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Forum Report: Directors Approve New Indemnification for Themselves

(May 22, 2006)


Sent: Monday, May 22, 2006 8:56 PM
Subject: Farmer Bros. directors approve new indemnification for themselves


In an SEC Form 8-K report filed shortly after 4PM today, Farmer Bros. reported that at their May 18 meeting the board of directors had approved additional indemnifications for themselves and for senior corporate officers.  (This action was not mentioned in the company's May 19 press release announcing the board's action at the same meeting to approve a dividend payment.)


The approved new form of “Indemnification Agreement” includes the following provisions:

§    As stated in the 8-K report’s summary, the company would be obligated to fully indemnify each director and officer “in any threatened, pending or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, against all expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such proceeding.”

§    The indemnification is made specifically applicable to any fines associated with management of the ESOP.  (See Section 1(k) of the Agreement for its assurance of coverage relating to duties or services of a director or officer “with respect to an employee benefit plan, its participants or beneficiaries.”)

§    Only the board itself or legal counsel selected by the board would be able to decide whether a director’s conduct met the requirements for indemnification, depriving shareholders of the right under subsection 145(d)(4) of the Delaware General Corporation Law (“DGCL”) to make the determination about whether a director "has met the applicable standard of conduct.”  (See Section 12 of the Agreement.)

§    As also summarized in the report, “in the event of a Potential Change in Control (as defined in the Indemnification Agreement), the Company will, upon request by the indemnitee, create a trust for the benefit of the indemnitee and fund such trust in an amount sufficient to satisfy expenses reasonably anticipated to be incurred in connection with investigating, preparing for, participating in or defending any proceedings, and any judgments, fines, penalties and amounts paid in settlement in connection with any proceedings.”  (For details of the trust funding requirements, see Section 15 of the Agreement.)

§    The condition of “Potential Change in Control” – the condition that would allow the board members to use corporate funds to establish a defense trust for themselves – is broadly defined to include such things as an announcement by any person that they intend to take or are simply considering the possibility of taking some action that might result in what the Agreement defines as a “Change in Control.”  A “Change in Control” has been defined to include such conditions as any investor’s accumulation of more than 15% of the company’s stock, or the kind of restructuring that might be required if the SEC acted to enforce the company’s compliance with the Investment Company Act of 1940.  In any event, dispensing with objectively defined conditions, the fourth alternative for defining a Potential Change in Control is merely that “the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.”  (See Sections 1(c) and 1(m) of the Agreement.)


In summary, if legally valid, the board’s new Agreement to indemnify themselves would allow directors unconstrained use of shareholder assets to cover any claims of shareholders or penalties imposed by regulators, and would deprive shareholders of their rights to judge the directors’ conduct or otherwise monitor management.


It is not known at this time whether the Agreement’s indemnification provisions would be legally applicable to the past conduct of directors, particularly in the context of the timing of the board’s action following public reports of the SEC enforcement actions relating to the National Presto case.  It is also not known whether the provisions could be made applicable to the defense of a shareholder proposal for voting to remove directors for cause as permitted by section 141(k) of the DGCL.


Your comments will be appreciated.

Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Fax: 212-605-0325




The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

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