Engineer Brad Wall oversaw the modernization of Wawa Inc.'s Delaware County industrial dairies on U.S. 1 near its Red Roof headquarters, and went on to lead the popular convenience chain’s rapid store expansion from 1999 until 2013 as director of construction and design.
He was one of many proud Wawa employees who hoped one day to retire on Wawa stock grants. But today, as the company expands along the East Coast, “Wawa is pretty much dead to me,” Wall said in an interview last week. “I am one of the ones who lost at least a couple million” after the company reversed a promise to let employees who left the company hold on to their shares until retirement age, as their value rose.
Wall is one of more than 1,200 former workers who shared a $25 million settlement in 2018 — a fraction of their actual losses, according to Wall and some others — to settle accusations that the company cheated them out of company stock they were saving for retirement.
Today the Delaware County-based company is negotiating a second federal lawsuit settlement with a larger group — who say they, too, were illegally forced to sell shares at a discount, so members of the founding Wood family could regain majority control of the fast-growing convenience-store chain. Consolidating control could make it easier for family leaders to sell the company for billions of dollars at terms favorable to them in the future.
Wawa has not acknowledged wrongdoing when it agreed to pay the $25 million to settle the first suit, called Pfeifer v. Wawa, including $5 million for workers’ lawyers. Spokesperson Lori Bruce said the company would not comment on settled or ongoing litigation, or on Wood family plans.
Nor would lawyers for the ex-staff, led by R. Joseph Barton of Block & Leviton, now in settlement talks for the second complaint, called Cunningham v. Wawa, on behalf of “several thousand” ex-Wawa workers who left since the years covered by the first suit.
Among other demands, they have asked the court to appoint independent fiscal overseers and break the company’s control over the Employee Stock Ownership Plan (ESOP) that holds shares in trust for thousands of workers.
The stock’s value, as estimated by Wawa’s advisers, has risen from $2,296 a share in 2009 to $6,940 when it forced them to sell in 2015 — and to $10,419 last spring (an increase far greater than the S&P 500 stock index for 2009-18), according to Wawa reports cited in the second lawsuit.
The suit contends the real share value is actually higher — because the actuaries who did the calculations were overconservative in assuming the company can’t be sold, and wrongly treated it as if Wawa still pays typical corporate income taxes, which it doesn’t. A Wawa source said last week the company has estimated its share value most recently at over $14,000. Spokesperson Bruce declined to comment.
Details of the allegations and the earlier settlement are in federal court records. Both cases have been heard by Judge Paul S. Diamond.
It’s not the only time the company has been accused of cutting corners in recent years. The company is fielding class-action complaints from customers who say Wawa failed to protect their personal data after the chain admitted malware left customer names, card numbers, and expiration dates exposed to hackers for nine months last year. In August, Wawa agreed to pay $1.4 million to settle a lawsuit that claimed the company shortchanged more than 300 assistant general managers out of overtime and wages.
With sales of $12 billion last year, Wawa is one of the largest privately owned companies based in the Mid-Atlantic region. It operates more than 850 convenience stores, many with gas pumps, all serving fast-food variations of hoagies and other familiar fare, in the states around Philadelphia and Washington, D.C., and in Florida.
The Wawa dairy was founded by George Wood in 1902, the store chain by his heir Grahame Wood in 1964. Another heir, Richard “Dick” Wood, has been Wawa’s board chairman since he stepped down as chief executive in 2004.
Wood, 82, plans to retire this spring in favor of his younger brother George, said sources at Wawa. The company declined to comment on the chairman’s plans.
CEO Christopher Gheysens has said the ESOP is a central part of Wawa culture, rewarding loyal workers and giving them pride in their ownership of the company.
The Wawa ESOP held stock worth more than $2 billion at the end of 2018, according to its annual report. Some 20,000 Wawa employees have enrolled in the plan. While some senior and long-serving employees have accumulated $1 million or more worth of shares, many participants are hourly workers who have only begun to accumulate shares, which are rewarded under formulas based on hours worked and length and type of service. Every year thousands of workers leave without qualifying for share awards.
