BOTH SIDES STAKE OUT THEIR CLAIMS IN BITTER LEGAL BATTLE. The proxy fight that dissident Guy Adams launched at Lone Star Steakhouse & Saloon really is beginning to sizzle. (See Highlights, May 25, 2001.) In addition to a lawsuit that the company already has initiated against Adams, Lone Star filed a motion June 11 seeking a preliminary injunction against him. With the injunction, the company is hoping to stop Adams, and those who it claims are acting with him, from proceeding with a battle to unseat Lone Star Chairman and CEO Jamie Coulter.

The company claims in its suit that Adams’ proxy solicitation materials violate federal securities laws (1) by failing to disclose the existence of participants that Lone Star says are “unlawfully financing and supporting his efforts”; (2) by falsely stating the financial consequences to Lone Star of certain employment agreements between Lone Star and members of its management; and (3) by making misleading statements regarding alleged support that he has received from shareholders of Lone Star.

The company notes that Adams said in his original SEC filings that he is prepared to spend approximately $30,000 on a proxy solicitation and devote many weeks to the solicitation process. “This dubious contention is clearly false in light of public filings by defendant Adams which demonstrate that he is virtually insolvent,” says the company in its complaint. To prove that he does not have the resources to launch such a battle, Lone Star obtained court filings from Adam’s recent divorce proceedings. Those filings indicate that as sole proprietor of GWA Capital, Adams reported GWA’s gross revenue as $39,000 in 1999, with a net profit to him of approximately $4,000. In addition, the filings show that for the 12 months ending Sept. 30, 2000, his average net monthly disposable income was $765. “Based upon the foregoing, the conclusion is inescapable that Guy Adams is neither capable of, nor financially interested in, mounting a single-handed proxy campaign costing $30,000,” says the complaint. Instead, the company says, this is evidence that Adams is a “stalking horse for others, and not a bona fide Lone Star investor.”    

The company points to the fact that Adams purchased 1,000 Lone Star shares shortly before the record date for Lone Star’s 2000 annual meeting; later he sold these shares after the record date had passed and before the 2000 annual meeting. Then, says the company, he traveled to Austin, Texas, to attend the meeting “notwithstanding any apparent available income or earnings to pay for such a trip and with no alleged investment to protect.” At the meeting, says the complaint, Adams presented himself as a Lone Star shareholder and “sought to disrupt the annual meeting and embarrass Lone Star’s directors.” The company also claims that at that meeting, Adams explored with Calpers the possibility of a working relationship to challenge Lone Star’s board in 2001. In November 2000, Adams continued his dialogue with Calpers, claims the company. (In an unusual move, Lone Star through a court order obtained from Calpers correspondence exchanged between Adams and the pension fund.) The complaint says that at that time he approached the pension fund with a plan under which Calpers would provide $1 million to cover the legal and proxy costs to challenge the Lone Star board. Under the same plan, says the company, Adams proposed that Calpers place its Lone Star shares in a partnership, which he would manage. 

The company also says Adams’ SEC filings misrepresent the change in control agreements that Lone Star entered into with the CEO and other employees in January 2001. More specifically, the complaint says Adams misstated what would trigger such agreements. Lone Star also says Adams mischaracterized certain related party transactions between the CEO and Lone Star.

Adams’ claims that he already has the support of the holders of 13 percent of the shareholders, including the support of Calpers and the LongView Collective Investment Fund, are false, says the complaint. “Defendant Adams’ claims regarding his alleged support are inherently misleading because shareholders have not yet received the company’s proxy statement and management’s recommen- dations. Any expression of ‘support’ is therefore meaningless,” says the complaint. In addition, the company says his claims of support are especially deceptive because whatever support he has received already is based on “the highly misleading and illegal materials that he has filed with the SEC and disseminated to Lone Star shareholders.”

Adams has made a motion to dismiss the case, arguing that the Kansas court lacks jurisdiction over the matter.

Investment banker Gary Lutin sent a letter dated June 14 to the company’s board expressing concerns about the lawsuit “in the context of a corporate director’s fiduciary duties.” He asks the Lone Star board to report on “all actions taken by the board to authorize the initiation and continued conduct of the Adams litigation and on the controls that have been established for independent, non-partisan oversight of the litigation.”