friendly icecream

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SHAREHOLDER ACTIVISTS AT FRIENDLY ICECREAM

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Page 1: Friendly Icecream

SHAREHOLDER ACTIVISTS AT FRIENDLY ICECREAM

Page 2: Friendly Icecream

1. Case Overview

Page 3: Friendly Icecream

Overview

• Friendly Ice cream founded in 1935 by Blake brothers.• Grew Rapidly and operated over 500 restaurants by

1970.• Honest and fair business.• Sold Friendly to Hershey Foods Corporation (HFC) for

$164mn.• HFC sold Friendly to Don Smith in a leveraged buyout.• Smith purchased friendly through The Restaurant

Company(TRC).• Later he sold friendly to public through IPO.• Blake bought some shares.

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Overview-Contd.• Due to decrease in stock price, Blake got worried and

bought 900,000 shares.• Issues were raised regarding expenses incurred by

Friendly to help TRC.• Blake expressed his concerns and called for the

resignation of Smith. Investigations conducted but no evidence found regarding expenses occurred.

• Blake filed a derivative suit against Friendly and Smith.• SLC committee filed a motion to dismiss Blake’s suit.• Court supported Blake’s claims and denied SLC’s request

and announced that their report did not cover some adequate information.

Page 5: Friendly Icecream

Overview-Contd.• Biglari invested around $5mn into Friendly in 2006

through Lion Fund and Western Sizzlin.• He started meeting with shareholders of Friendly.• Biglari insisted to obtain seats on the BOD to help the

company but Smith denied.

• Biglari said that Smith is looking at the company as his private firm. Smith was not focused to protect the interests of Other Shareholders.

• Biglari and Cooley prepared for Proxy fight and nominate themselves to be elected to the board.

• Blake keeps on buying share and increased his ownership to 13.2%.

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Q .2 Why is Black purchasing stock in his old firm? What is he trying to

accomplish?

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•As the stock price languished at near to bankrupt level, Blake had become concerned that Friendly was being mismanaged.•Blake did not need money but he felt some responsibility for its employee and the smaller stockholders who don’t have any place else to go.•Questionable expenses and certain transaction between friendly and TRC and Perkins.•He was worried about friendly’s high debt level (260 million at the end of 2000).•Blake did not like Smith’s strategy of closing and selling restaurants in order to raise money to pay down the debt.•Blake had little confidence in board of directors.•Blake wanted to save his legacy.

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Are the related party transactions questioned by Blake material

enough to warrant a legal battle?

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• Yes, Blake’s material was enough to warrant a legal battle.

• He filed suit for breach of fiduciary duty and misappropriation of Company’s assets.

• The case of personal use of jet by Smith without any written agreement to pay TRC for use of Jet and Friendly paying TRC for Illinois office.

• The management fee to TRC as compensation for the services and expenses was unsigned and undated.

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Contd…

• No evidence of Friendly’s purchase of Food products from competitive bidding process or testing.

• The TICC agreement involving Smith’s two sons was the largest refunds or credit issued by Friendly.

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4.Which related party transaction is most significant according to you and why?

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Breach of fiduciary duty and misappropriation of the company’s assets

• All the related party transaction were inappropriate but the factor that distinguish the breach of fiduciary duty and misappropriation of assets and the rest was-

• Jet was primarily used for personal purposes, without reimbursing Friendly• No written agreement between Friendly and TRC to share the expenses of aircraft• Friendly’s share of cost was higher than its share of effective use• In 2000, when company was going through a rough phase with a debt of around,260 million

dollars- On one hand Smith started closing and selling restaurant in order to raise money to pay down the debt

• On the other hand, Company struggling under a heavy debt loan was force to meet the expense of an aircraft –highlights the indifferent attitude of Smith towards the company

• Though, Smith was the Chairman and CEO of the company, Cutter ran the company• Still, Smith- earned a salary and EBITDA based bonus for a total of almost 500,000 dollars, from

Friendly

Open use of company’s jet for personal purpose

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• Friendly was headquartered in Massachusetts and had no operations in Illinois ,still Friendly paid 800,000 dollars for expense related to Illinois office

• Also throws light on the culture of the board of directors• Instead of protecting the interests of shareholders, they

were actually treating the company as a private firm of Smith

• Rather than making independent decisions and questioning Smith’s action, the members looked to Smith for direction and decisions

• They were working not for the company but for the best interest of Smith

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5. What other mechanisms were available to Blake to express his dissatisfaction with the CEO and the board's conduct? Could he have done anything differently?

