NOTICE OF PENDENCY OF DERIVATIVE ACTION, PROPOSED AGREEMENT OF SETTLEMENT AND RELEASE, AND SETTLEMENT HEARING
TO: ALL CURRENT RECORD HOLDERS AND BENEFICIAL OWNERS OF COMMON STOCK OF CHIPOTLE MEXICAN GRILL, INC. (“CHIPOTLE” OR THE “COMPANY”) AS OF OCTOBER 24, 2017 (THE “RECORD DATE”) (“CURRENT CHIPOTLE SHAREHOLDERS”).
PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. THIS NOTICE RELATES TO A PROPOSED SETTLEMENT AND DISMISSAL OF GUBRICKY V. ELLS, NO. 16-CV-02011-WJM-MEH (THE “ACTION”), A SHAREHOLDER DERIVATIVE ACTION, AND CONTAINS IMPORTANT INFORMATION REGARDING YOUR RIGHTS. IF THE COURT APPROVES THE SETTLEMENT, YOU WILL BE FOREVER BARRED FROM CONTESTING THE APPROVAL OF THE PROPOSED SETTLEMENT AND FROM PURSUING THE “RELEASED CLAIMS,” AS DEFINED HEREIN.
THE COURT HAS MADE NO FINDINGS OR DETERMINATIONS CONCERNING THE MERITS OF THE ACTION. THE RECITATION OF THE BACKGROUND AND CIRCUMSTANCES OF THE SETTLEMENT CONTAINED HEREIN DOES NOT CONSTITUTE THE FINDINGS OF THE COURT. IT IS BASED ON REPRESENTATIONS MADE TO THE COURT BY COUNSEL FOR THE PARTIES.
Notice is hereby provided to you of the proposed settlement (the “Settlement”) of this shareholder derivative lawsuit. This Notice is provided by Order of the United States District Court for the District of Colorado (the “Court”). It is not an expression of any opinion by the Court. It is to notify you of the terms of the proposed Settlement, and your rights related thereto.
1. WHY THE COMPANY HAS ISSUED THIS NOTICE
Sean Gubricky and Cyrus Lashkari (collectively “Plaintiffs”), Nominal Defendant Chipotle, and defendants M. Steven Ells, Montgomery F. Moran, Albert S. Baldocchi, Mark Crumpacker, John S. Charlesworth, Kimbal Musk, Patrick J. Flynn, Stephen Gillett, Darlene J. Friedman, and Neil Flanzraich (collectively “Defendants,” and collectively with Plaintiffs and Chipotle the “Parties”) have agreed upon terms to settle the Action on the terms set forth in the Stipulation and Agreement of Settlement and Release (“Agreement”), dated September 29, 2017, which can be viewed and/or downloaded at www.chipotle.com.
On March 15, 2018, at 9 a.m., the Court will hold a hearing (the “Settlement Hearing”) in the Action. The purpose of the Settlement Hearing is to determine: (i) whether the terms of the Agreement are fair, reasonable, and adequate and should be approved; (ii) whether a final judgment should be entered; and (iii) such other matters as may be necessary or proper under the circumstances.
2. SUMMARY OF THE ACTION
On August 8, 2016, a Chipotle stockholder, Sean Gubricky, filed a lawsuit in the United States District Court for the District of Colorado, asserting claims derivatively on behalf of Chipotle. That lawsuit was styled Gubricky v. Ells, et al., C.A. No. 1:16-cv-2011-WJM-KLM (D. Colo.). Then, on December 27, 2016, another Chipotle Stockholder, Cyrus Lashkari, filed a related lawsuit in the same court, also asserting claims derivatively on behalf of Chipotle. The second lawsuit was styled Lashkari v. Ells, et al., C.A. No. 1:16-cv-03180-RM-MJW (D. Colo.).
