Will Darden Restaurants Drown Under Mounting Legal Woes?

Every move the restaurant operator takes seems to create more problems for itself.

Apr 24, 2014 at 11:31AM


The tide is fast running out on Darden Restaurants (NYSE:DRI) as two groups of shareholders sue the casual-dining chain operator over changes it made to its corporate bylaws. The changes, implemented as a result of activist shareholders reacting to Darden's decision to sell its Red Lobster chain, have created a shareholder revolt that threatens to spiral out of control.

A Teamsters union fund and pension funds for the city of Birmingham, Ala., are going to court to reverse the changes the restaurant enacted to thwart the influence private equity funds could have over its operational decisions. Whereas the financial outfits see merit in the plan to shed the seafood chain, they believe that alone won't change Darden's underperformance and are seeking a broader transformation, but the restaurateur's resistance to their pleas has led Starboard Capital to call for a special shareholder meeting to have a non-binding referendum taken to gauge investor sentiment.

Darden, indignant that the proposal wastes its time and money because it says the spinoff doesn't need shareholder approval, implemented the bylaws amendments, allowing it to delay its annual meeting almost at will while imposing greater restrictions and disclosure requirements on shareholders calling for change. Even major institutional proxy services have recoiled at Darden's heavy-handed tactics and now endorse the call for the special gathering.

In lawsuits filed two weeks ago in Florida circuit court, Teamsters Local 443 Health Services & Insurance Plan and the Birmingham funds allege the changes were made in order to undermine shareholder rights. Both are looking to have to the amendments declared invalid and are seeking class action status for their suits.

When directors of a public company take such brazen action to insulate themselves from stockholder voting on important corporate matters ... the only logical conclusion is that the board is motivated by entrenchment.
-- City of Birmingham, Ala., lawsuit

The legal morass Darden is wading into can only serve as a greater distraction and creates an even bigger sinkhole into which it can pour its limited resources. Not that a company shouldn't defend its decisions, and I don't even necessarily disagree with management's position that the spinoff decision falls wholly within its discretion, but if it was trying to avoid the appearance of holding a vote it intended on ignoring anyway, the optics it created by undermining shareholder rights could hardly have been worse.

Of course, the bylaws amendments were primarily aimed at monied interests and not the regular shareholder, but there's nothing to say the private equity firms would have won the vote anyway, or come out ahead by a wide margin if the vote did go their way. Darden Restaurants has antagonized its shareholders for no good reason and can likely expect its directors to face sharp criticism for their actions.

Institutional Shareholder Services, one of the proxy firms now siding with the forces against Darden, found that over the first six months of 2013 (the latest data available), several dozen companies that adopted poor governance practices saw directors receive less than 50% support from shareholders.

Stubbornness seems to rule Darden Restaurants, and its board may end up bearing the brunt of the backlash that may ensue.

Three stocks to reel in for your portfolio
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Rich Duprey and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers