Lawsuits filed in Tennessee accused then-CEO David Perdue and the rest of Dollar General’s board of directors of breaching their fiduciary duties to shareholders, failing to disclose details about the deal and placing their personal interests ahead of those who held stock in the company.
(CN) — Facing a tight runoff race for reelection, Senator David Perdue of Georgia is raising eyebrows with some of the stock trades he made as a sitting lawmaker.
But it is not the first time the Republican faced questions about his actions surrounding the stock market.
Thirteen years ago, Perdue was ending his tenure as CEO of Dollar General when he became a defendant in securities litigation filed soon after the company announced it would be bought and privatized.
In March 2007, Dollar General told its shareholders that private equity firm Kohlberg Kravis Roberts and Co., or KKR, would buy the company – in a $7.3 billion dollar deal – and it would purchase their shares for $22 a share. Almost immediately, seven lawsuits filed in Tennessee state courts hit the companies, Dollar General’s board and Perdue.
The initial lawsuits, seeking class-action certification, accused Perdue and the rest of the board of breaching their fiduciary duties to shareholders, failing to disclose details about the deal and placing their personal interests ahead of those who held stock in the company. The night before the company and shareholders were set to argue over a motion for summary judgment, they agreed to settle the case and Dollar General eventually paid at least $40 million.
Many of the documents filed into the consolidated case sit in a Nashville courthouse under seal. Dollar General is based in nearby Goodlettsville, Tennessee.
With his background in business, Perdue is one of the wealthiest members of Congress. However, he has not placed his financial assets in a blind trust, which has raised questions about whether he used information gleaned as a lawmaker to make trades on the stock market.
After the Senate received a briefing on Covid-19 in late January, Perdue, who was reportedly not at the briefing, purchased stock in DuPont, a company which makes personal protective equipment, according to the Atlanta Journal-Constitution. And before Perdue became chair of the Senate Armed Services Subcommittee on Seapower, he purchased stock in a company that makes submarine parts and sold the shares after they rose while working on a defense spending bill that included funding for a project involving the company, the Daily Beast reported.
Last week, the New York Times reported the Securities and Exchange Commission and the Department of Justice investigated Perdue’s sale of Cardlytics stock but the lawmaker was cleared, according to Perdue’s campaign.
Usha Rodrigues, who teaches securities and business law at the University of Georgia School of Law, said it is not surprising a lawsuit – or several – were filed soon after the announcement of the sale of Dollar General because lawsuits are common in these types of situations. And neither was it surprising that the case was settled – they typically do – because of the risk of a large judgment a company may end up paying, Rodrigues said.
Perdue became Dollar General’s CEO and chairman of its board in 2003. Today, the company runs about 16,700 stores and brought in $27.8 billion in sales for the 2019 fiscal year. The complaints filed in 2007 described the company as selling items priced $10 or less that were frequently bought, used and bought again, such as cleaning supplies and snacks.
According to the shareholders’ complaints, filed months before the economy slid into the Great Recession, Dollar General had just come off a year where its stocks had dipped in 2006 after the company missed financial projections. The company’s sales and earnings had risen steadily since then.
“Thus, Dollar General shareholders had already lived through the worst part of Dollar General’s difficult times and were finally in a position to begin enjoying the company’s economic resurgence,” said a complaint filed by two retirement funds, the City of Miami General Employees’ & Sanitation Employees’ Retirement Trust and the Louisiana Sheriffs’ Pension and Relief Fund.
The suit said the fiduciary duty for the board members should have been to find the highest price for the shareholders during the sale – but the agreement made with KKR prevented the company from doing that.
Instead of shopping Dollar General around to interested buyers in order to get the largest price per share, the deal with KKR gave the private equity firm $225 million if Dollar General decided to sell itself to another buyer, according to the complaint.
The deal would snap open the golden parachutes of the company’s senior management, resulting in change-of-control payouts, the lawsuit said. The complaint claimed shareholders did not have enough information to assess the deal’s fairness, including details about the company’s real-estate portfolio and its internal financial information.
“They caused the company to enter into the merger agreement in order to perpetuate their own personal interest at the direct expense of Dollar General’s shareholders,” the complaint said of company executives.
Another complaint filed by shareholder Shalom Rechdiener claimed Perdue would gain about $30 million if the sale went through. Years later, the Atlanta Journal-Constitution reported Perdue received $42 million from the company after the deal.
The suits, which were transferred to Davidson County Circuit Court and consolidated into a master docket, asked the court to stop the sale.
But Judge Thomas Brothers did not halt the transaction. He ruled against the plaintiffs’ motion for injunctive relief, finding in June 2007 they were not likely to ultimately prevail. The shareholders amended the complaint, which is under seal, and the litigation continued.
