SEC Notice Supports Farmer Bros. Investors Who Seek Company Split

By CONOR DOUGHERTY
Staff Reporter

The Securities and Exchange Commission has told Farmer Bros. Co., the secretive coffee company run by 86-year-old Roy F. Farmer, that it cannot deny dissident shareholders the right to vote on a proposal that could split the company in two.

The notice, which came in a Nov. 15 letter, keeps alive a proposal by Franklin Mutual Advisers LLC to have shareholders decide if they want the company to register with the SEC as an investment company.

An investment company designation would change how Torrance-based Farmer Bros. reports its results and would require the company to hire investment professionals to oversee investment funds, which totaled $295 million, or 71 percent of Farmer Bros. total assets as of Sept. 30.

In August, Farmer Bros. asked the SEC to rule on its effort to keep the motion off the agenda at its annual shareholder meeting in December.

Under the Investment Company Act of 1940, companies with at least 40 percent of corporate assets in investment securities, such as a mutual fund, must register with the SEC as an investment company. Government securities are exempt from the 40 percent calculation.

The move to split the company came in June, when Franklin Mutual Advisers, the company’s largest institutional shareholder, submitted a shareholder request for the vote on splitting Farmer Bros. into a coffee company and an investment fund. Franklin argued that Farmer’s large pool of funds had turned the company into “a de facto investment company, but without the benefits of being registered as one.”

Since March, Farmer Bros. has moved more than $100 million in corporate funds into government securities, according to an SEC filing. The shift has reduced Farmer Bros. investment company funds to 30.2 percent of total assets as of Sept. 30, down from 44.1 percent at the beginning of the year, and raised investor suspicions that that the company is moving its money as a means to sidestep them and the SEC regulations.

The company’s quarterly report for the period ended Sept. 30 shows $234 million in U.S. Treasury and U.S. Agency obligations, or 56 percent of corporate assets. As of March 31, the company had $129 million, 32 percent of corporate assets, in government securities.

“I am not aware of any reasons consistent with conventional standards of business judgment to invest over $200 million in U.S. government obligations when they could earn millions of dollars more in alternative investment grade securities,” said Gary Lutin, a New York investment banker who chairs an online forum for Farmer Bros.’ shareholders.

Franklin Mutual declined comment; Farmer Bros. did not return calls.

Franklin Mutual, a unit of Menlo Park-based Franklin Resources Inc. with $252 billion in assets under management, owns 9.6 percent of Farmer Bros.’ stock.

Experts said Franklin Mutual’s investment company proposal might be for naught, as the SEC’s definition of what constitutes an investment company is cut and dried.

“If (Farmer Bros.) wanted to move their assets into T-bills or any kind of government securities so that (total investment company funds) came down below 40 percent, then they would no longer meet the definition,” said Ken Scott, a professor of law at Stanford University. “You can challenge their violating their fiduciary duty by holding a huge amount of low risk securities in the absence of some appropriate business purpose, but that’s coming at it a different way.”

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There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.