http://www.cnbc.

com/id/102083268

Darden board ouster: A warning to

corporate America
John Jannarone | @jannarone
Monday, 13 Oct 2014 | 2:09 PM ETCNBC.com

The ouster of the entire 12-person board of directors last week at Darden Restaurants could trigger
alarm bells at other companies where executives have ignored the demands of increasingly vocal
shareholders, corporate governance experts say.

"It's a warning that you've got to take into account the concerns of shareholders," said Charles Elson,
professor of finance and director of the John L. Weinberg Center for Corporate Governance at the
University of Delaware. "There's an election process and this can happen again—at any company."

Adam Jeffery | CNBC

Darden Restaurants shareholders voted on Friday to elect all 12 board nominees recommended by
Starboard Value and remove the existing directors. The vote brought to an end a prolonged fight
between Darden and two activist funds, Starboard and Barington Capital Group. Earlier this year,
former Darden CEO Clarence Otis announced his resignation in the midst of the battle with the
activists.

Starboard had urged the company to take several steps that management resisted, such as spinning off
Darden's real estate into a separate vehicle and splitting in half the company, which owns the Olive
Garden chain.

Instead, Darden's management sold its Red Lobster division without putting the matter to a shareholder
vote. The sale stirred up ire among some shareholders because it was allegedly designed to prevent the
activists from getting their way and generated a meager amount of money.

Read More Fishy financial disclosure at Darden's Red Lobster

This document is authorised for use only in Executive Education - International

Directors Programme - Cohort 60 - Module 1 at INSEAD - Jun 2023 - Dec 2023 – by Massimo
Massa (Programme Director(s)). Copying, printing or posting is a copyright infringement.
http://www.cnbc.com/id/102083268

"The problem was that management kept spitting in the activists' faces," said Jill Fisch, a law professor
specializing in corporate governance at the University of Pennsylvania. "Management was saying 'we
don't care what you want.'"

A Darden spokesman declined to comment to CNBC.com. However, in a statement Friday, outgoing

Darden board director Charles A. Ledsinger Jr. said, "We are extremely grateful to Darden Restaurants'
talented and dedicated management and employees who, day after day, serve our customers with
distinction and are the backbone of what makes Darden the pre-eminent casual dining company."

Investment bankers say it has become very common for activists to approach management before
waging a public campaign. The victory of the activists at a company as large as Darden, which has a
market capitalization of $6 billion, could encourage companies to negotiate with activists rather than
take the chance of going to battle with them.

"People are going to wake up to the fact that there's a serious risk that you're going to lose the entire
board," Fisch said. "If an activist has an idea, maybe sit down and have the conversation."

Public activism has reached unprecedented levels as more money flows into hedge funds that focus on
the strategy. Activist funds have $93 billion under management, with $14 billion in inflows so far this
year, according to research firm eVestment.

While Darden was an usually large company to see its entire board replaced, others have given up seats
to activist investors in recent months. In August, Sandell Asset Management won four board seats on
the 12-member board of restaurant chain Bob Evans.

Aside from hedge funds, there are other potential winners in an environment with more activism:
investment banks and law firms that advise companies that come under fire. Goldman Sachs advised
Darden while Lazard advised Bob Evans. Wachtell, Lipton, Rosen & Katz served as legal advisor to
both Darden and Bob Evans.

Neither Goldman, Lazard, nor Wachtell immediately responded to requests for comment from
CNBC.com.

Darden's ousted board members also face a pending lawsuit related to the sale of Red Lobster earlier
this year. The suit alleges that Darden misled shareholders when it said publicly that Red Lobster's
business was in decline and needed to be sold.

This document is authorised for use only in Executive Education - International

Directors Programme - Cohort 60 - Module 1 at INSEAD - Jun 2023 - Dec 2023 – by Massimo
Massa (Programme Director(s)). Copying, printing or posting is a copyright infringement.
http://www.cnbc.com/id/101928352

Fishy financial disclosure at Darden's

Red Lobster
John Jannarone | @jannarone
Tuesday, 19 Aug 2014 | 3:11 PM ETCNBC.com

Call it a tale of two lobsters.

