Barington Cancels Chico's Director Battle After Advisory Firms Back Retailer

Chico's (CHS) shares rose slightly in Friday morning trading after activist investor Barington Capital's Jim Mitarotonda announced he had ended a three-month campaign and proxy contest to elect two dissident directors to Chico's CHS board.

The cancelled contest came after the two large shareholder advisory firms recommended that shareholders back the company and not his two-person slate, in a major blow to the fund's campaign. Chico's shares climbed 1% in morning trading on the news and trades at $11.66 a share.

However, the cancellation doesn't appear to mean that Barington and Mitarotonda have ended their efforts at Chico's. In a statement, Mitarotonda said he is still "deeply committed" to Barington's investment in Chico's. The fund has a 1.6% stake. In addition, he said that the fund will be "monitoring the company closely," which suggests the New York-based activist could be back next year.

"We are deeply committed to our investment in Chico's and ensuring that the company maximizes its long-term value potential and is run in the best interests of stockholders," Mitarotonda said.

The cancelled contest, which had been scheduled to come to a vote at Chico's annual meeting set for July 21, comes after Glass Lewis, one of the two major proxy advisory firms, on Tuesday issued a report supporting the women's retailer's management-backed director candidates. The proxy adviser said in a report obtained by The Deal that Chico's has made positive changes with its strategy, management, operations, financial discipline and it has a new CEO and recently refreshed board, all of which has led it to recommend that investors back the incumbent board. In addition, Institutional Shareholder Services Inc., the other major proxy advisory firm, also said shareholders should back the management slate and that Barington did not make a compelling case that change was needed at the board level. 

Many institutional investors, particularly those that don't have the resources to research their own decisions, are heavily influenced by ISS and Glass Lewis recommendations when deciding how to vote on proxy fights. Barington likely saw the writing on the wall and knew that a victory was unlikely. In a statement, Chico's said the decision to withdraw its contest "is consistent with the strong support" the company received from its "shareholders, numerous industry analysts" and the two major proxy advisory firms. Barington was also outspent significantly in the campaign by Chico's, which produced a high-quality video of its CEO and said in a proxy statement that it may spend $6 million on its campaign.

The activist fund's battle was waged on the assertion that Chico's should cut its "substantial corporate overhead" and advertising costs and decentralize its corporate headquarters. However, both Glass Lewis and ISS contend that Chico's appears to be doing enough to reduce costs, including an effort to close stores. And Glass Lewis noted that Chico's has a "comprehensive plan and cost-cutting measures" in place.

At the center of the battle also was a governance dispute. Barington's asserts that one of Chico's nominees, Bonnie Brooks, is deeply conflicted because of her position as non-executive vice chairwoman at Hudson Bay Co. (HBC) , the operator of Saks Fifth Avenue and Lord & Taylor department stores. As a Chico's director, Barington asserted, Brooks would be conflicted because of she works at a direct competitor of the women's clothing company. Brooks announced last week, possibly under pressure from the activist campaign, to resign from Hudson Bay Co. on Dec. 31. Both proxy advisers suggested that her retirement renders any potential conflict of interest moot but Barington asserts that she will still overlap at both companies for a period of at least five months.

While Barington's campaign never raised the prospect of pushing for a Chico's sale the activist has a lot of experience in pushing companies to conduct share price improving mergers and some observers suggested that a sale may have been part of its agenda. The activist campaign comes in the wake of reports last year that private equity firm Sycamore Partners came close to acquiring Chico's but later canceled its effort over financing and valuation concerns.

Paul, Weiss, Rifkind, Wharton & Garrison LLP's team representing Chico's included corporate partners Scott Barshay and Steve Williams.

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