Barington Withdraws Shareholder Proposal After Darden Restaurants Appoints An Independent Chairman

Believes More Significant Changes are Needed in the Darden Boardroom

Expresses Strong Support for the Election of Starboard Value's Director Nominees

Aug 05, 2014, 08:00 ET from Barington Companies Equity Partners LP.

NEW YORK, Aug. 5, 2014 /PRNewswire/ -- Barington Companies Equity Partners, L.P., a long-term investor in Darden Restaurants, Inc. (NYSE: DRI), announced today that it has sent the following letter to the Corporate Secretary of Darden. The letter notifies the Company that Barington is withdrawing its proposal that the Darden Board adopt a policy that its Chairman be an independent director after the Company adopted Barington's recommendations last week. The letter also states that while Barington appreciates that the Board has finally agreed to adopt this policy, it believes that it will have little impact if a majority of Darden's incumbent directors are reelected at the 2014 Annual Meeting of Shareholders. Barington is convinced that the only effective means to improve shareholder value and protect shareholder interests at Darden is through the election of the slate of independent directors nominated by Starboard Value.

August 4, 2014

Teresa M. Sebastian Corporate Secretary Darden Restaurants, Inc. 1000 Darden Center Drive Orlando, Florida 32837

Dear Ms. Sebastian:

Barington Companies Equity Partners, L.P. ("Barington") hereby withdraws the shareholder proposal that Barington submitted on April 4, 2014 for inclusion in the proxy statement of Darden Restaurants, Inc. (the "Company") for the Company's 2014 Annual Meeting of Shareholders. The proposal requested that the Board of Directors of the Company adopt a policy that its Chairman be an independent director and was submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 

We appreciate that on July 28, 2014 the Company finally amended its corporate governance policies to provide for the appointment of an independent Chairman. As you know, we have repeatedly suggested that the Board appoint an independent Chairman – including during our January 30, 2014 webcast and in our March 26, 2014 letter to Darden's independent directors, both of which are posted on our website – in order to ensure that shareholder interests were protected as the Board considered various restructuring alternatives. Unfortunately, the Board chose to ignore our recommendations and let CEO Clarence Otis continue to serve as Chairman while it considered and approved the controversial sale of Red Lobster. 

It appears that the Darden Board is now seeking to give the impression that it amended its governance policies last week simply because it believes in the importance of having an independent Chairman. Darden's draft proxy statement for the 2014 Annual Meeting that was filed on August 1st states:

"The Board believes that separating the roles of Chairman and CEO allows for better alignment of corporate governance with shareholder interests and aids in the Board's oversight of management and the Board's ability to carry out its roles and responsibilities on behalf of the shareholders. The Board also believes that the separation of the roles of Chairman and CEO allows the CEO to focus more of his time and energy on operating and managing the Company and leverages the Chairman's experience."

Given that the Board changed its views on this subject last week, just two months prior to the date of the 2014 Annual Meeting, this appears to be nothing more than an 11th hour attempt by Darden's incumbent directors to remain in office.  We are convinced that this is the case as Darden's legal counsel informed us less than two weeks earlier that the Board planned to recommend that shareholders vote against our proposal at the 2014 Annual Meeting.  A copy of the statement we received from Darden's counsel advising us of this in accordance with Rule 14A-8(m) under the Exchange Act has been posted on our website.

While the Board may now have an independent Chairman, we fail to see how this will result in any meaningful change in the boardroom given the track record of Darden's independent directors. The new Chairman and his fellow incumbent directors seeking reelection at the 2014 Annual Meeting are the same individuals who chose to ignore shareholder wishes and proceed with the controversial sale of Red Lobster without subjecting the transaction to a shareholder vote. There can be no assurance that the status quo at Darden will change as long as these same directors constitute a majority of the Board. 

Need for Significant Changes in the Darden Boardroom

It is clear to us that if the owners of the Company wish to ensure that shareholder value is improved and shareholder interests are protected, then more significant changes are required in the Darden boardroom that can only be accomplished through the election of a new slate of independent directors. For the reasons set forth below, we believe that Darden's current independent directors have failed to effectively represent shareholder interests and must be replaced. 

1. Approval of the Red Lobster Transaction

We believe that the Darden's independent directors must be held accountable for their decision to approve the sale of Red Lobster's restaurant operations and real estate to Golden Gate Capital – a transaction that, in our opinion, has destroyed significant shareholder value.

