Starboard Escalates Darden Proxy Fight

NEW YORK (The Deal) -- Activist investor Starboard Value late Monday pressed ahead with its proxy contest to take control of Darden Restaurants' (DRI) board despite the restaurant chain's offer of concessions and move to axe its CEO - Clarence Otis.

"To be clear, the company still requires a major overhaul at the board level," Starboard Value's Managing Member Jeff Smith said in a statement "This board has proven over an extended period of time that it is unable to respectfully and capably represent the best interests of the shareholders they were elected to represent and cannot be trusted to make the incredibly important decision as to the selection of the next CEO of Darden."

In addition to the announcement of the departure of Otis, which took place late Monday as well, Darden also offered to give up three seats to Starboard on the company's 12-person board, a move that did not appease Smith. Charles Ledsinger, Darden's Independent Non-Executive Chairman, said the offer provides both "continuity of experience and expertise in the midst of our turnaround efforts as well as additional new directors proposed by Starboard." He added that Darden is committed to taking all appropriate steps to serve the interests of Darden and all Darden shareholders.

The announcement came the same day as the company completed a sale of its Red Lobster chain to Golden Gate Capital for $2.1 billion. As part of that deal, Red Lobster's real estate assets were sold to American Realty Capital Properties (ARCP) for $1. 5 billion as part of a sale-lease back arrangement.

Smith has called the two-part spin-off sale value destructive. He noted previously that a large vote in April of shareholders - 57% -- to call for a special meeting for the purpose of having a nonbinding vote on the sale demonstrated that investors never wanted the transaction to take place. Starboard had been seeking to have Darden delay its sale of Red Lobster but it eventually called off its effort to hold the meeting after it appeared the sale was going to go through.

The proxy contest still may have a long and winding path -- Darden has scheduled its annual meeting to take place September 30. Any effort to delay it, as targeted companies often do, could result in a lawsuit filed by Starboard seeking to compel a meeting.


In addition, on July 24 Starboard filed a complaint in a Florida state court seeking to have Darden produce documents related to the Red Lobster sale, as part of an effort the insurgent said was intended to gain insight into what it has called a fire sale. Starboard may have initiated the lawsuit as part of any effort to undo the deal or to help identify problems with the sale process that could help it gain institutional investor supporters for its change-of-control contest. Starboard owns an 8% stake in Darden.

Even though he was disappointed with the Red Lobster sale, Starboard's Smith argues that shareholder value can still be unlocked at Darden by seeking to "monetize" the company's remaining restaurant real estate assets. Darden owns the Olive Garden chain, which includes real estate assets, as well as other high-end restaurant chains. The dissident has argued that the Red Lobster real estate sale not only validates the value it believes the chain's real estate assets were worth but also may confirm that the remaining real estate owned by Darden are worth more than anticipated.

Nevertheless, it is possible Starboard's proxy contest could be called off if the dissident and company can find a mutually agreeable CEO to replace Otis.

"There needs to be a true and complete process to vet both internal and external talent in order to find a truly great, transformational, operationally-focused restaurant leader," Smith said. "This board has a history of repeatedly making the easy decision, rather than the decision that is best for shareholders. Darden needs a majority change to the board as soon as possible to jumpstart and complete the process of recruiting a truly great leader."

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