The Gubricky and Lashkari actions each alleged that certain current and former officers and directors of Chipotle violated state law and breached their fiduciary duties in connection with alleged failures to manage the risk of food-borne illness at the Company’s restaurants and to properly oversee the Company’s response to a series of food-borne illness outbreaks at the Company’s restaurants beginning in the summer of 2015. Because of the overlapping nature of their claims, the stockholder plaintiffs in the two actions agreed to consolidate their lawsuits, with the Gubricky action to remain the lead, or operative, case (the “Action”). The stockholder plaintiffs filed a motion to consolidate their actions on January 24, 2016 and the Court granted that motion on May 24, 2017.
On June 7, 2017, the Court granted a motion by the Defendants to dismiss the consolidated Action on the grounds that, under applicable Delaware law, Sean Gubricky lacked standing to bring a derivative suit because he had failed to allege it would have been futile for him to have demanded that the Chipotle Board institute the litigation on Chipotle’s behalf. The Court, however, issued its order without prejudice so as to give Gubricky the opportunity to make a litigation demand on the Chipotle Board.
On September 29, 2017, Plaintiffs and Defendants entered into the Agreement to resolve the Action.
Pursuant to the Agreement, Chipotle will institute certain internal controls and corporate governance reforms designed to ensure improved oversight by the Board and senior management of food-safety issues in the future and to prevent further alleged food-borne illness outbreaks such as those giving rise to the Action. As explained in more detail in the Agreement, Chipotle will implement corporate reforms including the following:
- Chipotle will continue to maintain, for at least two years, a Food Safety Advisory Council, which shall meet at least quarterly and be comprised of independent consulting experts in food safety dedicated to investigating, evaluating, and making recommendations regarding food safety to the Company’s Executive Director of Food Safety, who shall participate in all Council meetings and serve as the liaison between the Company and the Council.
The Council is charged with continually reviewing Chipotle’s food safety procedures and strategies, validating existing initiatives, and advising on opportunities for improvement. The Council’s recommendations will be reported to Chipotle management at least quarterly and more often as needed. Further, the Executive Director of Food Safety shall report the Council’s activities to the Board on a quarterly basis, ensuring that the Board will remain apprised of the Council’s views and recommendations.
- Chipotle will amend its whistleblower program, as necessary, to ensure, inter alia, that: (i) the Company’s General Counsel shall be responsible for reporting to the Audit Committee details of any significant food-borne illness related complaint and shall provide a detailed report concerning his or her investigation of such complaints no later than the next Audit Committee meeting; (ii) a log of all such significant food-borne illness related complaints, and the results of all investigations of such complaints, which shall be memorialized in writing and maintained by the CFO and General Counsel for a period approved by the Audit Committee; and (iii) that Chipotle shall continue to allow its independent auditor access to the log and investigation results upon request. Chipotle will also continue to allow the Audit Committee full access to the complaint log, complaint reports, and related materials. Chipotle shall also place contact information and directions for the Whistleblower Hotline on its website.
- Chipotle will commit that not less than three of Chipotle’s Board members who were Board members in November 2016 will no longer be directors of the Company by May 2018 (which each of the following shall be credited towards this requirement: the departure of Montgomery Moran from the Board, the four new Board appointees who have joined the Board in December 2016, and the four Board members who will not be running for election in 2017).
The Agreement also provides for the entry of judgment dismissing the Action against the Defendants with prejudice and, as explained in more detail in the Agreement, releasing and discharging certain known and unknown claims that could have been brought in any court by the Plaintiffs in the Action or by Chipotle, or any of its shareholders, derivatively against the Defendants and Chipotle, its direct and indirect subsidiaries, and all of their past, present, and future officers, directors, shareholders, members, partners, managers, agents, attorneys, and insurers that relate to, arise out of, or concern Plaintiffs’ Claim or Plaintiffs’ Allegations, including all claims or allegations that were brought or could have been brought in the Action, as of the Effective Date of the Agreement. Without limiting the foregoing in any way, this release explicitly includes a release of the claims being asserted by plaintiffs in a related action pending in Colorado state court, styled In re Chipotle Mexican Grill, Inc. Derivative Litigation, 2016CV31215 (Colo. Dist. Ct. Denver Cty.).