 As we noted in our May 19th press release, we believe it is unconscionable that the Darden Board would allow the Company to sell its Red Lobster business for what we believe amounts to a "fire sale" price. Golden Gate is effectively paying only approximately $600 million for Red Lobster's operating business after accounting for the $1.5 billion sale-leaseback of Red Lobster's real estate. Moreover, as the transaction will generate approximately $500 million of taxes and transaction costs, the net, after tax proceeds shareholders will receive for the operating business is a paltry $100 million. This is a disappointing sum, particularly when you consider that Darden has spent over $400 million to remodel its Red Lobster restaurants over the past five years.  Furthermore, by approving the sale of Red Lobster, the Board has prevented shareholders from participating in the revival of this iconic brand under a more dedicated and focused leadership team. Not surprisingly, Darden's market valuation has plummeted by more than $500 million since the transaction was announced on May 16, 2014.  

As you know, over a year ago we recommended the separation of Red Lobster together with Olive Garden into an independent operating company. We are convinced that our recommended strategy, which has been successfully implemented by a number of Darden's peers, would have enhanced the long-term financial performance of both Red Lobster and Olive Garden by improving management focus and operating execution at each brand. We have also proposed alternatives that would have enabled the Company to unlock the value of its real estate assets without incurring the significant taxes and transaction costs associated with the Red Lobster deal. 

Had Darden retained Red Lobster's real estate as we recommended (rather than including it as part of the sale), we believe that shareholders would have been significantly better off. Retaining Red Lobster's real estate would have avoided up to $500 million in taxes as well as preserved the opportunity for the Company to unlock the value of these assets in the future, such as through the formation of a publicly traded real estate investment trust (REIT). Our recommendation would also have allowed the Company to generate an attractive income stream from Red Lobster, as will be done by American Realty Capital, the REIT that purchased Red Lobster's real estate from Golden Gate Capital. We estimate that American Realty will earn over $110 million in rental income per year. It appears to us that the only plausible rationale for selling Red Lobster's real estate was the hope that it would somehow hide the disappointingly small sum received for the Red Lobster business.

2. Failure to Permit Shareholders to Vote on the Red Lobster Transaction

We also believe that Darden's incumbent directors should be held accountable for their decision to proceed with the controversial sale of Red Lobster without shareholder approval. Shareholders clearly indicated that they did not want the Board to proceed with a sale or spin off of Red Lobster unless the transaction was subject to a shareholder vote. Not only did we advise the Board's independent directors of this in writing, but a majority of Darden's shareholders took the unusual step of calling for a special meeting to be held to make this point abundantly clear. Unfortunately, instead of heeding the will of the owners of the Company, the Board chose to ignore their wishes.  This occurred despite the fact that Darden promised in an April 1, 2014 mailing to shareholders that "serious consideration" would be given to any shareholder feedback received by the Company. 

Furthermore, the Board allowed the Company's management team to make the process for shareholders to express their views on the Red Lobster separation plan as difficult, time consuming and costly as possible. Instead of voluntarily providing shareholders with the right to vote on the plan as we recommended, Darden required Starboard to go through the tedious and costly process of bringing a consent solicitation to call a special meeting. The Company also attempted to thwart Starboard's efforts by mailing to shareholders a revocation solicitation statement that provided shareholders with a card to revoke any consents previously sent to Starboard.

If the Darden Board had voluntarily provided shareholders with the right to express their views on the plan, it would have shown that it took the opinions of the owners of the Company seriously.  The views of shareholders on this important transaction do not appear to have been a concern of the Board, however, as it did not press for a timely vote on the Starboard resolution or wait for the results of the vote before approving the Red Lobster deal. The Board's claim today that it was "deeply concerned" about proceeding with the sale of Red Lobster prior to the special meeting rings hollow, particularly as the Company actively opposed Starboard's special meeting consent solicitation. In our opinion, the handling of this matter by the Darden Board is one of the most egregious examples of poor corporate governance that we have seen in our 14-year history of investing.

3. Failure to Engage with Shareholders

It is our belief that Darden's independent directors have repeatedly failed to properly inform themselves of the concerns of the shareholders that they have a fiduciary duty to represent. We also believe that the Board has been irresponsible in delegating the job of engaging with shareholders to a management team that has shown a propensity for ostracizing shareholders and analysts that are critical of the Company. 