Darden Restaurants has told shareholders that Red Lobster, the seafood chain it recently sold, smells
like week-old fish. But to another group of investors, the restaurant chain was described as a tasty treat.

Shortly after Darden announced a deal to sell Red Lobster to private equity firm Golden Gate Capital
for $2.1 billion in May, the restaurant chain began to market a $425 million debt offering. CNBC
Digital has obtained a copy of a 74-page document related to the deal, which isn't available on any
public website and wasn't distributed to Darden shareholders. The document originated with a debt
investor source.

Daniel Acker | Bloomberg | Getty Images

A Red Lobster restaurant is shown in Peoria, Ill.

The "Confidential Information Memorandum" said that Red Lobster's profits peaked in 2011 and have
since declined due to several factors, but the company believes the business will improve. "The
management team believes that each of these issues are temporary in nature, correctable, and that they
have plans in place to return the business to historic levels of profitability," the memorandum said. The
document is dated "June 2014," when Red Lobster was still a unit of Darden. The Red Lobster sale
didn't close until July 28, when the debt deal was also completed.

This document is authorised for use only in Executive Education - International

Directors Programme - Cohort 60 - Module 1 at INSEAD - Jun 2023 - Dec 2023 – by Massimo
Massa (Programme Director(s)). Copying, printing or posting is a copyright infringement.
http://www.cnbc.com/id/101928352

The upbeat view on Red Lobster may come as a surprise to Darden shareholders. When the Red
Lobster sale was announced in May, Darden said it would "bolster the Company's financial
foundation" and allow it to focus on the Olive Garden restaurant chain.

After the deal closed several weeks later, Darden went a step further, suggesting it had rid itself of a
business that wouldn't improve anytime soon. "Red Lobster's business continued to decline through
fiscal year end, and based on industry trends, the declines were expected to continue for an extended
time," the company said in a press release on August 4. The company cited several "key reasons for
long term structural decline in Red Lobster's operations" including financial pressure on its customers,
competition, and rising costs.

Why would Darden's management paint a bleaker picture of Red Lobster's prospects than fellow
executives who manage the restaurant?

Activist shareholders Barington Capital and Starboard Value have said Darden rushed into a Red
Lobster sale to prevent them from achieving their own goals. To convince shareholders Red Lobster
should be sold, Darden may have underplayed its potential, Starboard has said. "If management were
truly interested in realizing the maximum value for Red Lobster's business and assets, we would expect
management to be publicly emphasizing the value inherent in the business and the promising
turnaround opportunity, rather than focusing on the challenge it faces," Starboard said in a letter to
management in March.

Read MoreDarden CEO and chairman Clarence Otis steps down

Both activists suggested Darden could spin off the entire company's real estate. Without the Red
Lobster property, there is far less opportunity to unlock value through a real estate deal, the activists
have said. Starboard and Barington declined to comment to CNBC Digital.

In a statement, a Darden spokesman said: "The non-public document you reference and all estimates
therein were prepared by Golden Gate Capital and Red Lobster as part of the debt financing efforts in
connection with Golden Gate Capital's acquisition of Red Lobster. To the extent that they reference
Red Lobster executives, those executives were working on behalf of Golden Gate Capital.

"Indeed, the acquisition agreement with Golden Gate Capital specifically provides that Red Lobster's
management team, working with Golden Gate, would support the efforts to raise debt financing," a
spokesman continued. "Any representation of this document as a Darden document or as Darden
projections is factually inaccurate and misleading." Golden Gate Capital declined to comment.

Some corporate governance experts say Darden shareholders should have seen the information in the
memorandum. "Telling the shareholders one thing because they want them to sign off on a sale and
telling debt investors another thing is problematic," said Jill Fisch, a law professor specializing in
corporate governance at the University of Pennsylvania. "If I were a shareholder I'd want to have this
information."

Moreover, Fisch said there's no real distinction between Red Lobster management and Darden
management as long they were part of the same company.

