Proxy Advisory Firms Back Darden Activists


(UPDATED to include the ISS report.) Two proxy advisory firms are backing the activist investors in their push to get Darden Restaurants to hold a special meeting on the Red Lobster separation.

Glass Lewis & Co. is recommending that shareholders agree to a special meeting to discuss the Red Lobster sale, citing "questions regarding the strategic and financial merit of the currently planned Red Lobster separation, the failure of the board and management team to make a compelling case for their current plan, the widespread concern and skepticism among Darden's shareholder base and the company's previous eschewing reaction to shareholders and investors who have been critical of the company."

Later in the day, the other proxy firm, Institutional Shareholder Services, recommended that shareholders agree to the special meeting, saying it would give shareholders the ability to accept or reject a potentially major change.

The views of proxy firms can be important considerations in shareholder votes. Many institutional shareholders look at those recommendations as they consider what to decide, and the recommendation from both firms significantly increases the chances that Starboard will succeed in its push for a meeting.

That said, the views of these firms will hardly make or break a proxy contest. And though Darden canceled its Investor Day it has been making its case directly to analysts and investors in recent weeks.

Activist investors have been turning up the heat on Darden since December, when the company announced plans to spin off Red Lobster or sell the struggling chain. One of the activists, Starboard Value, has called for a special meeting to vote on the plan—even as Darden pushes ahead with the spin off. Another activist, Barington Capital—which backs the special meeting—has called for Darden to search for a new CEO.

The primary issue is real estate, and a belief that Darden's plan to fix Red Lobster could be accomplished within the company for now. the activists want Darden to spin off its vast real estate holdings, estimated at $4 billion in value. If Darden gets rid of Red Lobster it would also get rid of a lot of that real estate.

Darden argues that spinning off the real estate would hurt the stores' profitability, and hurt the company's flexibility, and that the needs of Red Lobster require the chain to get more special attention, which it would receive as a stand-alone company and not part of an eight-concept behemoth.

The company also argues that a special meeting is unnecessary and would be a waste of resources. It also believes that it would end up spending millions of dollars fighting proxies if the meeting is held, because Starboard has vowed to push for board seats if the Red Lobster sale goes through. We believe that latter argument doesn't hold water—if Darden holds a special meeting, and shareholders back the company's plan, then Starboard would be stupid to try for board seats after such a loss.

Glass Lewis, meanwhile, said that any cost incurred with a meeting would be "appropriate" because "hundreds of millions or billions of dollars of shareholder value are at stake."

The firm also says that Starboard has a "compelling case" that Darden has failed to enhance shareholder value, and that the company has "fallen short of justifying that it should be given complete deference with respect to strategic matters." In addition, the firm said, Darden "has clearly underperformed its peers by a significant margin," which makes a case for investors to question management's judgment when it comes to a Red Lobster separation.

In a statement, Darden blasted the Glass Lewis report, calling the firm's assertions on the company's record of engagement with shareholders "demonstrably false."

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