On October 10, 2014, Starboard Value LP achieved a landmark and unprecedented victory when it ousted the entire board of directors of a Fortune 500 company, Darden
Restaurants, Inc., the owner of Olive Garden, Longhorn Steakhouse and several other restaurant chains. After a long and contentious proxy battle leading up to Darden’s 2014 annual meeting (the “Annual Meeting”), shareholders elected to remove all twelve of Darden’s incumbent directors and replace them with Starboard’s entire slate of director candidates. While there is little question that shareholder activism has become a dominant force across corporate America, Starboard’s unparalleled success at Darden was unique and offers invaluable insight and lessons for activist investors and target companies alike.
In fact, Darden represented the perfect storm. It is not every day that a board of directors of a Fortune 500 company is completely removed and replaced with a dissident’s slate of director candidates while being advised by the nation’s leading financial and legal advisors. But it is also not every day that a board of directors ignores the will of its shareholders by entering into an important transaction prior to holding a shareholder requested special meeting to first discuss the transaction. Importantly, Starboard ran a sophisticated, thorough and aggressive campaign, including the publication of a 294-page detailed investor presentation, which was developed alongside leading consultants and advisors hired by Starboard.
While there are a myriad of reasons why activist investors are generally gaining more widespread support and success in this unprecedented era of shareholder activism, Starboard’s campaign at Darden was truly unique in that it embodied all of these emerging trends. Although another Darden situation is unlikely in the near future, an analysis of the facts and circumstances provides a useful roadmap for the emerging issues that will continue to shape shareholder activism and provides a cautionary tale for management teams and boards of directors facing pressure from activist investors.
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Situations for Control Like Darden Defy the Defense Pundits’ Argument that Activists are Short-Term Focused
The landscape of activism has significantly changed in the past few years. Gone are the days when an activist’s sole objective is to extract an immediate, short-term profit at the expense of the long-term development of the company by forcing management to, for example, return excess capital or force a quick sale of the company. So-called “corporate raiders” or “one-trick ponies” are no longer the mainstream as activists are increasingly focused on effectuating longterm value creation by developing strategies and goals that support the future growth and profitability of a company. Today’s activists are focused on R&D, general and administrative expenses, gross margins and capital expenditures and/or adopting and developing new products or services, which require a long-term oriented focus and commitment.
The reasons for this shift toward long-term shareholder value creation are three-fold. First, the activists themselves are much larger as the amount of money invested in activist hedge funds has increased from $12 billion to over $100 billion in the last decade. Such an influx of additional capital provides activists with the tools and resources necessary to run more sophisticated campaigns against much larger companies. Second, principals of activist hedge funds are going onto the boards of companies directly, thereby subjecting themselves to significant trading restrictions that are applicable to insiders of public companies. Such restrictions limit the ability of activists to quickly exit the company and reflect their desire to effectuate long-term changes that support the future growth of the company. Lastly, activists have increasingly prepared detailed operational white papers and presentations committing themselves to multi-year plans and phases, which cannot be implemented or achieved overnight.
Starboard’s campaign at Darden underscores this shift toward long-term value creation. Starboard’s 294-page presentation focused on the long-term strategies and goals necessary to create value for Darden, including a detailed turnaround plan for Darden’s largest brand, Olive Garden, which was developed alongside highly reputable advisors and consultants. 1 Furthermore, Starboard identified ten independent, highly qualified nominees with direct experience relevant to all aspects of Darden’s business to assist with developing, and to eventually lead Darden through, the turnaround plan. Starboard also included two principals, Jeff Smith and Peter Feld, in its slate of nominees, thereby subjecting itself to significant restrictions once they joined the Board. Situations like Darden highlight this shift toward long-term shareholder value creation and defy the archaic stigma that activists are “corporate raiders” aimed at extracting only short-term profits.
A Formal Mechanism for a Referendum of Shareholders Is a Very Powerful Tool
While special meetings of shareholders and consent solicitations have always been important mechanisms for shareholders to voice their opinions and seek to effectuate change, the Darden defeat provides an invaluable lesson for companies, namely, listen to your shareholders and value their opinions. In fact, boards of directors will often argue that they have spoken with their large shareholders and that such shareholders support their strategies or plans, which is precisely what Darden did with respect to its proposed sale of Red Lobster. A formal mechanism like a special meeting request or consent solicitation, however, removes the “he said, she said” and adds transparency to the process to provide a clear picture of how shareholders genuinely feel about a given strategy or plan.
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