4. PLAINTIFFS’ ATTORNEYS’ FEES AND EXPENSES AND SERVICE AWARDS TO NAMED PLAINTIFFS
After negotiating corporate governance reforms, counsel for Plaintiffs, the Company, and Defendants negotiated the attorneys’ fees that Chipotle would pay to Plaintiffs’ Counsel. As a result of these negotiations, and in light of the substantial benefit conferred, Chipotle has agreed to pay Plaintiffs’ Counsel attorneys’ fees and expenses of $375,000 (“Fee and Expense Award”). To date, Plaintiffs’ Counsel have not received any payments for their efforts. The Fee and Expense Award will compensate Plaintiffs’ Counsel for their efforts in prosecuting this Action and the substantial benefits achieved for Chipotle and its shareholders. Plaintiffs intend to seek a Service Award in an amount of up to $1,000 for each Plaintiff, which shall be paid from the Fee and Expense Award.
5. REASONS FOR THE SETTLEMENT
The Court did not enter judgment in favor of Plaintiffs or Defendants. The proposed Settlement was negotiated at arm’s-length by attorneys for the Parties. The attorneys for all of the Parties have extensive experience in shareholder derivative cases, and they all believe the Settlement is in the best interest of their clients. Chipotle and Plaintiffs believe that the Settlement provides substantial benefits upon Chipotle and its shareholders.
5.1 Why Did Plaintiffs Agree to Settle?
Plaintiffs’ Counsel investigated claims and the underlying events and transactions alleged in the Action, including by securing nonpublic Company documents through a books and records demand. Plaintiffs’ Counsel have analyzed the evidence adduced during their investigation, and have researched the applicable law with respect to the claims of Plaintiffs, Chipotle, and its shareholders against Defendants and the potential defenses thereto.
Based upon their investigation, Plaintiffs and their counsel have concluded that the terms and conditions of the Agreement are fair, reasonable, and adequate to Plaintiffs, Current Chipotle Shareholders, and Chipotle, and in their best interests, and have agreed to settle the claims raised in the Action pursuant to the terms and provisions of the Agreement after considering, among other things: (a) the substantial benefits that Chipotle and its shareholders will receive from the Agreement, (b) the attendant risks of continued litigation of the Action, and (c) the desirability of permitting the Settlement to be consummated.
In particular, Plaintiffs and their counsel considered the significant litigation risk inherent in this Action. The law imposes significant burdens on Plaintiffs for pleading and proving a shareholder derivative claim. While Plaintiffs believe their claims are meritorious, Plaintiffs acknowledge that there is a substantial risk that the Action may not succeed in producing a recovery in light of the applicable legal standards and possible defenses, particularly in view of the District Court’s determination that Gubricky could not plead demand futility under Delaware law. Plaintiffs and their counsel believe that, under the circumstances, they have obtained the best possible relief for Chipotle and its shareholders.
5.2 Why Did the Defendants Agree to Settle?
Litigation presents inherent risks. Although Defendants deny that they acted improperly, the defense of the Action requires an expenditure of corporate resources, in particular, of management time and attention. After investigation of the underlying facts and analyzing the applicable law, Defendants believe that the arm’s-length Settlement negotiated with Plaintiffs is appropriate under the circumstances. The Settlement provides a certain and specific resolution of the disputes and provides corporate governance changes that are beneficial to Chipotle’s shareholders. The Settlement also permits Chipotle’s management to focus their attention on Chipotle’s business affairs, which is where the focus of management should be.
6. SETTLEMENT HEARING
On March 15, 2018, at 9 a.m., the Court will hold the Settlement Hearing before the Honorable William J. Martinez at the Alfred A. Arraj United States Courthouse, 901 19th Street Denver, Colorado 80294-3589, in Courtroom A801. At the Settlement Hearing, the Court will consider whether the terms of the Settlement are fair, reasonable, and adequate and thus should be finally approved and whether the Action should be dismissed with prejudice pursuant to the Agreement.