Perdue, for his part, left Dollar General in July 2007.
Throughout the litigation, Dollar General denied liability and said the shareholders’ complaint was without merit because it contained “implausible assumptions.” In a memorandum arguing why the judge should dismiss the litigation, the company said it had formed a strategic planning committee to study the sale and it considered four bidders.
Furthermore, the company argued, only two people on the 11-member board were also part of the company’s management: Perdue and Chief Operating Officer David Bere, who entered his job in December 2006. And the company’s charter protected its directors from personal liability when it came to breach of fiduciary duty claims.
During his first deposition, Perdue said until the Dollar General board agreed to sell the company on March 10, 2007, it was not officially for sale, although he “as a matter of course” reached out to several sources of private equity and investments to explore the options the company had, according to a memo filed in May 2008 accompanying a motion to compel.
But, according to the shareholders, documents turned over by Dollar General and KKR told a different story. For instance, an email sent in August 2006 at KKR between a partner and a senior executive there recounted a conversation where Perdue allegedly told the private equity firm he wanted “to pursue a transaction exclusively with” KKR.
“These documents, among others produced by defendants well after defendant Perdue’s deposition, give rise to significant questions regarding defendant Perdue’s original testimony and the Board members’ motivations and supposed disinterestedness in evaluating the acquisition by KKR,” court filing states.
Perdue sat for his second deposition on Aug. 25, 2008. Weeks later, on Oct. 10, 2008, the shareholders received what a memo filed months later described as a surprise set of documents made during the early part of Perdue’s tenure at Dollar General “whose existence was essentially denied.”
“The documents produced included board materials from 2003 and 2004 that further supported plaintiff’s theory that Dollar General’s senior management sold the company on the basis of significant store growth potential that was not considered by the board or shared with shareholders,” the memo states.
The shareholders and the company notified the court they had reached a settlement on Nov. 24, 2008. Brothers wrote in an order approving the settlement agreement the shareholders faced an uphill battle if they continued litigating.
Shareholders are the owners of the company who cede control of the company to the board and the board delegates the running of the company to its officers, the University of Georgia’s Rodrigues said.
So it is somewhat unusual, as alleged by the complaints, that Perdue had talked with companies about selling Dollar General.
“One would not expect the corporation’s CEO to be talking about selling the company without getting the board’s approval to do so,” Rodrigues said.
However, the company later created a committee to explore the sale and seemed “to do things by the book,” according to Rodrigues.
Another unusual aspect of Perdue’s involvement with the Dollar General deal was his stock options, Rodrigues said, which had what is called single-trigger acceleration, meaning he would get a windfall if the deal went through.
But allegations of breaching fiduciary duty to shareholders are different than allegations of insider trading where everyone trading stock is supposed to operate with access to all the same information, the professor said.
“They’re two different examples of claims of a lack of candor in the face of a duty to disclose,” Rodrigues said.
Meanwhile, Perdue’s reelection campaign, when asked about this litigation and his time with the company, described his tenure at Dollar General as one marked by the company’s expansion.
“As the first non-family CEO of Dollar General, David Perdue fast-tracked change and led a turnaround — adding nearly 20,000 American jobs and opening over 2,000 new stores all across the nation. By any measurement, Perdue’s tenure at Dollar General was a tremendous success as the company better fulfilled its mission of helping families get from payday to payday. These false attacks failed in 2014, and they will fail again now,” said John Burke, Perdue’s campaign spokesman, in an email, referring to Perdue’s first Senate run six years ago.
However, attorney Darren Robbins said the Dollar General sale is one example of when profitable public companies are taken over by private equity, which have tended to extract dividend payments from the privatized companies and then take them public again or let them continue as “zombie companies loaded with debt.”
Robbins – of the firm Robbins Geller Rudman & Dowd, which focuses on representing shareholders in litigation surrounding corporate takeovers – was one of the attorneys representing Dollar General shareholders in the case.
In privatization sales, Robbins said, shareholders can often be left with the short end of the deal, and he said in Dollar General’s case the company was “sold on the cheap.”
But details of the case are obscured from public view because protective orders in suits like this, meant to protect trade secrets, tend to overreach with how much information they obscure in the taxpayer-funded court system, Robbins said.
“When you go to trial, the seal comes off,” he said.
Robbins said it can be safely assumed there were admitted facts the Dollar General defendants did not want to come out at trial in open court, so they paid $40 million to settle.
Robbins said he has not looked over Perdue’s trading history. But generally speaking, “ethics are not situational. People either follow the law and the rules or they don’t,” Robbins said. “Draw any inference you want from that.”