A Washington county judge has rejected a motion for a preliminary injunction against a $4 billion special dividend payment planned by Albertsons that was disclosed in the announcement of its $24.6 billion deal to merge with The Kroger Co.
In a Zoom hearing late Friday, Judge Ken Schubert of King County Superior Court denied the request to stop the payment, which has been suspended under a temporary restraining order (TRO) attained Nov. 3 by Washington State Attorney General Bob Ferguson. Schubert, however, ruled to extend the TRO by another 10 days, to Dec. 19 at 4:30 p.m. PST, because a court may find reason to lengthen the TRO to give the state an opportunity to appeal the decision.
Initially, in ruling against the injunction, Schubert also was slated to lift the TRO unless the state could show precedent to uphold it by 4 p.m. PST.
The attorney for the Washington AG’s office said at the hearing that the state aims to immediately file an emergency motion with the Washington State Supreme Court to extend the TRO on the dividend payment pending further consideration of the preliminary injunction. The motion for the injunction was filed with the state's high court later on Friday.
The Washington AG’s office had argued that the $4 billion dividend payment, if made, would hamper Albertsons’ ability to operate and compete as well as potentially harm consumers and workers. The state also claimed the payment, as planned, was anticompetitive because it was tied to a merger agreement.
Schubert, however, said the state didn’t demonstrate that the dividend would harm Albertsons, consumers or the grocery retail market and noted that the state cannot step in and tell the grocery retailer how to spend its money. He also supported explanations by attorneys for Albertsons and Kroger that Albertsons decided on its own to make a special dividend payment to shareholders and that the proposed dividend wasn’t connected to the merger transaction itself.
The fact findings of Schubert's ruling noted that, in late February 28, Albertsons filed with the Securities and Exchange Commission that it planned a strategic review, which included a potential return of capital to shareholders via a tender offer (stock buyback) or a special dividend, with Albertsons preferring the former. In June, Kroger expressed an interest to acquire Albertsons, but the Boise, Idaho-based grocer couldn't pursue both a tender offer and a merger deal due to a possible SEC violation, the court document said. That left a special dividend as Albertsons' only recourse to return capital to shareholders and proceed with the merger. And in the ensuing merger talks, Kroger negotiated to limit the size of the dividend payment to $4 billion.
"The parties did not agree that Albertsons would issue that special dividend, nor did Kroger require Albertsons to do so," Schubert's ruling stated. "Kroger merely acquiesced to allow Albertsons to issue a special dividend if Albertsons, unilaterally, decided to do so."
An Oct. 18 10-Q filing with the SEC by Albertsons indicated that the company will use $2.5 billion of its $3 billion cash on hand and about $1.5 billion of its line of credit to pay for the special dividend, leaving the grocer with approximately $500 million cash on hand and $2.6 billion in its line of credit. "The state failed to show that Albertsons’ payment of the dividend will impair its ability to compete during regulatory review of the merger or harm competition in grocery retail markets in Washington state communities," Schubert's order said.
Washington state failed to establish the likelihood that it will be able to prove at trial that Albertsons and Kroger made an agreement in unreasonable restraint of trade or commerce and that Albertsons’ payment of the special dividend is an unfair method of competition, in turn not making the case for the issuance of a preliminary injunction, Schubert determined. Yet the state did establish "good cause" to extend the current TRO to allow for an appeal of the ruling against the injunction, his order stated.
"Albertsons Cos. awaits a ruling on the request for a preliminary injunction filed Dec. 1, 2022, by the California, Illinois and District of Columbia attorneys general against the payment of the special dividend. On Nov. 8, 2022, the U.S. District Court for the District of Columbia denied their request for a temporary restraining order against the payment of the special dividend," Albertsons said Friday evening in a statement on the King County Superior Court ruling.
"Albertsons Cos. continues to believe that the claim brought by the attorney general of the state of Washington, and the similar lawsuit brought by the attorneys general of California, Illinois and the District of Columbia, is meritless and provides no legal basis for preventing the payment of a dividend that has been duly and unanimously approved by Albertsons Cos.’ fully informed board of directors," Albertsons added. "Albertsons Cos.’ proposed merger with The Kroger Co. is continuing through required regulatory review, including seeking clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976."
Under the merger deal, unveiled on Oct. 14, Kroger plans to acquire all outstanding shares of Albertsons common and preferred stock for about $34.10 per share. The total value of the transaction includes the assumption of roughly $4.7 billion of Albertsons’ net debt. In the merger announcement, the companies reported that Albertsons had planned to pay a special cash dividend of up to $4 billion, or about $6.85 per share, to its shareholders on Nov. 7.
In mid-November, Schubert had scheduled a Dec. 9 hearing (in State of Washington v. Albertsons Companies Inc. et al., Cause No. 22-2-18046-3) to re-examine the Washington state TRO that had halted the dividend payment. The U.S. District Court for the District of Columbia on Nov. 8 had denied a request by the attorneys general of California, Illinois and D.C. for a TRO to stop Albertsons’ planned dividend payment. The TRO in Washington state, though, remained in effect. D.C. AG Karl Racine said in a Nov. 4 joint status report filing that he aimed to move for a preliminary injunction after the court rules on the Washington state TRO.
The AGs of D.C., California and Illinois earlier last month had sued to stop the Albertsons dividend payment pending a full review of the merger deal by state and federal regulators. Efforts to block the dividend contend that its size will impede Albertsons’ operations and ability to compete during the merger transaction’s antitrust review, in turn impacting workers and shoppers. The companies have said they expect to close the transaction in early 2024, but industry observers say regulatory clearance could take up to two years.
The lawsuits came after a letter sent in late October to Albertsons CEO Vivek Sankaran and Kroger Chairman and CEO Rodney McMullen urging them to forgo the dividend payment. The letter—signed by Ferguson (D.), Racine (D.) and state AGs Mark Brnovich (R.) of Arizona, Rob Bonta of California (D.), Lawrence Wasden (R.) of Idaho and Kwame Raoul (D.) of Illinois—requested Albertsons to respond by Oct. 28. However, the grocer declined and decided to move ahead with the planned dividend payment.
On Dec. 8, Colorado AG Phil Weiser also had called for Washington state to block the Albertsons dividend payment in a brief filed with King County Superior Court. His office also is leading a multistate investigation of the proposed Kroger-Albertsons merger, arguing that if the transaction is approved it could hoist grocery prices for Colorado consumers, lower wages for workers, cut jobs, and negatively impact farmers and other local suppliers.
UPDATE: This story has been updated with additional information from the court ruling.