Starboard Value LP recently took an interesting step in its battle to get its slate of directors on the board of Office Depot Inc. On June 13th Starboard Value sued Office Depot for not holding an annual shareholder meeting to elect directors for 13 months. The complaint was filed with the Court of Chancery in Delaware, where Office Depot is incorporated. This follows a move by Starboard Value in April to have shareholders approve its slate through a consent solicitation. In response to Starboards filing of a preliminary consent solicitation with the SEC, Office Depot said in a statement its board “advises shareholders to take no action at this time regarding Starboard's proposed consent solicitation. Office Depot's Board of Directors will carefully consider and evaluate Starboard's letter and filing, and will communicate with shareholders in due course.”
What is driving Starboard to take these somewhat unusual steps? Office Depot plans to merge OfficeMax n an all-stock deal that values OfficeMax at about $1.19 billion. The companies have said the deal, which was announced on Feb. 20, would create a new retailer with $18 billion in sales. Starboard does not challenge the wisdom of the merger but believes that the current board lacks the expertise to run the merged businesses. Starboard wants to replace four members of the 10-person board with “highly experienced” leaders in the retail sector, including among others Home Depot CEO Robert Nardelli.
If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting . . . for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director.
Office Depot’s last annual meeting was held last April. Starboard undoubtedly has standing as a shareholder as it owns approximately 15% of Office Depot. While Section 211(c) is permissive rather than mandatory, Delaware law is clear that there is a strong presumption articulated by the Supreme Court for a prompt annual meeting. It is unlikely that Office Depot will prevail in arguing that it may delay an annual meeting until after the merger is approved as it would like to do. Unless it can prove bad motive on Starboard’s part it is hard to see the Court denying its claim.
What is interesting in all of this is the timing. Why did Starboard file this action now? It already has a consent solicitation request filed with the SEC. If the Delaware Court of Chancery does rule in its favor on action to compel an annual meeting (as seems likely) the Court will most likely give Office Depot sixty days from the date the order compelling the meeting is issued to actually hold the meeting as a “sixty-day time period for the annual meeting is consistent with timeframes this Court previously has imposed in terms of ordering an annual meeting.” Office Depot has announced that it will begin mailing joint proxy statement/prospectus relating to the proposed merger with OfficeMax on or about June 10, 2013 and will hold a special shareholder meeting to vote on the proposal on July 10, 2013. So while Starboard’s actions may succeed in getting a meeting called it will not be in time to allow the board they propose to have any oversight over the planned merger.
It may be that for Starboard this is simply standard operating procedure. Starboard has been an aggressive activist investor this annual meetings season, challenging a number of companies’ boards in proxy contests and in some cases forcing corporate governance changes.
For example, Starboard as the beneficial owner of 10.1 percent of wireless chipset provider DSP Group Inc. nominated three candidates for election to DSP’s board arguing in a letter to DSP shareholders that DSP has suffered a huge decline in shareholder value under the direction of its long-serving board members. Starboard also criticized the incumbent directors’ lack of DSP common share ownership. In response, DSP adopted “a number of actions to place the company at the forefront of corporate governance best practices”.
- the election of a non-executive chairman to the board of directors;
- the adoption of a resolution to declassify the company’s board beginning in 2013; and
- the adoption of a resolution to establish a minimum stock ownership policy for members of the board and the company’s senior management.
Similar changes were made Tessera Technologies Inc, as part of a settlement agreement to settle a proxy contest with Starboard. Under the agreement, two of Tessera’s directors resigned from the board, the company increased the size of the board to 12 and appointed six Starboard nominees. Tessera also replaced its CEO, Richard S. Hill, with an interim CEO from among the Starboard slate.
These actions were resolved prior to court ruling. It will be interesting to see the next development in the Starboard/Office Depot tussle.