Battling for Bally

Bally Total Fitness (NYSE: BFT) may have some of the sexiest -- well, in an over-the-top kind of way -- commercials on television, but there's nothing sexy about the company's 12-month chart. The gym chain's shares have badly underperformed the S&P 500 over that period, turning in steady losses even as the bellwether index has crept up by about 15%.

Yesterday, the shares sucked in their collective guts, rising more than 10% on news that a couple of investment funds owned by Liberation Investment Group -- funds that own, according to a press release, just under 6% of the company's outstanding shares -- have submitted several proposals for a shareholder vote at the company's annual meeting. (It's scheduled for July 29.)

Liberation asked that the company:

• require its chairman and CEO to be different people (currently both posts are held by Paul Toback)
• remove its shareholder rights plan, thus eliminating a common takeover defense
• declassify its board, which would mean that every director would be up for re-election each year
• require its directors to retire at 75, which would seem to have the sole effect (based on Bally's 2003 14a filing with the SEC) of necessitating the removal of J. Kenneth Looloian, one of the two longest-serving members of the board

These aren't the proposals happy investors make. Then again, it's not hard to see why Bally investors might be upset: While the company has managed to boost revenues slightly in Q1, investors are still smarting from the restatements to past earnings the company made in 2003. Class action lawsuits have cropped up as a result. Directors and executives have been replaced. So has Bally's auditor.

And those executives and directors still preside over a company that lost money in 2003 and has substantially more long-term debt than it does cash. Management clearly has work to do, and it can't have been motivated by the reaction the market had to Liberation's proposals yesterday. That 10% pop represented a pretty solid vote of little-to-no confidence in Bally's stewardship.

Fool contributor Dave Marino-Nachison doesn't own shares of Bally.