How to win a proxy fight
Earlier this month, activist investment firm Starboard Value completed its campaign to gain control of the 12-person board of Darden Restaurants, the summation of a nine-month proxy battle aimed at the company’s management.
Propelled by investor dissatisfaction with the restaurant group, which famously operates the Olive Garden chain (and, until a $2.1 bn sale in July, the Red Lobster chain), Starboard sought the assistance of Okapi Partners, a strategic proxy solicitation and investor response firm.
The proxy campaign against Darden Restaurants was unique, says Bruce Goldfarb, CEO and president of Okapi Partners
Bruce Goldfarb, Okapi’s CEO and president, describes his firm’s services as providing ‘the strategy and execution needed to identify investors and get them to understand the message being presented in a proxy campaign.’ This focuses on an effort to communicate relevant material to investors in an understandable and accessible way, as required by the Darden stalemate.
‘We were retained by Starboard after it had indicated to Darden that it felt the company needed some change in its strategic direction,’ Goldfarb continues. ‘Starboard believed Darden needed to implement some different approaches to unlock value in the company, particularly in how it was dealing with its larger, mature restaurants and real estate assets.’
In short, the changes were proposed in the name of increased shareholder value. Okapi’s role, says Goldfarb, was to see ‘whether and how shareholders could be better involved in that process.’
The first step was to get a majority of shareholders to convince Darden that investors should be consulted about any transaction to spin off Red Lobster through a consent solicitation campaign. The restaurant operator, however, did not take investors’ desire to vote into account, selling the chain to a private equity firm. ‘When you look at the value received and how the real estate was sold, the Darden shareholders received very little consideration for the transaction,’ Goldfarb says.
‘Having shareholders very disappointed and upset with the company, we then worked with Starboard to elect a slate of directors to replace the entire board at Darden’s annual meeting, though we had to pressure Darden to have the meeting in the first place. We made requests to Darden for information, created proxy materials and ensured all of those materials got to the voters and proxy advisory firms.’
The campaign was unusual, Goldfarb reveals, because Starboard provided such an in-depth analysis of Darden, the issues that needed solving and how they could be remedied. Starboard also cherry-picked potential board members with the skills needed to do it.
To best bring this across to Darden, Starboard needed to clearly illustrate the story of why change was needed. ‘One of the best ways to do this is to produce a slide-deck or white paper, some visual demonstration of what’s wrong, what needs fixing, and how you have the right people to fix it,’ Goldfarb explains. In this case, a whopping 300-page presentation was made available to investors, analysts and proxy advisers alike, shared via Starboard’s campaign website.
Nominated shareholders even went directly to ISS’ offices to go through the presentation with the proxy adviser, fielding questions and allowing ISS’ team to meet the potential new board members. ‘ISS was able to make its decision after reviewing information from both sides of the fight and making its own analysis,’ says Goldfarb, adding that the interaction was key to winning the proxy fight.
The presentation itself caught the imagination of the mainstream media, given its exacting proposals addressing everything from executive remuneration to the number of breadsticks served with an Olive Garden dinner. Comedian John Oliver featured the campaign on his late-night cable TV show, while even Buzzfeed produced a digest of the more entertaining aspects of the presentation.
Such attention ultimately reduced the distance between voting investors and the company they held a stake in, and meant there was overwhelming support for Starboard’s proposals. ‘Sometimes there’s a little bit of a disconnection between the people the IR professionals talk with regularly and colleagues at the investment firm who make voting decisions,’ says Goldfarb. ‘We help to bridge that gap and make sure the messages we have are being heard by the right people.’
In the future, says Goldfarb, such campaigns may become more commonplace. ‘I think you’re going to see a continued trend of investors believing value can be boosted by adding new board members,’ he says, noting that the SEC’s changes to proxy voting rules will have an effect, too. Large institutions may no longer vote, or may be represented by management alone, or shares that traditionally were always voted may suddenly be missing.
‘While companies have been fairly certain of the way investors would take action, they may need to rethink or rework their approach to proxy solicitation campaigns and how investors vote in the future,’ Goldfarb concludes.