Friendly Ice Cream

Corporation

Submitted by Group 3
 Advait Bhobe
 Chandrashekhar Jindal
 Kanumuri Rajashekhar
 Raunak Vasandani
 Sangram Korekar

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1. Case Overview

 Friendly Ice cream was founded in 1935 by Blake

brothers.
 Grew Rapidly and operated over 500 restaurants by 1970.
 Initially they were operating business on the basis of
honesty & fairness.
 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.
 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.

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 Blake expressed his concerns and called for the
resignation of Smith. Investigations were
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. 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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2. Why is Blake purchasing stock in his old firm?
What is he trying to accomplish?

 Blake felt in that mismanagement had cause a

strong company with good brand value to be the
undervalued company.
 He believed he could unlock significant value at
Friendly if he could get on its board and put his
ideas into practice & manage the company & force
Smith to resign from CEO post.
 He bought the stock of the company so that
companies debt could be paid off and the
company‘s share prices rises & it would in build
confidence in the minds of the shareholders
 Blake did not need the money as he had become
wealthy when he first sold out-but he could not
stand to see his company driven into the ground.
He had concern about his employees & felt that it
was his responsibility to see that the employees
are treated well.

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3. Are the related party transactions questioned by
Blake material enough to warrant a legal battle?

 Blake had three main concerns for Friendly Ice

Cream Co regarding declining stock prices in the
market, Smith’s strategy & management &
concerns over the using the jet for his private
purpose which was not needed.
 Blake also had issue on Smith’s closing the
number of restaurants so as to reduce the
burden of heavy debts.
 Smith had 10% share in Friendly company while
he had 70% share in TRC company. He was
Chairman of both the companies i.e. Friendly
company & TRC company.
 Friendly Co was badly mismanaged by the CEO &
the employees over the latter stages.

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 Blake had concerned over that Smith was unjustly
profiting by being both head of TRC & head of Friendly
because the positions allowed him to shift assets or
income from Friendly to TRC or shift costs from TRC to
Friendly.
 Blake had an issue with Friendly’s payments to TRC
for expenses related to Illinois office.
 This was done because Smith owned 10% of Friendly
Co & 70% of TRC Co.
 Also Friendly Chairman Don Smith, was misusing the
company’s funds , since then he had publicly
badgered the board of directors to turn things around.

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

 Aircraft related party transaction is most

significant according to us because:
 The jet was rarely used by anyone other than Smith
or his family and they used it for personal purpose.
And they never used to Reimburse Friendly.
 Jet was usually utilized by Smith for his personal
purpose which did not go well in the eyes of Blake.
 Smith was misusing the fund of Friendly Company.
 There was no written agreement between Friendly
and TRC to share the expenses of the Aircraft.
 Friendly’s share of the cost was higher than its
share of effective use.

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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?

 Blake was dissatisfied with the strategies

followed by Smith who is the CEO of the
Company & the board of directors.
 As internet was just established in USA he
could have made use online support & should
have created the website.
 He should have conducted meetings with the
investors, bankers & shareholders who are in
connection with the company.
 He could also have discussed the problems of
the shareholders
 Mr. Blake could have gathered support from The
Douglas family, Sardar Biglari by discussing and
trying to focus on common cause.

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6. How do you assess the board's responses to Blake's
actions over time? Could the board and the CEO have done
something differently to accommodate Blake's requests?

 Board was not ready to consider the issue raised

by Mr. Blake.
 They did not allow him to get a seat in the board,
but finally they had to agree.
 Every company wants to increase its
shareholder wealth, and achieve operational
efficiency.
 The Director of the board should have listen to
the concerns of /mar Blake & understand it in
the company’s point of view.
 They should have given the thought over his
ideas & whether they are feasible.

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7. 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?

 Yes there was a problem with the independence of

the board of directors at Friendly Co as they were
unable to control the activities of CEO & Chairman.
 Blake had appointed independent directors as he
believed that they would manage the company but
they failed in their fiduciary duty to shareholders.
 The board of directors seemed to view the interest
of Smith & Friendly to be one & the same.
 One example of this was that both Friendly & Smith
had hired the same attorney to defend against
Blake’s suit.
 Board of Directors in the Friendly did not had unity
among themselves.

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 I agree with the court conclusion in May 2006 as
SLC had not been appointed by the majority of
the independent directors & SLC had failed to
prove that two of the directors were
independent.
 Friendly’s board of action was also not proper
through out the whole process.
 The decision taken by the court supported
Blake’s position & represented a major blow to
Friendly’s board as the directors of company
was bias towards Smith, the CEO of the
Company.

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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?

 The shareholders didn’t know the inside story of

Friendly Company till Mr. Blake had flied the suit
in the court against the CEO of the company
 After 2006, the public came to know about the
inside story of the company & financial status of
the company.
 That was the reason for shareholders to emerge
after 2006.
 I don’t think Blake’s actions played a role in
Biglari’s investment
 Biglari had invested in Friendly Company right
from the start.

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9. How should Friendly's board deal with Biglary?

 Biglary began investing in Friendly’s 2006 & by the

end of august he filed the report he had become a
5% owner of the company.
 Biglary was interested in Friendly company & since
2006 he started investing in the company.
 Bilglary’s company had owned 8% of Friendly &
Western Szzlin had owned 7% of the company.
The group became the largest holder of the
company.
 Smith had demanded two seats on the board of
directors to help drive change in the company .
 The meeting did not go well as Smith was resistant
to give him 2 seats.
 According to me, Friendly company should have
taken the advantage of the presence of Biglary as
he was excited in the company.

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 The CEO should have given 2 seats to him for the
betterment of the company.
 He wanted to improve the Corporate Governance of
the company which had gone for the toss.
 He could have successfully unlock the value of the
company.
 The company should have use Biglari properly
optimally.

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 Questions…..

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