What Is Darden Restaurants Afraid Of?

Whereas the sale or spinoff of its Red Lobster chain is seen by just about everyone as a necessary action, Darden Restaurants (NYSE: DRI  ) has been deaf to all entreaties to slow down and consider a broader realignment of its operations. Even in the face of activist investor Starboard Value winning over more than half of the restaurant operator's shareholders in calling for a special investor meeting to discuss the separation, Darden is barreling forward with its plans and may even try to subvert the will of its shareholders.

Starboard revealed yesterday a letter it delivered to Darden's board decrying an executive's statements last week that the restaurant chain might be able to delay for as long as four months the special meeting, giving it enough time to complete the Red Lobster transaction by June or July.

If true, the allegation represents a serious subversion of the will of its investors. The meeting would only be a nonbinding referendum as it is, and any vote taken by shareholders would not require management to do anything. If the divestiture of the seafood chain is the only viable path for Darden to take, then it ought to be able to defend its decision and sway investor opinion. Even if I agree that such decisions are rightly within the purview of management discretion, forging ahead torpedoes-be-damned style while trying to skirt the sentiments of the company's true owners represents a dereliction of the board's fiduciary responsibility to shareholders.

Both Starboard and Barington Capital have been seeking to have Darden take a more holistic approach to the restaurant's problems. Along with the sale or spinoff of Red Lobster, Starboard calls for the wilting Olive Garden to be included in any separation plan, as well as for the creation of a real estate investment trust for all of Darden's remaining properties. It charges Darden is leaving over $800 million worth of value on the table by only pursuing this one single avenue.

For its part, Darden shoots back that it did consider the proposals made but found them lacking. It still considers Olive Garden a potential turnaround candidate with a lot of growth and thinks the idea of a REIT is only a limited "value creation opportunity" because it would likely trade lower than other REITs. Besides, it doesn't need shareholder approval to do what it wants.

That may be true enough, but it's troubling nonetheless that it wants to thwart the will of its investors. According to Starboard, Darden's VP of investor relations told attendees of an investor luncheon last week that the company is on track to shed Red Lobster next month or the month after and it could, if it wanted to, delay by 60 days any shareholder meeting the investors wanted. Starboard delivered to Darden last month written requests from 55% of its shareholders calling for the special meeting with an independent inspector certifying 57% of the restaurant operator's investors ultimately called for one being held. Considering the number of shares held by retail investors, those owned by insiders, and the amount that are out on loan, the total really translates into nearly three-quarters of what could be considered voting shares that support the meeting.

According to Starboard, Florida law says the chain has 60 days from the delivery date to hold the special meeting, or around the third week of June. Darden, however, says it believes it can delay calling the meeting as far as 60 days from the date of certification and then wouldn't be required to hold it for an additional 60 days after that (it has admitted it could always hold it sooner, too).

This end run around investors and the law raises the question: Just what is Darden Restaurants afraid of? Obviously, it must realize it doesn't have the support of investors, and getting a vote against the transaction on record wouldn't look good. But pushing out the meeting to a point till after the deal is done tramples over the wishes of investors and it doesn't put it in a good light, either. And if this comes to pass, it ought to be remembered when directors come up for a vote.

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