The Board's failure to meet with shareholders and thoughtfully consider their views is extremely disturbing, particularly in light of the significant issues at hand. After we first shared our recommendations privately with the Board in a September 23, 2013 letter, the Board not only ignored our offer to meet to discuss our suggestions, it also instructed Mr. Otis to cancel a previously scheduled meeting with us in Orlando later that week. This is the same Board that allowed the Darden's management team to cancel this year's annual investor conference and instead conduct private meetings with "selected" shareholders. We fail to see how a Board can make thoughtful decisions with such a "head in the sand" approach.

4. Failure to Ensure that Shareholders Receive Full and Fair Disclosure

We believe that the Board's independent directors have repeatedly failed to ensure that shareholders receive full and fair disclosure from the Company's senior management team. 

For example, as we noted in our May 19, 2014 press release, the Company's announced valuation of the Red Lobster transaction at 9x LTM EBITDA is highly misleading as it includes the value of Red Lobster's real estate. The Company continues to conceal the truth, arguing in a statement released today that "the $2.1 billion purchase price represents a premium multiple compared to comparable restaurant deals" without noting that these "comparable" deals did not include $1.5 billion worth of real estate. Indeed, after accounting for the $1.5 billion sale-leaseback, Golden Gate paid only approximately $600 million, or approximately 5.4x pro forma EBITDA, for Red Lobster's restaurant operations.

Furthermore, on February 28, 2014, reported allegations that Darden has prevented analysts critical of the Company from asking questions on earnings conference calls. Jeffrey Sonnenfeld, a professor at the Yale School of Management, was quoted in the CNBC article stating "[i]t's bad precedent for a publicly held company to muzzle analysts. A company's conference call is supposed to be a dialogue not a monologue." The New York Times has also reported equally disturbing allegations involving the Company's heavy-handed treatment of analysts by its head of investor relations.

Responsibility for such actions must ultimately rest with Darden's independent directors. As a significant shareholder of Darden, it is unacceptable to us that they would permit a culture to exist where it is permissible for the management team to limit or obfuscate the flow of information to the owners of the Company.

5. The Board's Appalling Record in the Area of Corporate Governance

The record of the Darden Board in the area of corporate governance has been, in our opinion, nothing short of horrific. 

Institutional Shareholder Services has issued Darden its worst possible governance rating in February 2014, while Glass Lewis has given Darden a "D" pay-for-performance grade in each of the last two years. The Company also has a "poison pill" shareholder rights plan in place that has not been approved by shareholders. 

Even more troubling is the fact that the Board recently amended Darden's bylaws, also without shareholder approval, to add measures that make it materially more burdensome for shareholders to nominate directors. The Company claimed in its March 19th Form 8-K filing that the amendments were made "as part of its regular corporate governance review." In light of the likelihood at that time that Starboard would nominate directors, we believe that the Company was clearly being disingenuous, and has since been sued in Florida by two pension funds who believe that Darden's bylaws were amended with the intent to entrench the Board. 

It has also been recently reported that the Board allowed Clarence Otis to serve as a director of so many outside boards that he was obligated to participate in at least 76 board meetings last year for organizations other than Darden, including Verizon Communications, VF Corp., the Atlanta Federal Reserve and Williams College. Professor Robert Jackson, a corporate governance expert from Columbia Law School, was quoted in a May 13th New York Post article as saying that is "a striking total that's far outside the norm," especially for a company facing significant operational and board issues. Furthermore, the Board permitted Mr. Otis to use the Company's corporate jet to attend some of these meetings, according to disclosure in the Company's 2013 Proxy Statement. "The idea that you'd fly a director around to other companies' meetings in the corporate plane sounds like something from the 1980s," according to Professor Jackson.