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• Blake didn’t readily jumped into legal fight• In January 2001, Blake held a meeting with

Smith in order to express his concern about the company’s increasing debt and languished stock prices

• Between 2001 and 2001, Blake continued to pressure Smith and Friendly about the personal use of company’s jet

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• At May 2001, Blake expressed his displeasure with the leadership at Friendly in the annual shareholders meeting

• He also called for several investigation regarding the misuse of aircraft and Illinois office

• In 2002, The special committee formed , found no evidence that supported Blake’s claims and his request to inspect records were declined

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• From the case study, it is clear that Board of directors were not ignorant

• They were simply working for the best interest of Smith

• They had actually failed in their fiduciary duty to shareholders by ignoring and condoning improper actions between Friendly, Smith and TRC

• In addition, they had exercised their authority as directors to cover up improper conduct of Smith

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• It was obvious that Blake wont receive any support from the Board of Directors

• In such a scenario, Blake was the only one, who felt responsible for the shareholders and employees of the company

• Hence, it was justified on part of Blake to file a derivative suit against Friendly and Smith in order to address his concern

• Because neither the CEO nor the Board of Directors had any intention to work for the best interest of the company.

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Q.6 How do you assess the Board’s response to Blake’s action, Over times

could the board and the CEO have done something differently to accommodate

Blake’s request?

Page 20: Friendly Icecream

•In order to investigate Blake’s allegations about Smith, Board appointed Parker as an investigator, who had been special counsel to TRC and who reported directly to Smith and in his investigation, he didn’t find any evidence.

•In response to a formal demand letter by Blake, Board Formed SLC but later SLC’s report concluded that none of Blake’s suit had any merit, and filled a motion to dismiss Blake’s suit. While the court concluded that the SLC had not been appointed by a majority of independent directors and the SLC report was missing adequate supporting documents.

•In both the above investigation Board could have appointed independent director.

Page 21: Friendly Icecream

• No, the Board of Directors were not independent.• They viewed interests of Smith and Friendly as same.• They ignored and covered improper actions like they

gave no evidences in their reports.• The culture of the board was real breakdown.• They looked to Smith for direction and decisions.• They failed to understand that they had to protect

interest of other shareholders.

Page 22: Friendly Icecream

Was there a problem with the independence of the board of directors

at Friendly? Do you agree with the Court's conclusions in May 2006?

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Contd…

• Yes, Court’s conclusions in May 2006 was correct.• The SLC had failed to prove that both members of

committee were independent as both were new directors of Friendly.

• SLC failed to conduct a thorough and careful analysis.• The report was missing the adequate documentation

as there was no written documents for cases.

Page 24: Friendly Icecream

Q.8 Why didn't other shareholders emerge till 2006? Do you think Blake's

actions played a role in Biglari's decisions to invest in Friendly?

Page 25: Friendly Icecream

•Before 2006 it was only Blake who was trying to save his legacy.

•The Douglas Family who owned 12% by end of 2004 was a pure financial investor that wanted no part of managing the company.

•But in 2006 Sardar Biglari began buying stock of Friendly and became 5% owner by August 2006.

•He met with Blake, Douglas family and other major shareholders of Friendly to see if they had any common interest.

•By September 2006 he owned nearly 15% and hoped to obtained two seats on the BoDs to help drive change at the company.

•Bilgari and Cooley had to prepare for a proxy fight in which they sent letters to all the shareholders to nominate themselves for the board and made the shareholders aware of the action of the BoDs.

•Blake’s lawsuit helped Biglari to understand the situation at Friendly and he felt that mismanagement at the company had caused a good brand to be undervalued.

• Biglari believed he could unlock the significant value at the friendly if he could get on its board and put his ideas into practice.

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Q.9 How should Friendly's board deal with Biglari?

Page 27: Friendly Icecream

• Don Smith, Friendly’s chairman resisted Biglari’s attempt to join the board.

• The culture of the board had allowed Smith to act as though he owned the company.

•To deal with Biglari the board should start acting like a board and should start taking decisions in the company’s interest and should stop depending on smith for the decisions.

•The board should take the responsibility of all that is not going good at Friendly and should appoint new CEO for the company which will show a positive change from the board’s point of view to the shareholders.

•Biglari and Cooley should be offered two seats without any doubt on their intentions and the board should have trust on them.

•By doing this the board will show their positive intention to work in the best interest for the company and it is possible that Biglari take back his proposal of declassification of the board.

•The new CEO along with the board members should propose some plan of action including the ideas from Biglari to turn the fortune of the company and impact the performance of the company.