Impact of the Pandemic and the Value of Cooperation

The pandemic continues to have a huge impact on restaurants, among others. The initial lock downs earlier this year shuttered many dining and other establishments. Some establishments closed. Many restaurants morphed into takeout establishments and later added outdoor dining. Recent restrictions in some areas such as California have even closed outdoor dining, but not takeout. There is little doubt that many restaurants will unfortunately not survive.

One nationwide chain tried to survive by taking a series of actions which more than suggested it was suffering from financial difficulties. At the same time the company did not disclose some information that would have added to the bleak picture painted by its disclosures. The omissions were later penned into an Order Instituting Proceedings charging false statements. In the Matter of The Cheesecake Factory Incorporated, Adm. Proc. File No. 3-20158 (December 4, 2020).

Cheesecake Factory is a well-known national restaurant chain based in Calabasas Hills, California. The firm’s shares are traded on Nasdaq Global Select Market under the ticker symbol CAKE.

As the pandemic began to unfold Cheesecake Factory and other restaurant chains effectively had their businesses closed by the initial restrictions imposed which were designed to try and contain the virus. By mid-March 2020 Cheesecake Factory and others faced unprecedented challenges. Over the next month Cheesecake Factory took a series of steps to try and survive. Those included:

· Efforts to conserve cash such as a March 18, 2020 letter sent to landlords saying that it would not be paying April rent due to a severe decrease in restaurant traffic from the virus; the firm hoped to resume payments as soon as “reasonably possible,” according to the letter;

· On March 23, 2020 the firm drew down the last $90 million on a revolving line of credit; at the beginning of the second quarter the company had about $65 million in cash and cash equivalents;

· By March 23 the company was actively seeking additional liquidity through either debt or equity investments with the goal of raising at least $100 million;

· Possible private equity investors were told the company would survive at the current negative cashflow rate for about 16 more weeks – documents reflected a negative cash flow rate of $6 million per week;

· In a March 23 Form 8-K filed with the Commission Cheesecake Factory stated that it was withdrawing prior financial guidance due to the virus; the attached press release stated the company was moving to an “off-premise model” or delivery to permit the firm to operate “sustainably;”

· Two days later each restaurant landlord received a letter stating the April rent would not be paid; the letter was reported in the media;

· A March 27, 2020 Form 8-K stated the company was not planning to pay rent in April and that it was in discussions with landlords regarding its ongoing rent obligations and potential resolutions; in addition, executive officers, board members and certain employees would take a pay cut while 41,000 workers were furloughed but allowed to retain certain benefits;

· An April 3, 2020 Form 8-K filing attached an April 2 press release disclosing preliminary Q1 2020 sales noting that the restaurants were operating sustainably using the off-premises model; and

· On April 20, 2020 Cheesecake Factory announced a $200 million subscription agreement for the sale of convertible preferred stock to a private equity investor.

The Order alleges that the March 23 and April 3 Forms 8-K were false and misleading. The Forms did not disclose that the firm was “excluding expenses attributable to corporate operations” from its discussions of “sustainability;” there was no statement that the negative cash flow was $6 million per week or only 16 weeks of cash remained as was stated to certain potential lenders. The Order alleges violations of Exchange Act Section 13(a).

The firm, whose cooperation was considered by the Commission, resolved the matter, consenting to the entry of a cease-and-desist order based on the sections cited in the Order. The firm also agreed to pay a penalty of $125,000 that was transferred to the U.S. Treasury.

Comment

Clearly an issuer cannot make selective disclosure. Cheesecake Factory selectively disclosed the available facts yet painted a bleak picture of the firm’s finances but not bleak enough.

The Commission acknowledged that Cheesecake Factory cooperated with its investigation.

But just what did Cheesecake Factory get for that cooperation? Reduced charges? A reduced penalty? Stated differently, what is the value of cooperation? If the Commission wants to encourage corporate cooperation – and a recent report suggests it is declining (here) – it would be useful if the agency could add specificity to what is considered.