The Company also has one "independent" director who is seeking reelection to the Board who is the President and Chief Operating Officer of Signature Flight Support Corp., a company that is party to a 10-year sublease agreement with Darden to provide an aircraft hangar, fuel and other services for the Company's $18 million Cessna Citation Sovereign. According to the Company's 2013 Proxy Statement, aggregate payments made by Darden to Signature Flight in fiscal 2013 were approximately $1 million

The Company's poor corporate governance record is likely attributable, in part, to the fact that two-thirds of Darden's independent directors are in at least their ninth year of service. GMI Ratings (an independent provider of research and ratings on governance and other risks affecting the performance of public companies) issued Darden a "D" rating, noting "it is increasingly difficult to consider board members independent after so many years of service. Long-tenured directors can often form relationships that may compromise their independence and therefore hinder their ability to provide effective oversight." This appears to be the case here, given the track record of the Board and its failure to engage with shareholders or fight to protect their concerns in connection with the sale of Red Lobster. We fail to see how Darden's corporate governance will improve if these same directors continue to constitute a majority of the Board.

6.  Failure of the Board to Amend Darden's Multi-Brand Strategy

Despite a sustained decline in the Company's operating performance, Darden continues to cling to its capital-intensive, multi-brand strategy. Over a year ago, we advised the Company that underperforming restaurant conglomerates including Brinker International, McDonald's and Wendy's have successfully improved long-term shareholder value by separating their brands.  Since then, a number of leading industry analysts have reinforced the value potential of our recommended strategy. For example, Miller Tabak estimated in a June 20th research report that if Darden separated its brands its stock would be worth $67 per share. 

The failure of the Company's multi-brand strategy is most clearly evidenced in the performance of Darden's two largest brands – Red Lobster and Olive Garden – which account for approximately 70% of the Company's revenue. Despite menu changes, costly store remodels and a variety of brand renaissance initiatives, the Company has been unable to halt the long-term decline of these brands. For FY2014, Red Lobster and Olive Garden's same store sales declined by -6.1% and -3.4%, respectively. This follows same store sales declines of -2.2% and -1.5%, respectively, for FY2013.

While the financial performance of Darden's mature brands has disappointed investors for years, the performance of the Company's higher growth brands is also starting to falter. For example, same store sales at Yard House fell to a paltry 0.1% for FY 2014, while same store sales growth at Long Horn Steakhouse and Capital Grille for FY2013 and FY2014 significantly lagged FY2011 and FY2012 results. The Company appears to have acknowledged its inability to generate meaningful results from its higher potential brands, issuing a meager 2% same store sales forecast for its Specialty Restaurant Group for FY2015. As a result, it is no surprise that Darden's total shareholder return over the past three and five-year periods has lagged its mature brand peers (Bloomin Brands, Brinker International and The Cheesecake Factory), its higher-growth peers (BJ's, Chuy's, Del Frisco's, Ignite and Texas Roadhouse) and the S&P 500 index by a substantial margin:





Darden Restaurants



Mature Peers



Higher Growth Peers



S&P 500 Index



We fault the Board not only for its decision to remain committed to Darden's outdated multi-brand strategy, but also for its decision to allow Clarence Otis, someone with limited operating experience, to run the Company for so long. Prior to becoming CEO, Mr. Otis's primary operating experience was running Darden's Smokey Bones brand. Darden invested more than $400 million in this brand between 2002 and 2007. It later closed over 50 underperforming restaurants and sold the remaining 73 restaurants to Sun Capital Partners for just $80 million (equal to approximately 0.4x 2007 revenue). While the Board has finally followed our recommendations and will be initiating a search for a new CEO, we believe the Board should be held accountable for its failure to replace Mr. Otis sooner with a more capable restaurant operator.


In light of the foregoing, we strongly believe that the best course of action for shareholders would be the election at the 2014 Annual Meeting of the slate of independent directors nominated by Starboard. We are convinced that only through the election of new directors that constitute no less than a majority of the Board can the owners of the Company be assured that shareholder interests will be protected and changes will be made to unlock Darden's vast value potential.

Very truly yours,

Barington Companies Equity Partners, L.P.

About Barington Companies Equity Partners, L.P.

Barington Companies Equity Partners, L.P. is a value-oriented, activist investment fund that was established by James A. Mitarotonda in January 2000.  The Fund invests in undervalued publicly traded companies that Barington believes could appreciate significantly in value as a result of a change in corporate strategy or from various operational, financial or corporate governance improvements.  Barington's investment team, senior advisors and industry contacts are seasoned operating specialists, experienced in working with companies to design and implement initiatives to improve their financial and share price performance. 


SOURCE Barington Companies Equity Partners LP.