October 20, 2014 Bruce Goldfarb Quoted in Agenda
Bruce Goldfarb Quoted in Agenda
Normally, activists will attempt to gain minority representation on a board by asking to replace one or more members with their own nominees. However, in this case, the relationship between shareholders and management became so strained that the activists opted to oust the entire board. The goal of the action shifted from gaining influence over decision-making at the company to gaining control.
Bruce Goldfarb, president and CEO of Okapi Partners, a proxy solicitor assisting Starboard, says in an e-mail that it was hard to pinpoint the exact turning point of the dispute, but “Darden galvanized investors by selling Red Lobster without giving shareholders an opportunity to vote and make a decision about the future of the company. The sale ended up bringing very little value to the company, making shareholders even more interested in future decisions and votes.”
Darden Ousting: Could Your Board Be Next? [Agenda]
By Matthew Scott
The complete overhaul of the Darden Restaurants board of directors this month has some questioning whether activist investor Starboard Value’s approach has opened up a new playbook that other activists may follow in the future.
Last Tuesday, Darden certified results of its Oct. 10, 2014, annual meeting, where shareholders elected all 12 Starboard-nominated directors to the board. The company also announced that the new board appointed Starboard CEO Jeffrey Smith as non-executive chairman of the board and named Darden’s former president and chief operating officer, Gene Lee, as the company’s interim chief executive. These actions were the culmination of a high-profile, nearly year-long activist campaign spearheaded by Starboard, which owns an 8.8% stake in Darden, and Barington Capital Group, which owns 2.8%.
It is very rare for an entire corporate board to be replaced in a proxy vote. However, this was no ordinary proxy contest. The activists took the unusual step of creating a 300-page document outlining the turnaround plan for the company in detail. They also recruited an entire slate of new directors to replace the Darden board, with qualified candidates ready to step in and handle the problem areas detailed in their proposal.
Normally, activists will attempt to gain minority representation on a board by asking to replace one or more members with their own nominees. However, in this case, the relationship between shareholders and management became so strained that the activists opted to oust the entire board. The goal of the action shifted from gaining influence over decision-making at the company to gaining control.
Bruce Goldfarb, president and CEO of Okapi Partners, a proxy solicitor assisting Starboard, says in an e-mail that it was hard to pinpoint the exact turning point of the dispute, but “Darden galvanized investors by selling Red Lobster without giving shareholders an opportunity to vote and make a decision about the future of the company. The sale ended up bringing very little value to the company, making shareholders even more interested in future decisions and votes.”
The Darden board pushed through the sale of Red Lobster for $2.1 billion to Golden Gate Capital in May even though a majority of shareholders had called for a special meeting to vote on spinning off the restaurant chain as a separate company. Although the board argued that the sale had to be done at that time in order to generate any value at all from the chain, whose performance had declined, Josh Black, press officer for research firm Activist Insight, says in an e-mail, “Consummating that deal without a shareholder vote at a time when 57% of shareholders had submitted consents requesting a special meeting was really the height of disdain a company has shown for its shareholders this year.”
Now that Starboard has shown it is possible to put together enough shareholder support to replace an entire board, other activists may follow suit.
“We will likely see more of these big, sweeping wins in the near future as investors are indicating that they would rather support an activist and identify who they want on the board of an underperforming company rather than support a management team and have limited control over which particular directors are elected,” says Goldfarb. “In fact, we received calls from several activists right after the Darden meeting who are looking at campaigns right now for meetings next year.”
Keith Gottfried, head of the shareholder activism defense practice at Morgan Lewis & Bockius, doesn’t think ousting entire boards will become a major trend. While no one knows what was said in the Darden boardroom, most analysts agree that the board’s unwillingness to negotiate with activists earlier and the sale of Red Lobster when it was clear shareholders wanted a say in the decision made this proxy fight about more than company performance.
“This was really a proxy fight about a company that has lots of challenges in an industry that has lots of challenges, and who had the better plan for fixing the company and creating value for shareholders going forward,” says Gottfried. “Was it going to be the existing board or was it going to be a new board that is not tied to any mistakes from the past?”
Gottfried says the Starboard win is more symbolic in that it “provides the activist community with a success story to use as leverage” in the future. However, finding similar circumstances to warrant replacing an entire board is very unlikely. “This was a unique situation,” he says.
If anything, the Darden example may move more boards to settle negotiations with activists and avoid proxy fights for fear of becoming “the next Darden board.” Chris Ruggeri, a principal at Deloitte Advisory Services, believes there will be even more engagement between boards and shareholders, which will discourage replacing full boards in the future. She says it is a “fundamental sea-change in the relationship between public companies and their shareholders. Investors are demanding a more direct voice in some of the key decisions that the management of companies make.”
Now that Starboard has won the battle to make decisions for the company, its board will aggressively move forward on the plan that investors approved by electing its slate of directors. However, it won’t be easy. Many analysts have forecast trouble for the restaurant industry, with greater competition in the fast-casual dining segment, higher food prices and a continuing sluggish economy affecting Darden’s future growth.
After the election of Starboard’s director nominees, Morningstar director and analyst R. J. Hottovy noted that even though Morningstar believes the new slate of directors would be helpful in assisting a Darden turnaround, “we no longer view the company’s competitive advantages as sufficient enough to drive excess economic profits over an extended horizon.… We forecast high-single-digit top-line growth for the fast-casual restaurant category the next five years compared with low-single-digit growth across much of the casual dining space — which will effectively neutralize Darden’s brand intangible asset advantages, bargaining power with suppliers, and marketing and other operating expense economies of scale.”
Black predicts that under this new board, Darden “might see a new CEO [come] from among Starboard’s slate, a cost-reduction campaign and some new marketing drives,” as immediate actions. In a few months, he says, the board will likely explore some of the spin-offs that were proposed, splitting the company into two separate units and creating a company to manage Darden’s real estate holdings.
Whether other activists decide to pursue a strategy that involves replacing the entire board of directors, as Goldfarb suggests, remains to be seen. However, Gottfried says there is one thing that is certain.
“There is a lesson to be learned when an activist comes to the table with a 300-page value-enhancement plan,” he says. “More boards will be looking at this situation and saying we should be more thoughtful about activism defenses and preparing for shareholder activists, because if this could happen to a large-cap, well-established company like Darden, it can happen to us.”
Source: Agenda