Darden Restaurants' Special Shareholder Meeting Now in the Center Ring

Darden Restaurants (NYSE: DRI  ) can't avoid putting on the dog and pony show any longer. Activist investor Starboard Value reported it gained the support last week of more than 55% of the company's outstanding shares to hold a special meeting of Darden shareholders to vote on delaying Darden's proposed Red Lobster spinoff.

It may only be a nonbinding referendum, one that only gives a sense of how Darden's investors feel, so management doesn't have to abide by the vote's outcome, but directors of a board that willfully ignores its shareholders often find themselves off that board.

After being pressured from hedge fund investor Barington Capital Group to combine its mature restaurant concepts Red Lobster and Olive Garden into a separate entity and spin them off from its other high-growth concept restaurants, Darden said it would spin off or sell only the 705-restaurant seafood chain -- and, perhaps seeing the writing on the wall, it pointedly noted at the time that the transaction would not require a shareholder vote.

If management expected the half-measure to mollify its investors, it miscalculated, because the move instead fired up its base and attracted Starboard Value, which acquired 5.5% of Darden's stock and said Darden's plan "falls significantly short of the actions required to maximize shareholder value." It urged Darden to delay the strategic review process and take a more expansive view of enhancing value.

The restaurant operator has steadfastly refused the entreaties of the private equity firms, saying it reviewed their proposals in depth and found them lacking. Barington responded first by calling for CEO Clarence Otis to split his dual role of board chairman and CEO. Then, after being further rebuffed, it said it no longer had confidence in him to lead the company and called for his ouster.

Darden's response to mounting investor pressure has been a ham-fisted approach to controlling the discussion, including unilaterally amending the company bylaws to give the board discretion on delaying the annual shareholder meeting while requiring shareholders disclose more information about their practices and compensation policies. The changes sparked lawsuits by several investor groups, and even the respected proxy services Institutional Shareholder Services and Glass Lewis found Darden's actions beyond the pale and backed Starboard's call for a special meeting. 

Starboard says, though, that it may still gain additional support for the special meeting, and last week it chose to deliver to Darden the results it's already garnered to ensure the special meeting is held sooner rather than later. The restaurant says it's merely a show of support for holding the meeting and not an indication of how they will vote, but even management must see things are piling up against them.

Starboard has noted that because "there's a large retail component here and there are some shares that are out on loans," surmounting the 50% approval threshold as it did is a significant achievement, a clarion call, really, from investors for Darden to hold the meeting, so the restaurant would be wise not to unduly delay the gathering.

I've noted before that Darden has a point that spinoffs and other operational matters should be within management's discretion and not subject to a plebiscite every time an investor gets his dander up, and Barington Capital's plan may not be the optimal solution for what ails the company. But the restaurant operator has exacerbated the situation, and to avoid an atmosphere of a three-ring circus it would do well to heed the call of its shareholders.

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