Wachtell At Risk Of Big Defeat In Bitter
Darden Proxy Fight
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
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
Until recently, Darden circulated near-daily shareholder letters and press
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
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
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
"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
Red Lobster unit puts the company
in a tough spot. The $2.1 billion deal surprised shareholders in May and
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.