7. RIGHT TO ATTEND SETTLEMENT HEARING
Any Current Chipotle Shareholder may, but is not required to, appear in person at the Settlement Hearing. If you want to be heard at the Settlement Hearing, you must first comply with the procedures for objecting, which are set forth below. The Court has the right to change the hearing dates or times without further notice. Thus, if you are planning to attend the Settlement Hearing, you should confirm the date and time before going to the Court. CURRENT CHIPOTLE SHAREHOLDERS WHO HAVE NO OBJECTION TO THE SETTLEMENT DO NOT NEED TO APPEAR AT THE SETTLEMENT HEARING OR TAKE ANY OTHER ACTION.
8. RIGHT TO OBJECT TO SETTLEMENT AND PROCEDURES FOR DOING SO
You have the right to object to any aspect of the Settlement. You must object in writing, and you may request to be heard at the Settlement Hearing. If you choose to object, then you must follow these procedures.
8.1 You Must Make Detailed Objections in Writing
Any objection must be presented in writing and must contain the following information. The Court may not consider any objection that does not substantially include the following information:
- Your name, legal address, and telephone number;
- Proof of being a Current Chipotle Shareholder as of the Record Date;
- The date(s) you purchased your Chipotle shares;
- A statement of your position with respect to the matters to be heard at the Settlement Hearing, including a statement of each objection being made;
- The grounds for each objection or the reasons for your desiring to appear and to be heard;
- Notice of whether you intend to appear at the Settlement Hearing (this is not required if you have lodged your objection with the Court); and
- Copies of any papers you intend to submit to the Court, along with the names of any witness(es) you intend to call to testify at the Settlement Hearing and the subject(s) of their testimony.
8.2 You Must Timely Deliver Written Objections to the Court, Plaintiffs’ Counsel, and Defendants’ Counsel
YOUR WRITTEN OBJECTIONS MUST BE ON FILE WITH THE CLERK OF THE COURT NO LATER THAN FOURTEEN (14) DAYS BEFORE THE SETTLEMENT HEARING.
The Court Clerk’s address is: Clerk of the Court United States District Court District of Colorado Alfred A. Arraj United States Courthouse 901 19th Street Denver, Colorado 80294-3589
YOU ALSO MUST DELIVER COPIES OF YOUR WRITTEN OBJECTIONS TO COUNSEL FOR PLAINTIFFS AND COUNSEL FOR DEFENDANTS SO THEY ARE RECEIVED NO LATER THAN FOURTEEN (14) DAYS BEFORE THE SETTLEMENT HEARING.
Counsel’s addresses are:
Stuart J. Guber
Faruqi & Faruqi LLP
101 Greenwood Avenue,
Suite 600 Jenkintown, PA 19046
Co-Lead Counsel for Plaintiff
Thomas R. Blackburn
Messner Reeves LLP
1430 Wynkoop Street, Suite 300
Denver, Colorado 80202
Counsel for Defendant
9. HOW TO OBTAIN ADDITIONAL INFORMATION
This Notice summarizes the Agreement. It is not a complete statement of the events of the Action or the Agreement.
You may inspect the Agreement and other papers in the Action at the United States District for the District of Colorado’s Clerk’s office at any time during regular business hours of each business day. The Clerk’s office is located at the United States District Court for the District of Colorado, United States District Court District of Colorado, Alfred A. Arraj United States Courthouse, 901 19th Street, Denver, Colorado 80294-3589.
PLEASE DO NOT CALL, WRITE, OR OTHERWISE DIRECT QUESTIONS TO EITHER THE COURT OR THE CLERK’S OFFICE. Any questions you have about matters in this Notice should be directed by telephone to Faruqi & Faruqi LLP at (215) 277-5770 or in writing to Faruqi & Faruqi LLP, 101 Greenwood Avenue, Suite 600, Jenkintown, PA 19046.
OCTOBER 24, 2017
BY ORDER OF THE COURT
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO