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Source: Law360, October 9, 2014 article

Wachtell At Risk Of Big Defeat In Bitter Darden Proxy Fight

By Karlee Weinmann

Law360, New York (October 09, 2014, 2:00 PM ET) -- Wachtell Lipton Rosen & Katz has made a name for itself by mowing down shareholder activists but one of its highest-profile clients this proxy season, Darden Restaurants Inc., appears headed for defeat when investors vote Friday on a complete board overhaul proposed by activist Starboard Value LP.

As the vote nears, some analysts have predicted victory for Starboard, a hedge fund that bought into Florida-based Darden a year ago and has since swelled into the company's bitter rival. After months of wrangling and escalating tensions, the activist unveiled a rare plan to oust all 12 directors at Darden, the parent to Olive Garden and other popular restaurant chains.

Starboard's campaign has picked up momentum in the marketplace, helped along by a series of Darden stumbles that continue to haunt the company — and Wachtell, a firm that for decades has cultivated a reputation as one of the toughest defense firms for companies in activists' crosshairs. For Darden to lose board control in one of the highest-profile contests of the year, especially wholesale, would be a distinct blow.

Until recently, Darden circulated near-daily shareholder letters and press releases to hype its stand-alone plans and echo a familiar refrain: that ceding board control to New York-based Starboard, a minority investor, is a misguided move.

But in the days leading up to the vote, some Darden analysts said it is likely to cede at least a majority of its board seats to Starboard, which holds almost 9 percent of its shares. That sort of shake-up would bring about change far more pronounced than Darden wants — the company's slate of nominees leaves room for four Starboard picks, plus four incumbent directors and four independent newcomers.

Starboard's stake is the second-largest among Darden investors, a solid foundation heading into the vote but well short of enough to seal a victory. Few investors have gone public with their votes but Barington Capital Group LP, a fellow activist with a smaller stake, has said it would back the Starboard play, reportedly joined by the California State Teachers' Retirement System.

Other shareholders are likely to follow suit after the two most influential proxy advisory firms put their weight firmly behind Starboard. Both Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC recommended that investors back Starboard's entire slate, an unusual and unequivocal show of support from firms increasingly relied upon by institutional investors to steer their proxy votes.

Deal watchers hailed the blanket support from ISS as a key turning point for Starboard, but Wachtell has proven that activist targets can beat an unfavorable recommendation from ISS — including in a high-profile proxy showdown between Starboard and AOL Inc., a Wachtell client, in 2012.

In that case, the adviser endorsed a pair of Starboard director candidates but shareholders ultimately voted to keep the activist out of the boardroom.

"Resolute defense can overcome contrary ISS recommendation," the firm wrote in a presentation that touched on its victory in the AOL proxy fight. Still, sweeping votes of confidence from both ISS and Glass Lewis are a different story — one that has rarely played out in the years since proxy advisers began building up their flex in the marketplace.

In addition, the fact that ISS based its report heavily on Darden's decision to sell its Red Lobster unit puts the company in a tough spot. The $2.1 billion deal surprised shareholders in May and has since cemented a place at the center of the proxy battle, a reminder of governance concerns that have hung over Darden throughout the dispute.

After the deal announcement, Starboard requested Darden hold a nonbinding shareholder vote on the deal before closing, a call backed by the holders of 57 percent of Darden's shares. The company sealed the sale without convening a shareholder meeting, a move critics say was a critical governance misplay that could bite back on Friday.

Support for the nonbinding vote doesn't explicitly translate to support for Starboard in the proxy fight, but while the company's decision to sell Red Lobster was legal, blowback in its wake suggests the move might have alienated certain shareholders.

Darden has tried to ease tensions over the past few months with concessions to Starboard, but they never took hold. In addition to freeing up room for activist-backed board picks, the company said in July it would permanently split the CEO and chairman roles after controversy-plagued Clarence Otis Jr. resigns later this year, answering calls for the switch.

The company's tweaks addressed some of the overarching changes requested by Starboard, but the fund criticized them as short-term fixes that fail to address bigger problems. When the company outlined the changes, Starboard hit back with more criticism over the Red Lobster sale — a deal that closed the same day Darden offered its olive branch.

"It is a shame for all Darden shareholders that this change happened only after the board sanctioned the destruction of a billion dollars in shareholder value by approving the Red Lobster sale against the vehement objections of its shareholders," Starboard CEO Jeff Smith said in an emailed statement at the time.

Starboard is represented by Olshan Frome Wolosky LLP.

--Editing by Katherine Rautenberg and Mark Lebetkin.


© 2014, Portfolio Media, Inc.



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