The Activist Investor Blog
The Activist Investor Blog
Starboard Bothers with Nonbinding Proposals, Too
Late last month we considered why Carl Icahn might get mixed up with non-binding (precatory) proposals at Apple and eBay.
We speculate that he studied the strategy that Ralph Whitworth at Relational Investors and CalSTRS undertook at Timken, where a non-binding proposal probably helped speed along the decision to spin-off its steel business. We conclude Icahn may do this because starting this year, shareholder proposals can pressure corporations in new ways.
It seems Jeff Smith at Starboard Value studied the same strategy. This week Starboard announced its plan to submit a non-binding resolution opposing Darden Restaurants’ announced spin-off of its Red Lobster business. And, Starboard intends to call a special shareholder meeting for the sole purpose of voting on that resolution. In addition to presenting some interesting strategic choices, it seems that Starboard may not have any other option for opposing the spin-off.
It comes down to winning the hearts and minds of other investors. The extent of support for resolution and special meeting constitute an early sign of what other investors think about the Starboard and Darden plans for the company.
A Non-Binding Resolution?
Starboard seeks a non-binding shareholder vote on the Red Lobster deal. Based on the experience at Timken, this makes sense. To “win”, the resolution needs a majority of votes cast in favor, not a very high threshold:
❖Starboard and Barington Capital, the other activist that began the action at Darden, own 7.5%
❖three activist-friendly institutions own 24%
❖insiders own 3.3%.
At the annual meeting in September 2013, shareholders cast 92 million votes on five shareholder proposals. So, it would take 46 million votes in favor to win, perhaps much less, as fewer investors tend to participate in special meetings. The proxy access proposal among the five, arguably the one with the greatest practical interest to and impact on investors, won with 57 million votes.
If Starboard’s proposal wins, management should pay attention. As we noted earlier, directors that ignore a winning resolution could confront much a much more challenging election at the next shareholder meeting.
And, A Special Meeting?
Starboard also plans to call a special meeting to consider the non-binding resolution. Earlier, we discussed the strategic and practical ins and outs of special meetings.
Companies call special meetings mostly to approve major deals. Investors demand them mostly to replace directors in-between annual meetings. Why would Starboard do this for a mere non-binding resolution?
One reason is, calling a special meeting requires many more votes than winning approval of the shareholder resolution. As a Florida corporation, it takes 50% of the outstanding shares to call a special meeting, a much higher level than the vote needed to approve the non-binding resolution. With 110 million shares outstanding, it takes 55 million votes to call the special meeting, compared to a possible 46 million or fewer votes to approve the resolution. If investors vote to call the special meeting, they are even more likely to support the non-binding resolution.
The special meeting vote also introduces a couple of intriguing strategic factors. First, the vote to call a special meeting is less controversial than the vote on the non-binding resolution. Starboard notes this carefully in the preliminary proxy materials, distinguishing between the current consent for the special meeting, and the more elaborate proxy for the resolution.
We think an investor would more readily agree to call the special meeting to consider what do to with Red Lobster than they would vote for the actual resolution to not spin-off Red Lobster. Support for the special meeting does not necessarily translate into support for the resolution, which probably helps Darden.
Second, Starboard alone collects the consents for a special meeting. While Darden no doubt will seek to collect “revokes” from investors that have already consented, Starboard can monitor the progress toward calling a special meeting without any public disclosure, and hence without Darden knowing which investors do and do not support it.
Yet, No Other Options
It also seems that Starboard may not have much other choice. When Darden announced it would spin-off Red Lobster, it indicated it would not seek shareholder approval, say through the usual vote at a special meeting.
Darden also announced that it expects the spin-off to take place early in Fiscal Year 2015, which begins May 26, 2014. On the other hand, in past years the company conducts annual meetings in September. (The company could also delay the 2014 annual meeting.) Thus, based on the company’s announcement and its custom, it would close the spin-off before shareholders meet to vote on directors.
What can Starboard do? It could just let the spin-off proceed, and then seek to replace the BoD at the 2014 annual meeting. It seems that Starboard cares too much about the company’s business, and investors’ restructuring plans, to let that happen.
It could litigate Darden’s decision to not seek shareholder approval, with the attendant cost, uncertainty, delay, and distraction. We don’t know this aspect of Florida corporation law, so we suspect it allows deals like this to proceed without shareholder approval. Otherwise, Starboard, as smart an activist as we’ve seen, would have already started to litigate.
Neither the resolution nor the special meeting will cost very much for Starboard to pursue. For the special meeting, Starboard will collect consents from investors, and can do that at its own pace until it has the requisite 50%. For the resolution, Darden will organize the special meeting, prepare and send proxy materials, and collect proxies. Starboard will need to persuade investors to support both, but won’t make numerous proxy filings or compete with Darden to solicit proxies.
How will this work out?
Hard to tell this early. It seems that investors beyond Starboard and Barington support some form of a restructuring. When those two called for a more complete breakup, Darden responded with the Red Lobster spin-off, presumably in response to entreaties from other shareholders. Of course, Starboard and Barington object to the Red Lobster proposal as inadequate. Darden seems to bet that the Red Lobster deal will satisfy other investors hungry for change.
Starboard bets that investors that have already joined it and Barington to pressure Darden to break up the company will likely support something as simple as a special meeting to consider a non-binding resolution. Watch how fast Starboard can collect special meeting consents. If they announce success within only a few days or weeks after filing their final proxy materials for the special meeting solicitation, Darden had better rethink their plans for Red Lobster.
Thursday, February 27, 2014