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Coffee Concern May Face Shareholder Suit In Oversight
Dispute
By CONOR DOUGHERTY
Staff Reporter
A Jan. 3 letter sent to the board of Farmer Bros. Co. hints
at legal action if the company does not respond to shareholder concerns
about mismanagement.
“Investors need to know whether they can rely on a company’s board of
directors to serve the interests of shareholders,” wrote Gary Lutin, a New
York investment banker who has been advising a group of Farmer Bros.
shareholders. “This question has become a serious issue in relation to
recent management statements and conduct suggesting that your shareholders
must resort to legal proceedings to enforce essential rights.”
The letter reiterated several shareholder concerns, from the company not
having enough independent directors to how the investment portfolio is
managed. It requested a reply by Jan. 10.
“If the directors don’t respond positively, shareholders would have to
assume that they would have to take actions to enforce their rights,” Lutin
said.
John Simmons, treasurer of Farmer Bros., acknowledged that he had received
the letter, but said he would not reply to Lutin because he is not a
shareholder. He added the company is in search of an additional independent
director.
Farmer Bros. long has been assailed by shareholders for being run to benefit
the founding family, consisting of 86-year-old Chairman and Chief Executive
Roy F. Farmer and his son, Roy E. Farmer, the company’s president.
A proposal from Franklin Mutual Advisers LLC, the largest institutional
shareholder, to have Farmer Bros. register with the SEC as an investment
company was voted down at the Dec. 26 shareholder meeting.
An investment company designation would require Farmer Bros. to report the
results of its investment portfolio in more detail and appoint more
independent directors. Such a registration would essentially split the
company into two operations: an investment portfolio and a coffee company.
Farmer Bros. management, which controls 52 percent of the voting stock, had
recommended against the investment company proposal. Farmer Bros. had $296
million, or 84 percent, of its corporate assets in investments as of Sept.
30.
In an interview last week, Simmons disputed Franklin’s claims that Farmer
Bros. is an unregistered mutual fund. “It just doesn’t pass the smell test,”
he said. “We’re not an investment company.”
During the shareholders meeting, Simmons stressed that Farmer Bros. is “a
coffee company” and maintained that “more than 50 public companies in
California alone hold a higher percentage of their assets in cash and
equivalents than Farmer Brothers – and, like us, are not registered
investment companies.”
The list of companies, provided by Simmons to the Business Journal, includes
several local companies including Ixia Inc., ValueClick Inc. and Stamps.com
Inc.
David Winters, president and chief executive of Franklin Mutual Advisers,
noted that the proposal received more than 70 percent of the non-management
vote at Farmer Bros. shareholder meeting. “So basically the shareholders
agree with us,” he said.
Winters would not comment on any further steps Franklin might take.
Former regulators said it could be years before the SEC closely examines the
company. The agency, understaffed and under-funded, is focusing its
attention on higher profile businesses.
There also are significant hurdles in proving that Farmer Bros. is an
unregistered investment company. The 1940 Investment Company Act states that
a company with at least 40 percent of its assets in marketable securities,
less cash and government securities, is an investment company, and therefore
must register with the SEC.
Since March, Farmer Bros. has moved more than $100 million in corporate
funds into government securities, according to SEC filings, reducing its
marketable securities holdings to 30 percent of total assets as of Sept. 30,
down from 44 percent at the beginning of the year.
“The SEC would have to show pretty conclusive facts as to why (Farmer Bros.)
is an investment company, and that takes time, which is something the SEC,
at this juncture, does not have,” said Barry Barbash, a partner at Shearman
& Sterling and former head of the SEC’s division of investment management.
“Once you put yourself below that 40 percent threshold, it would be
difficult for a shareholder to claim successfully that the company is an
investment company,” he said.
In 1990 the Dart Group settled with the SEC over charges that it violated
securities laws stemming from the Investment Company Act. In the months
before the SEC levied its charges, Dart Group was not in violation of the 40
percent rule, according to the SEC’s complaint.
“Realistically, it could take a couple of the years for the SEC to be able
to do something,” Lutin said. “These kinds of contests can be dragged out
for as much as two years, but as a practical matter shareholders would be
better off financially engaging in a two-year fight to win their rights than
they would be giving up.”
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