 
Sister takes fight to Farmer Bros.
by Ron Orol Posted 03:40 EST, 17, Dec 2003 A family feud could undo Farmer Brothers Co. The California Superior Court is set Dec. 24 to hear arguments in a lawsuit filed by Catherine Crowe, sister of Farmer Brothers chairman Roy F. Farmer, and her two children, to remove the coffee roaster and distributor's chief as head of a family trust including shares owned by the Crowes. If successful, the suit would deny Farmer control over a critical 12.5% voting stake at a key time for the Torrance, Calif.-based company. The board and management of Farmer Brothers are struggling to complete a reincorporation under which the company would adopt a series of antitakeover provisions that stand to diminish shareholder influence at the corporation. Disgruntled shareholders led by Franklin Mutual Advisers LLC, a Short Hills, N.J., investment firm, oppose a management proposal at Farmer Brothers that would change the company's registration from California to Delaware. Shareholders have pressured Farmer Brothers to seek a sale or go private for over a year, and they see Crowe's case as a critical turning point in control of the company. "This is the ninth inning; the game is tied and going into overtime," said Jack Norberg, chairman of Standard Investment Chartered Inc., a Costa Mesa, Calif.-based investment firm that has a 1% equity stake in Farmer Brothers. Farmer and management together control 53% of the company's stock. If the suit succeeds, company management would no longer have a controlling stake in Farmer Brothers, raising the likelihood that dissident shareholders would successfully vote down the reincorporation plan at Farmer Brothers' Jan. 5 annual meeting. "We think we have a cohesive amount of shareholders with Ms. Crowe to get the 50% stake we need to overthrow the reincorporation proposal," said Marc Heilweil, chairman of Atlanta-based investment firm Spectrum Advisory Services Inc. Heilweil said the company should sell the coffee distribution business separately from its real estate assets. Shareholders accuse Farmer Brothers of hiding information about the value of its real estate and other assets to depress the company's stock, which as of Tuesday, Dec. 16, traded at $318 per share. Heilweil and Norberg also argue that the company lacks independent directors. "No director that was independent of management would have voted for that reincorporation proposal," said Gary Lutin, a spokesman for the shareholder group and president of New York investment firm Lutin & Co. Thomas Dubbs, partner at law firm Goodkind Labaton Rudoff & Sucharow LLP in New York, said that Farmer Brothers management is purposely using the antitakeover measures and other tactics to depress the company's stock price to lower its estate taxes when control of the company shifts from Roy F. Farmer Sr., 87, to his son, Roy Farmer Jr. "The management of Farmer Brothers for many years has disregarded shareholder interests and hoarded cash in order to accomplish their estate planning goals, which are not shared by all shareholders," said Dubbs, who represents a group of shareholders, including Franklin Mutual, in a class action against the company. Estate taxes are typically based on the value of a company's stock market capitalization on the day when the majority shareholder passes away and control of the stake changes hands. Farmer Brothers is proposing to adopt a range of takeover defense provisions, including a poison pill and staggered board. If passed, they would bar shareholders from calling special meetings or changing the board size. In addition, stakeholders could change corporate bylaws only if they received an 80% vote from participating shareholders. According to Lutin, reincorporating in a different state is a conventional tool for developing a new governance charter, implementing antitakeover provisions and reducing the influence of minority shareholders. Lutin also said that the Securities and Exchange Commission could step in to block Farmer Brothers from reincorporating in Delaware. The company acknowledged Monday, Dec. 15, that the SEC may require Farmer Brothers to register with the agency as an investment company. That could derail the reincorporation proposal, Lutin said. According to a study by Lucian Bebchuk, director of the corporate governance program at Harvard Law School, antitakeover provisions often act to curb a company's stock price. Norberg predicts Farmer Brothers stock will plummet by 30% if the reincorporation proposal is adopted. Since 2001 Farmer Brothers' stock has hovered at $300 to $350 a share. In November, the company reported revenue of $45.6 million for the three months ending Sept. 30, the fourth consecutive quarter in which sales have declined. Farmer Brothers spokesman James Lucas declined to comment. In proxy materials released Monday, Dec. 15, the company said that antitakeover provisions benefit shareholders because they protect the company from hostile takeover. Farmer Brothers is reincorporating in Delaware because the "prominence and predictability of Delaware corporate law provide a more reliable foundation" for decision-making, the company said in the filing.
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