3 Lessons Learned As Darden Proxy Fight Heats Up

By Karlee Weinmann

Law360, New York (September 09, 2014, 6:10 PM ET) -- Darden Restaurants Inc. has a bull's-eye on its back as it stares down a shareholder vote on an activist-backed overhaul of its board, a high-stakes clash that offers lessons for contentious proxy showdowns in an era where activist investors wield more power than ever.

The Florida-based parent of Olive Garden and other chains has locked horns with Starboard Value LP for months and both sides indicated over the past week they won't budge before an October summit where shareholders will choose a winner. At the center of the fight is Darden's current leadership and governance, prompting Starboard's push to wipe out the existing board.

After the activist brushed off several proposed compromises, Darden said Tuesday it would stick with its latest slate, essentially confirming the acrimonious fight would go to a vote.

Under Darden's plan, the company would cede four seats to Starboard and replace four other board members with independent nominees, and leave four of its sitting directors on the ballot. Starboard called the pitch "suboptimal" for a company that needs a fresh start in the boardroom.

A pair of investor presentations trumpeting its proposed slate is the latest step in Darden's ongoing push to quiet Starboard's all-out assault on its top brass and business plan, a tough fight that's taken its toll. A choppy run for the company's shares under activist pressure has shaved off as much as 20 percent of their value while increasing scrutiny and skepticism in the wider marketplace.

Starboard and another activist, Barington Capital Group LP, initially pressed Darden to reconsider its long-range plan. Both funds, now united behind Starboard's proxy push, offered detailed blueprints for fresh strategies. But Darden dismissed the calls for change, instead opting to sell its Red Lobster unit for $2.1 billion in May despite shareholder backlash, sending the activists into overdrive.

The fight pitting Darden against Starboard and Barington so far has showcased a boldness on both sides, as well as certain factors that threaten to inflame activist battles.

Size Matters

Starboard has been a respected player on the activist scene in recent years, targeting a range of well-known companies including Office Depot Inc. and Smithfield Foods Inc. The fund has aggressively, and successfully, jostled for boardroom changes and, in some cases, M&A moves.

But on a growing list of high-profile targets, the Darden buy-in stands out. It became Starboard's biggest play to date when the hedge fund ratcheted up its ownership interest to 8.8 percent — worth more than $556 million, based on recent trading prices.

The size of Starboard's play gives the activist substantial leverage, both in its communications with Darden and the public but also in the forthcoming shareholder vote. It also goes a step further, boosting the stakes of a landmark play that already deviates from the typical activist playbook.

Most frequently, activists angle for minority board representation or other smaller-scale tweaks, but Starboard's proposed ouster of the entire board is a more extreme push. With plenty of skin in the game and a monthslong crusade behind it, Starboard has more reasons not to capitulate to a compromise.

Timing Counts

Darden has consistently refused to incorporate the activists' suggestions into its business, but recent concessions including board seats for Starboard and the departure of its controversy-plagued dual chairman and CEO might have come too late to quiet the long-simmering tensions.

The decision to permanently split the chairman and CEO roles came in July, half a year after Barington first pressed for the switch, saying it would help make sure the board fairly considers outside ideas. When it announced the move, Darden also said Clarence Otis Jr. would resign from both posts, four months after Barington called for his ouster.

Darden's moves addressed some governance concerns raised by the activists since the early days of their pursuits, but not before widespread public disapproval of Otis. The activists tore into the executive for slow-going returns, fanned by criticism in the media that was stretched too thin with obligations to other companies' boards to meet his fiduciary duty to tackle Darden's problems.

The company's decision to wait several months to show Otis the door could sting. Critiques of his leadership exposed weak spots in Darden's governance and put the focus on underperforming parts of its business — but that cuts both ways. With Otis out of the picture, shareholders could see an answer to many of the critiques lobbed to date and promise in a new CEO.

Still, the governance concerns stretch wider than Otis. The lead-up to the Red Lobster sale, spotlighted by the activists, also cast the company's practices in an unfavorable light.

Starboard had filed papers in April seeking a nonbinding shareholder vote on then-prospective plans to unload Red Lobster. The holders of more than 57 percent of Darden's stock backed the request, enough to justify postponing a deal until after the company's annual meeting, the activists argued.

The activists again pressed for a vote after several weeks of silence on Darden's end, but then the company unveiled an agreement to sell Red Lobster to Golden Gate Capital. At the time, Darden dangled the prospect of a special meeting but made it clear the sale could close with or without investor approval.

Darden shares sunk after the deal announcement, a drop the activist attributed to wider dismay with the transaction.

Settlements Not a Given

Most of the year's biggest activist plays tailed off well before a shareholder vote, underscoring a general willingness on both sides to find middle ground. For companies, a compromise can erase costly and distracting proxy fights. For activists, they provide a gateway to board representation or other payoffs.

Companies frequently took a softer approach this year after a banner proxy season for activists in 2013, choosing the safer route as institutional shareholders cozy up to activists' agendas, attorneys on both sides of the table have said.

Three months into 2014, the year approached record levels of engagement, experts said, fueling an unprecedented wave of settlements — typically one-year deals promising activists minority board representation, struck ahead of nomination deadlines. Many such plays never make headlines after the parties resolve them quickly and behind closed doors.

But just because companies are generally more eager to deal, it doesn't mean it's the chosen approach every time. And even when a target sidles up the bargaining table, determined activists won't necessarily join it.

Starboard, and to a lesser extent Barington, have shrugged off multiple olive branches from Darden that would end the proxy war in exchange for a few board seats, bucking the budding trend of greater cooperation between activists and their targets.

--Editing by Katherine Rautenberg and Richard McVay.

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