Legal expert evaluates Cracker Barrel, Biglari board battle

Cracker Barrel Old Country Store Inc. appears braced for a third consecutive proxy fight over board seats with the company’s largest shareholder, activist investor Sardar Biglari.

Sandra B. Cochran, president and chief executive, strongly urged shareholders in a letter sent Thursday to vote for the board’s nominees at the company’s just-scheduled Nov. 13 annual meeting.

“Your vote will be especially important at the annual meeting,” Cochran wrote.

Lebanon, Tenn.-based Cracker Barrel has 624 company-owned locations in 42 states.

Last month, Cracker Barrel’s board voted not to support the proposed nomination by Biglari’s Lion Fund II L.P. of himself, as chairman and chief executive of Biglari Holdings Inc., an affiliate of Lion Fund, and Philip Cooley, the vice chairman of Biglari Holdings. San Antonio, Texas-based Biglari Holdings owns the Steak ‘n Shake and Western Sizzlin brands.

The Lion Fund and affiliates own more than 4.7 million of Cracker Barrel’s 24 million outstanding shares, or nearly 20 percent, and Biglari made efforts in 2011 and 2012 to gain board seats.

In Securities and Exchange Commission filings Thursday, Cracker Barrel said Biglari garnered about 36 percent of the votes needed to gain a board seat in 2011. In 2012, he targeted two seats and received about 29 percent of shareholder votes.

Christopher P. Davis, chair of the mergers and acquisitions and investor activism groups at the New York-based Kleinberg, Kaplan, Wolff & Cohen P.C. law firm, recently spoke with Nation’s Restaurant News about Biglari’s third attempt at gaining seats on the Cracker Barrel board.

Davis, who represents activist investors and funds but is not involved in the current Cracker Barrel-Biglari efforts, said Cracker Barrel has acted on many of Biglari’s early criticisms. “They’ve stolen some of his thunder by adopting and embracing his ideas without embracing him,” Davis said.

What makes this case atypical?

The board, in no uncertain terms, says no. Again. The obviously interesting part is that it is very rare in these types of things to have a board fight for a third consecutive year. Nonetheless, Biglari has chosen to go out and do that. You are in a situation where the board sort of, to be honest, handily won last year.

How has it gotten this far?

I think to a certain extent you could argue that Biglari is a victim of his own successful ideas. I personally think it was the pressure he put on [Cracker Barrel] in the first year that really provided the impetus for this board to turn things around. You look at the market price of the stock, and you look at how things have changed, and the board has a plausible case to make that things have improved.

Now you are in a situation that having accepted, in effect, the ideas, or the spirit of the ideas — it made changes that are positive — it takes some of the pressure off [shareholders] to put him on the board. The shareholders plainly didn’t embrace him last year. Unless there is going to be something new as this fight balances out, it is going to be hard to come out with a different result without putting in a fairly different input and a different set of arguments.

Biglari a 'determined adversary' for board

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What about Cracker Barrel’s reduction of the size of its board from 10 to nine with the impending retirement of Martha M. Mitchell, who has served on the board since 1993?

I think the board helps itself in one respect, because they are getting someone off who has been on the board for an awful long time. Directors who are perennial directors year after year and decade after decade open themselves up to the criticism that this is a board that has too little fresh blood, too little fresh perspective and too much staid continuity. And that hurts it. I think every time you get a longer-serving director off the board it ends up helping the board’s argument.

The fair question for the board was, ‘If the previous number was 10, and that was the right number, why is nine all of a sudden the right number?’ That seems very geared toward frustrating Biglari.

How would you characterize the situation at this point?

It’s pretty clear after last year’s fight that this is pretty personal, and they are saying, in effect, that they have real issues with him and what they would like to characterize as his potential motivations. I don’t think that they could make it any more clear that this is kind of an ‘over-their-dead-body’ situation for him to get a seat on the board. He has apparently turned down the request to be bought and intends to continue to try and get on that board.

And from Biglari’s standpoint?

He’s plainly sending a very strong message to the market that he’s on the watch and he’s not giving up and that he is going to be a very determined adversary for this board.

What advice would you give the activist investor at this juncture?

Presumably, Biglari is going forward with this and wants a different result. Therefore, I think he is going to have to put forth different arguments and different explanations for why change is needed and why he is the right guy to bring change. He very well may be. But I’m waiting to see what he is going to use to convince the shareholders differently this year from last year.

This year, he has to convince the shareholders that he is the right guy and that he has new ideas that aren’t being implemented. That would be a very strong basis for him to move forward.

Contact Ron Ruggless at [email protected].
Follow him on Twitter: @RonRuggless