A pension fund and three former shareholders allege Restaurant Brands International abused its control over its largest Burger King franchisee to force a sale of the business.
Plymouth County Retirement Association, along with former stockholders Scott Hamparian, Emad Tadros and Zeiad Tadros, filed a lawsuit October 10 in Delaware Chancery Court accusing RBI of effectively coercing Carrols Restaurant Group to sell its 1,022 Burger King restaurants to the parent company in May for $1 billion.
Carrols “stockholders reasonably believed that they faced the Hobson’s choice of either (a) supporting the unfair transaction with RBI or (b) voting down the transaction and owning shares of a company with limited growth prospects,” the lawsuit states. “Thus, Carrols’ stockholders were coerced into voting in favor of the transaction.”
RBI did not immediately respond to a request for comment.
Toronto-based RBI, formed in 2014 with the $12.5 billion merger between Burger King and Tim Hortons, also owns Popeyes and Firehouse Subs. It announced plans to acquire Carrols in January; the purchase was finalized May 16.
Negotiations for the deal, according to the lawsuit, took place in just four days.
RBI invested in Carrols, which was publicly traded, in 2014 and owned 14.6 percent of the company’s stock. Carrols started in 1960 as a drive-in restaurant and in 1976 became a Burger King franchisee when it converted all 78 of its locations to Burger Kings. Over what the complaint described as a “multi-decade acquisition spree,” Carrols purchased hundreds of BK stores across 23 states.
In connection with its 2012 acquisition of 278 company-owned Burger Kings, Carrols obtained right of first refusal on franchisee sales of BK units in 20 states, the lawsuit said. Carrols was also granted pre-approval by the franchisor to acquire restaurants from Burger King franchisees in certain markets unit it hit 1,000 locations. Carrols surpassed 1,000 Burger Kings in 2019.
Though its acquisition pace slowed at times as the brand overall struggled with sales and profits, one of Carrols’ purchases in 2019 was Cambridge Franchise Holdings, which it bought from investment firm Garnett Station Partners. The transaction, per court documents, included 165 Burger Kings, 55 Popeyes locations and six convenience stores.
As part of that deal, GSP owned 16.7 percent of Carrols stock, and the firm’s principals, Matt Perelman and Alex Sloane, were on the Carrols board. By 2023, the lawsuit stated, GSP began selling its stock as part of a process to exit that investment.
Carrols, meanwhile, was looking to get back in acquisition mode, the lawsuit argued. The complaint referred specifically to a comment made by then CEO Deborah Derby during an August 10, 2023 earnings call in which she noted, “I believe that obviously you’ll see acquisitions as a component” of the company’s three-year strategy going forward.
RBI, though, according to the suit, wanted Carrols and other franchisees to put capital toward remodels, not acquisitions, and told Carrols in particular that reinvestment in existing locations should take priority.
Carrols’ “ongoing and substantial remodel investment requirements” influenced the company’s decision not to officially explore a sale on its own last year, according to the lawsuit, as it determined there would likely be few, if any, potential buyers.
In December, RBI decided to make its own push to buy Carrols and, the lawsuit stated, met with Perelman and Sloane, who were later placed on a special committee to examine a possible sale. In court filings, the plaintiffs argue, Perelman’s and Sloane’s involvement on the committee was a conflict of interest because of their relationship with RBI and their firm’s plan to exit its investment in the company. The suit also alleges breach of fiduciary duty.
The initial purchase price offered by RBI for Carrols was $8.75 per share on January 11, according to the lawsuit, 6 percent higher than the company’s closing stock price the day before. Wall Street analysts, the filing noted, had target prices of up to $13 per share.
RBI’s special committee and the Carrols board did agree to a $9.55-per-share purchase price, an “unfair price,” according to the lawsuit. The deal was announced January 16 and shareholders later approved the deal, which was finalized May 16.
The plaintiffs are seeking “equitable relief as is appropriate,” the awarding of damages and of fees and costs associated with the lawsuit.