Shareholder Sues Yum! for Billions

LOUISVILLE (CN) - Yum! Brands, owners of KFC, Pizza Hut and Taco Bell, cost shareholders billions of dollars by concealing that a supplier was providing chicken overdosed with antibiotics to its restaurants in China, a shareholder says in court.

Bert Bauman sued Yum! Brands in a shareholders' derivative complaint in Jefferson County Court. He also sued 19 of its former or current officers and directors.

Bauman claims the defendants "utterly failed to implement appropriate internal controls at Yum's Chinese operations. This lack of internal controls allowed Yum's senior management to violate food health and safety standards in its restaurants in China for several years which, when revealed, subjected the company to a major decrease in business and may result in significant fines and penalties. In addition, the individual defendants caused or allowed the company to issue materially false and misleading statements concerning the company's financial condition and future business prospects, including misrepresentations and omissions of material facts concerning Yum's financial disclosures in filings with the U.S. Securities and Exchange Commission."

Overdosing of food animals with antibiotics is believed to contribute to the growth of antibiotic-resistant strains of bacteria and viruses in the animals and the people who eat them.

Bauman claims that "since at least 2010, Yum knew as a result of its internal investigations that one of its Chinese suppliers, Shandong Liuhe Group, was providing the company with chicken containing excessive levels of antibiotics. The company found an unacceptably large amount of antibiotics in nearly half of the samples tested. Rather than terminate the contract with Shandong Liuhe immediately, certain of the individual defendants permitted the company to continue buying tainted chicken from the supplier through at least August 2012, and failed to disclose the existence of the tainted chicken to the public and the relevant regulators."

Bauman also accuses the directors of illegal inside trading, claiming they sold $64 million of their own stock while hiding the company's violations and offering misleading projections about growth in China.

"Despite well publicized warnings of slowing economic trends generally in China, and knowing that news of the tainted chicken could potentially ruin business prospects for Yum in China, defendants' predicted earnings per share ('EPS') growth of at least 13 percent for the coming fiscal year. The defendants' scheme inflated Yum's earnings and stock price by as much as 12.7 percent, which the insider selling defendants ... exploited by selling more than $64 million worth of their personally held stock.

"When news of the chicken scandal and false and misleading statements was slowly revealed in late 2012 through early 2013, Yum's share price plummeted, falling more than 16.64 percent, or $12.39 per share, erasing almost $5.6 billion in market capitalization. Further, as a direct result of this unlawful course of conduct, the company is now the subject of multiple federal securities class action lawsuits filed in the U.S. Court for the Central District of California on behalf of investors who purchased Yum's shares," the complaint states.

Bauman claims that shareholders demanded an investigation after a public apology was posted on Yum Brands' website, but "although the company claims that the investigation remains ongoing by an undisclosed special committee of the Board, with an expected completion in late August 2013 or sometime thereafter, the Board's refusal of the demand and unreasonable delay in investigating it demonstrates the Board's prejudice against pursing the allegations in the demand."

According to the complaint, the Chinese division of Yum Brands "is comprised of approximately 5,700 'system restaurants,' primarily company-owned KFCs and Pizza Huts. In 2012, the China Division recorded revenues of approximately $6.9 billion and operating profit of approximately $1 billion."

Included among the defendants are Chairman of the Board and CEO David C. Novak, CEO of Yum China Jing-Shyh S. Su, and Yum! Brand's President Richard T. Carucci.

Bauman seeks compensation for money lost in the drop of the stock price, wants the company ordered to strengthen its internal policies on financial disclosures and food-safety testing, and shareholders allowed to nominate at least three candidates for the board of directors.

He is represented by David Futscher, with Parry, Deering, Futscher and Sparks, in Covington, Ky.

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