The memorandum goes into a detailed analysis of factors that can help Red Lobster's business improve,
such as a decline in various input costs, along with a reduction of complimentary meals. "The Red
Lobster management team believes that the identified cost savings are a conservative estimate of true
potential with additional upside above identified opportunities," the memorandum says.

Those benefits lead to a much rosier profit outlook than Darden investors had been told to expect.
Specifically, the memorandum estimates the company's earnings before interest, taxes, depreciation,
and amortization (ebitda) can be $150 million after it addresses some low-hanging fruit. That compares
with an "unadjusted" ebitda level of $125 million for fiscal 2014, which ended in May.

This document is authorised for use only in Executive Education - International

Directors Programme - Cohort 60 - Module 1 at INSEAD - Jun 2023 - Dec 2023 – by Massimo
Massa (Programme Director(s)). Copying, printing or posting is a copyright infringement.
http://www.cnbc.com/id/101928352

The memorandum said Red Lobster can be even more profitable, reaching a target ebitda of $200
million as the company realizes further cost savings.

Darden shareholders, meanwhile, were told that Red Lobster's profit was in decline with no sign of
improvement. In Darden's Aug. 4 presentation, it said Red Lobster "was expected to have less than
$100 million of ebitda as of the transaction close." Darden went on to say that "given deteriorating
trends at Red Lobster and multiple turnaround attempts, the divestiture is projected to be medium and
long-term accretive."

The difference in outlooks is critical because a higher level of ebitda would likely mean a greater
contribution to Darden's profits if Red Lobster had remained part of the company. Similarly, investors
might have hoped for Darden to sell Red Lobster for a higher price if its prospects had become rosy.

Read MoreDarden sells Red Lobster to Golden Gate

The memorandum also raises questions about Darden's disclosure. Listed companies commonly
communicate with select groups of investors, but normally need to make disclosures "promptly" if any
nonpublic information is disclosed, according to a Securities and Exchange Commission rule known as
Regulation FD. The rule applies if selectively-disclosed information is material to a company's
financial condition. A spokesman for the SEC declined to comment to CNBC Digital about Darden.

The memorandum contains a letter dated June 25 from Red Lobster to Deutsche Bank, the deal
underwriter, stating that the information it provided is "either (i) publicly available or (ii) not material
(although it may be sensitive and proprietary)." Deutsche Bank declined to comment.

Darden wasn't required to seek shareholder approval for the Red Lobster sale. Starboard, which owns
8.8 percent of Darden shares, attempted to put the matter to shareholder vote and told the company it
had secured enough shareholder support to call a meeting. But Darden announced its deal to sell Red
Lobster before any such meeting took place.

The activists have criticized the Red Lobster sale since the deal. In May, Barington said the deal
"severely undervalues Red Lobster" and "does not retain future upside for shareholders." Starboard
said on July 15 that the company "decided unilaterally to sell Red Lobster at a fire sale price."

Some Wall Street analysts have also criticized Darden for its move. "Management's decision to ignore
shareholder concerns and go forth with an undervalued sale of Red Lobster as opposed to waiting for
operations to improve or entertain monetization without fully disposing the brand during a depressed
earnings period will likely result in meaningful changes at the board level and among senior
management," Buckingham Research analyst Matthew DiFrisco wrote in a May investor note.

Darden announced that CEO Clarence Otis would step down from the company on July 28, the day the
Red Lobster deal closed. Even so, Darden shares have remained weak, falling 13 percent since the start
of 2014 while the S&P 500 has gained 7 percent.

The activists, meanwhile, have pushed for further change. Starboard has nominated 12 directors,
enough to replace Darden's entire board, for a vote at the annual shareholder meeting on Sept. 30.
Barington has said it supports all of Starboard's nominees.

—By CNBC.com's John Jannarone

This document is authorised for use only in Executive Education - International

Directors Programme - Cohort 60 - Module 1 at INSEAD - Jun 2023 - Dec 2023 – by Massimo
Massa (Programme Director(s)). Copying, printing or posting is a copyright infringement.