herbert Haft held a proxy and agreed to serve as a nominal
beneficiary of a voting trust that gives control of the Class B shares to the
Company.
10. The purpose of the repurchase was to prevent Herbert Haft from
exercising his proxy on the shares by the simple expedient of turning them into
treasury shares that are ineligible to vote under 8 Del.C. Section 160(c).
Indeed, the respondents not only do not deny this fact, they actively celebrate
it. According to The Washington Post, "through a complex series of
transactions, ... the deal removes any claim Herbert would have to control
Dart.... Company sources said the move of the stock out of Ronald's Haft's
hands and into the
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Company's removes Herbert Haft's ability to exercise his proxy over the
shares." (The Washington Post, Saturday, October 7, 1995 at A1, "Legal
Settlement Would Sever Hafts From Dart, Firm To Get Family's Controlling
Stake"). The same point was made in a Form 8-K filed by Dart with the
Securities and Exchange Commission dated October 6, 1995.
11. The respondents were not content with removing those shares
from the voting pool, however, because unless something more was done, Robert,
Gloria and Linda Haft would have become the holders of a majority of the
Company's voting stock. Since, according to The Washington Post, the purpose
of the entire settlement was to "de-Haft Dart," (id.) -- a characterization Mr.
Schafran also used in a meeting with Robert Haft -- such a result was untenable
to the individual respondents. Thus, the next step of the agreement was to
have Ronald exercise his previously challenged option on the 197,048 shares of
Class B shares and thus place those shares into a voting trust together with
the 25,206 Class B shares held by Ronald free of the proxy to Herbert Haft.
The option shares, if entitled to vote, would represent control of Dart under
respondents' scheme. The "initial" voting trustees -- the new masters of Dart
- -- are respondent Schafran and plaintiffs' counsel in the Kahn action.
12. The issuance of stock pursuant to the option and the
subsequent "trust" arrangements were, very simply, a sham. This series of
transactions has no economic substance, its sole purpose was to manipulate the
holding of Dart stock to divest Gloria, Robert and Linda Haft of control.
First, in order to effectuate this transaction, Dart arranged for Ronald Haft
to pay the entire exercise price of the option with a $27.4 million note and
$197,048 in cash. The cash was provided by $200,000 in cash given to Ronald as
part of the settlement, while a put/call agreement guarantees the shares will
be repurchased by Dart at some point after January 1997 at exactly the amount
necessary to cancel the note. Moreover, while the note carries an 8% interest
rate, the interest does not have to be paid on an ongoing basis and it is
exactly offset by an 8% annual accretion to the put/call price. Thus, the
settlement guarantees that not only will Ronald not have to repay the note, he
will not even have to pay the interest.
13. In other words, Ronald Haft has no meaningful economic or
other interest in these shares and never will. The sole purpose of their
issuance was to place them into the hands of a voting trust, one of whose
initial two trustees is a respondent, in order to prevent Robert, Gloria and
Linda Haft from exercising control over the Company. The sole source of funds
for the transactions was Dart, and Dart itself has ultimately control over the
shares by right of purchase.
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14. The voting trust is a shame as well. It is a thinly veiled
device to create the illusion that the option shares are controlled by a
distinct entity -- the voting trust -- and not by Dart. But that veil is
transparent. The "Voting Trust Agreement" itself demonstrates that the voting
trust is a creature of Dart.
15. First, the Agreement makes plain that Ronald Haft is, at best,
a nominal beneficiary. According to the Agreement, "it is anticipated that the
Voting Trustees will use their authority hereunder to serve the best interests
of Dart and its shareholders as single class...." The Trust Agreement goes on
to require the voting trustees to vote, not in Ronald's best interest, but in
the "best interest of Dart and all of its shareholders as a single class."
Thus, not only does Ronald not have any economic stake in the stock, he is not
even treated as the real beneficiary of the voting stock. Rather, the real,
and intended, beneficiary of the trust is Dart.
16. The Voting Trustees are also kept tied to Dart economically.
For example, in paragraph 8, the Company, not Ronald Haft, agrees to pay
non-"full time employees" of the Company $275 per hour for their services as
voting trustees. Although plaintiffs' counsel has declined to accept such
compensation for his services, this provision demonstrates the fundamental
economics of the position -- voting trustees are being employed by the Company
and those trustees who already are employed full time by Dart get no further
pay.
17. Nor is that the end of the matter. Paragraph 8 goes on to
state that:
"Dart hereby acknowledges that the Voting Trustees are acting
in that capacity at its request and agrees that the Voting
Trustees are entitled to indemnification in accordance with
Article Eleventh of Dart's Certificate of Incorporation and
Article VII of Dart's Bylaws."
