Firms abandon planned class actions against Retail Food Group
Franchise July 4, 2018 9:35 pm By Christine Caulfield | Melbourne

Law firm Maurice Blackburn has dropped plans for a class action against Retail Food Group alleging the franchisor misled shareholders about the long-term viability of its business model.

The firm, which had called in March for investors to join a lawsuit against the owner of Gloria Jeans and Donut King chain stores, declined to say Wednesday why it decided not to proceed with a case.

Bannister Law has also abandoned its potential class action against RFG on behalf of franchisees, according to the Sydney Morning Herald on Wednesday. The firm did not respond to a request for comment and it’s not known if its investigation of a proposed investor action remains open.

RFG did not immediately respond to a request for comment.

The company has not escaped shareholder wrath, however, with a proposed class action led by law firm Phi Finney McDonald still in pre-proceedings mode. That case, financed by litigation under IMF Bentham, claims the franchise giant failed to make adequate disclosures about the financial health and misled the market.

The action, on behalf of shareholders who bought stock in ASX-listed RFG between April 2017 and February 2018, will allege the company concealed the financial risks of its franchise model and that its franchise network was deteriorating.

RFG’s shares traded at an artificially inflated price as a result of its disclosure failures, according to Phi Finney McDonald.

The financial health of the company was sufficiently troubling that consulting firm Deloitte Touche Tohmatsu was hired in June 2017 to review the sustainability of its model, the class action will claim.

Its share price dropped about 40% between December 11 and 18, and a further 25% when the company announced that its 2018 half-year results would be materially lower than in previous years. The company’s stock price fell another 36.5 percent after the half-year report showed deterioration in the performance of its domestic franchise division and substantial asset impairments.

“Shareholders should be angry. Retail Food Group’s Board knew about critical defects in the franchise model and the financial crisis afflicting its franchise networks. However, RFG investors only discovered these issues from  media coverage in December 2017,” Phi Finney McDonald director Tim Finney said in a statement announcing the proposed action.

“Retail Food Group continued to deny any structural dysfunction within its franchise and didn’t properly reveal the difficulties until March 2018,” Finney said.

RFG said in its March 2 announcement that it would close between 160 and 200 stores by the end of the 2019 financial year, blaming “unsustainable rent and declining shopping centre performance”.

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Christine Caulfield

Christine Caulfield has been a journalist for 18 years. She was most recently the Co-Managing Editor at US legal news publication Law360. Prior to that she worked as the County Court reporter for The Herald Sun. She is Co-Founder and Editor of Lawyerly.