A battle over a proposal related to control of employee stock ownership plan assets ended in defeat last week for a group of Farmer Bros. Co. shareholders.

The Securities and Exchange Commission said in an Oct. 4 letter to Farmer Bros. attorneys Skadden Arps Slate Meagher & Flom LLP that Farmer Bros. does not have to include in its proxy materials a proposal from hedge fund Lime Capital Management LLC.

The proposal would have amended the company’s bylaws to provide control of the ESOP to an independent trustee and a governing committee selected by ESOP employee participants.

The proposal, submitted to the Torrance-based coffee company on Aug. 12 in preparation for the annual stockholders meeting on Nov. 29, stated the change was “so employees will know that their retirement rights cannot be withdrawn or changed without their consent.”

Farmer Bros. attorneys claimed in an Aug. 25 letter to the SEC that operating an employee benefit plan relates to employee compensation, which is “within the scope of the ordinary business operations of the company,” and may therefore be omitted from proxy materials. The SEC agreed.

“If the SEC isn’t going to allow the company’s employees to take responsibility for the protection of their rights, I assume this means the SEC will,” said New York investment banker Gary Lutin, who runs an investor forum for Farmer Bros. shareholders and wrote several letters to the SEC in support of the shareholder proposal.

“We’ve asked them to investigate and take appropriate action,” Lutin said. “Management has basically stated in their argument that they intend to continue to control assets they claim they turned over to employees.”

Lutin says that Farmer Bros. management used the ESOP, which was established in 2000, to pass entrenchment measures.

“The Farmer Brothers ESOP already has pass-through voting, which means that the employees vote all of the ESOP’s 300,000 shares,” said Jim Lucas, a spokesman for Farmer Bros.

Shareholders have long been outspoken about their dissatisfaction with the management of the 92-year-old company, which has posted 11 straight quarters of year-over-year earnings declines.

Roy E. Farmer took over as chief executive in March 2003 from his father, Roy F. Farmer, who died a year later.

In January, Lutin sent a letter to the SEC asking that it investigate possible violations of securities laws. He and others maintain that Farmer Bros.’ extensive investment portfolio makes it an investment company that must comply with the Investment Act of 1940, and asked the SEC to probe other issues.

Farmer Bros. management has since made some shareholder-friendly moves, including disclosures related to a loan to the ESOP and modifications of ESOP governance provisions. It also implemented a 10-1 stock split in March.

Despite concessions, many shareholders want the company sold, Lutin said. “There are increasing questions about management’s ability to either run the coffee business or manage the investment portfolio,” he said. “There are only two ways to solve the problem. One is for the board to replace management, and they don’t seem inclined to do that. The other alternative is to transfer ownership of the company to somebody that can provide the management that’s needed to grow the company.”

– Rebecca Flass
 

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