18. In other words, the voting trust is an arm of the Company
designed to operate in "the best interest" of Dart, and the option shares, as
issued by the "trust" were, and remain, treasury shares, owned by the Company,
not entitled to vote under 8 Del.C. Section 160(c). Indeed, that these are
really treasury shares was highlighted by The Washington Post article -- an
article that was clearly based on extensive background information provided by
the respondents' advisors -- which flatly states that "[t]he agreement will put
Ronald Haft's controlling stake of the Company into Dart's treasury, where it
will be monitored by an independent trust."
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19. In short, in a transaction taken without this Court's prior
approval as required by Chancery Court Rule 23.1, and in derogation of the
rights of the persons controlling a majority of the Company's voting stock, the
respondents, who challenged Ronald Haft's right to the option on the Class B
shares, have paid Ronald tens of millions of dollars in order to use the option
shares as a device to divest completely Gloria, Robert and Linda Haft of
control of the Company. Ronald, the purported wrongdoer, was paid a huge
premium from the Company treasury so the Company could attempt to take control
of itself, while Gloria, Robert and Linda Haft, who were not involved in the
control struggle, have had their legitimate rights as controlling stockholders
stripped from them.
20. The stock issuance to the trust consequently was (1) a
violation of this Court's rules; (2) a breach of the fiduciary duty owed by the
respondents to the Company's voting stockholders; (2) an inequitable
manipulation of the corporate machinery that entrenches respondents in office;
and (3) a violation of 8 Del.C. Section 160(c) and the principles behind it,
which preclude any Delaware corporation from exercising voting control over
itself. As The Washington Post stated, under this agreement the "firm" does
indeed "get family's controlling stake." But Delaware law does not allow
"firms" to seize controlling stakes for themselves, although that is what has
been attempted here. Indeed, if this blatant attempt to seize control from the
stockholders and give it to an insulated and lavishly compensated group of
directors is allowed to stand, any public company, faced with a threat to the
directors' control, could create a similar "voting trust" arrangement designed
to remove the stockholders' ability to control the Company's destiny.
IV. THE CONSENTS
21. Upon confirming the respondents' actions, Linda, Gloria and
Robert Haft together with New Frontier Investments L.L.C. and Mary Z. Haft,
executed written consents removing the respondents as Dart's directors and
replacing them with the Independent Directors. The 104,976 shares they voted
represented 80.6% of the 130,222 shares of Class B Common outstanding and
entitled to vote (or 100%, if Ronald Haft's 25,246 shares held by the trust are
also disenfranchised by Section 160(c)). The Independent Directors, who are
persons of substance and integrity, are committed to (1) restoring financial
and business stability to Dart and (2) to ending the various counterproductive
conflicts for control that have befallen Dart by considering, after due
investigation, and subject in all respects to their fiduciary duties, multiple
options to maximize value for the stockholders, including but not limited to a
sale of some or all of the assets of the Company and a distribution of the
proceeds to the stockholders. Petitioners believe that steps are called for
and intend to support the
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independent Directors in their efforts to implement such a program.
WHEREFORE, based on the consents that were submitted and the
ineligibility to vote the option shares held in "trust," petitioners
respectfully request that the Court enter an order pursuant to 8 Del.C. Section
225:
a. Declaring that the individual respondents were
validly removed from office as Dart directors and that the Independent
Directors were validly elected as directors of Dart;
b. Temporarily, preliminarily and permanently enjoining
the individual respondents from acting or purporting to act as directors of the
Company;
c. Temporarily, preliminarily and permanently enjoining
Dart from recognizing or purporting to recognize the individual respondents as
directors of the Company;
d. Temporarily, preliminarily and permanently enjoining
Dart from refusing to recognize the Independent Directors as lawful members of
the Board;
e. Awarding petitioners their costs and expenses,
including attorneys' fees, incurred in this action; and
f. Granting such other and further relief as may be just
and appropriate.
ASHBY & GEDDES
/s/ LAWRENCE C. ASHBY
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Lawrence C. Ashby
Stephen E. Jenkins
John S. Grimm
One Rodney Square
P.O. Box 1150
Wilmington, DE 19899
(302) 654-1888
Attorneys for the petitioners,
Robert M. Haft, Gloria G. Haft
and Linda G. Haft
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OF COUNSEL:
Joseph M. Hassett
David J. Hensler
HOGAN & HARTSON LLP
555 Thirteenth Street, N.W.
Washington, DC 20004
(202) 637-5600
Dated: October 17, 1995
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)
DISTRICT OF COLUMBIA ) ss.
)
Robert M. Haft, being duly sworn, deposes and says that he
resides in the District of Columbia; has read the foregoing petition and, to
the best of his knowledge, believes the allegations thereof to be true and
correct.
/s/ ROBERT M. HAFT
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Robert M. Haft
Sworn to and subscribed before me
this 17th day of October, 1995.
/s/ BESSIE O. HOUCK
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Notary Public
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