The “forced sale" of ex-employees’ Wawa stock followed soon after Wawa’s 2014 legal conversion, from a typical American C-corporation, which pays income taxes, into a closely held S-corporation, like a small or family business with a handful of private owners. That move had the effect of ending the company’s federal income tax obligations, and boosting its profits, its ability to pay shareholder dividends, and its future value to potential buyers, according to the lawsuit now in settlement talks.
The company made that conversion after President Barack Obama signed the “Private Company Flexibility and Growth Act” of 2012, which made it easier for large private companies to avoid making detailed financial reports public. The act had been supported by Wawa and by area Congress members including Senate cosponsors Pat Toomey (R., Pa.) and Tom Carper (D., Del.). .
Before the change, Wawa officials had said the company was moving, from ownership by Wood heirs and top executives, toward employee ownership.
Indeed, back in 2004, Wawa and the Wood heirs who controlled its board had relied on veteran employees’ help, and their share ownership, as their control was threatened.
That’s when the charitable foundation set up to manage part of the drug fortune of Philadelphia’s McNeil family, which had privately purchased a block of Wawa stock, told Wawa it wanted to sell the stock and pocket profits from the company’s recent growth, through a public stock offering.
But a public sale would dilute Wood family control and subject the company to Wall Street and federal regulatory pressure. Wawa needed cash if it was to buy out the McNeils and keep the Woods in control.
The company asked veteran employees who participated in a Wawa profit-sharing plan to trade their savings for ESOP shares. It then borrowed from the enlarged ESOP to buy McNeil’s Wawa shares and keep the company private. Wawa owed the ESOP a total of $188.7 million and has until 2060 to pay, according to court papers.
Wawa employees who participated in that deal felt like heroes for saving the company as they knew it. Those workers also had been well-rewarded, as their retirement accounts zoomed in value as Wawa sales and profits grew. That lucrative growth continues, for thousands of Wawa employees. Others left and pursued careers elsewhere, confident in Wawa’s promise that it would never “divest you of any entitlement or benefit,” according to the Pfeifer complaint.
But in 2015, chairman Wood and Wawa management told ex-employees they would have to sell their shares, even if they weren’t close to retirement age. According to the Pfeifer lawsuit, Wood and top Wawa officials “misled” and “misrepresented” the legality of that change, which cut ex-workers from “investment gains from the continued rise in the value of Wawa stock, the dividends paid, and the opportunity for future investment gains — all in violation of the federal Employee Retirement Income Security Act.”
Under the 2018 settlement of that lawsuit, the company, while admitting no wrongdoing, agreed to make payments averaging $15,000 to 1,264 Wawa ex-employees who had been assured they could “hold Wawa stock in their ESOP accounts” until they were retirement age, even if they left before retirement and now worked elsewhere.
Wall, the construction director, who worked for Wawa for a total of 20 years, filed a lonely challenge during the settlement negotiations, arguing in 2017 that it was far below the value of his loss, and others’. But the court ruled he had acted too late.
The current suit — Cunningham v. Wawa Retirement Plan — contends that the Woods wanted to regain at least 50% control of the company before the end of the 2020s, when the Wood family trust that owns most of the family shares is scheduled to expire and heirs may find it easier to sell their shares individually.
According to that suit, taking back departed employees’ shares cut the ESOP from 44% to 41% of Wawa’s total shares — and boosted the Wood family stake to just over 50%, from 47%. (The rest of the shares are held by former executives, and a handful of outsiders.)
Would those changes put Wawa insiders — Wood family members and top executives — in a better position to sell Wawa as an entire company or put it on the public stock markets through an initial public offering?
The company strongly disputed those possibilities.
“To be clear, we are committed to remaining privately held and to sharing ownership with our associates through our ESOP,” Bruce said. “We believe our ownership structure between the founding family and our associates is the foundation of our culture and our ongoing success.”