Red Lobster Case Summary
On Monday, September 22, 2014, a Darden Restaurant shareholder filed a suit against the Darden board of directors on grounds that the sale of Darden’s Red Lobster division was harmful. The suit was filed in Florida by Teamsters Local 443 Health Services and Insurance Plan of Connecticut. This lawsuit is the second of two lawsuits that that Teamster has brought against Darden, the first was a suit for violating company bylaws. Teamsters alleged that Darden mislead the shareholders when it informed the shareholders and the public that Red Lobster was suffering financial troubles and needed to be sold. While information was being spread about the decline in business for Red Lobster, Red Lobster in June 2014, was seeking $425 million in financing claiming that Red Lobster’s troubles were only temporary and no need to worry. In fact, they claimed that their earnings would increase to 200 million within the year. (Jannarone)
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The law suit stemmed from a long battle between Darden and majority shareholders Barrington Capital and Starboard Value.
Barrington Capital and Starboard Value have been urging Darden to split into two companies, separating the real estate as a third. Instead of accepting the shareholders proposal, Darden decided to sell Red Lobster in order to dodge the more drastic business model change that Barrington and Starboard were suggesting. The board of directors decided to sell because that allowed them to retain their roles at a larger company, whereas, if they were to split the company up, the powers would be split between three different board of directors. According to the CNBC article, “The Board knew at all relevant times that it was selling Red Lobster at an artificially low price to protect the Board member’s
directorships.”
Circling back to the first lawsuit that Teamster brought against Darden, that was in regards to the alteration of the corporate bylaws. The lawsuit was in direct relation to the second lawsuit, as the alteration of the bylaws was to prevent the shareholders from voting on the decision to sell the Red Lobster division. Even though a majority of shareholders wanted to hold a meeting to vote on the matter, Darden disregarded the shareholders and sold Red Lobster before they could meet and vote. Therefore, the sale of Red Lobster was considered “rushed”.
Considering the above details of the case, the issue of whether or not Teamster, or the shareholder, can successfully sue the board of directors of Darden is presented.
Rule
Board of directors are simply stated supposed to act in the best interest of the corporation. The fiduciary duties that board of directors owe to the corporation are: 1) the duty to act within one’s authority and within the power of the corporation, 2) the duty to act diligently and with due care when conducting affairs, and 3) the duty to act with loyalty and good faith for the benefit of the corporation (Barnes, Dworkin, Richards). That duty to act within authority includes acting accordingly to the articles of incorporation, bylaws and statute. If directors act outside their authority, they can be held liable. The duty of due care and diligence includes following the Model Business Corporation Act (MBCA) rule of acting as prudent person would, which includes the board of directors acting in 1) good faith, 2) as an ordinary prudent person would under similar circumstances, and 3) under the belief that they are acting in the best interest of the corporation (Barnes, Dworkin, Richards). Lastly, the board of directors owes a duty of loyalty and good faith by acting in the best interest of the corporation and to not seek to personally profit at the expense of the corporation. (Barnes, Dworkin, Richards).
When board of directors make decisions, there are some decisions that need to be voted on by shareholders, while some decisions can solely be made just by management without consulting with shareholders. Any fundamental change to the corporation needs to be voted on by shareholders, or considered to be given board initiative. Fundamental changes include, amendments of the articles of incorporation, sell of all or a substantial amount of the company’s assets, and voluntary dissolution of the corporation (Barnes, Dworkin, Richards). However, if any of the above mention fundamental changes or other fundamental changes are noted in the bylaws or articles of incorporation not needing approval of the shareholders, this ruling does not apply
The law suit stemmed from a long battle between Darden and majority shareholders Barrington Capital and Starboard Value.
Barrington Capital and Starboard Value have been urging Darden to split into two companies, separating the real estate as a third. Instead of accepting the shareholders proposal, Darden decided to sell Red Lobster in order to dodge the more drastic business model change that Barrington and Starboard were suggesting. The board of directors decided to sell because that allowed them to retain their roles at a larger company, whereas, if they were to split the company up, the powers would be split between three different board of directors. According to the CNBC article, “The Board knew at all relevant times that it was selling Red Lobster at an artificially low price to protect the Board member’s
directorships.”
Circling back to the first lawsuit that Teamster brought against Darden, that was in regards to the alteration of the corporate bylaws. The lawsuit was in direct relation to the second lawsuit, as the alteration of the bylaws was to prevent the shareholders from voting on the decision to sell the Red Lobster division. Even though a majority of shareholders wanted to hold a meeting to vote on the matter, Darden disregarded the shareholders and sold Red Lobster before they could meet and vote. Therefore, the sale of Red Lobster was considered “rushed”.
Considering the above details of the case, the issue of whether or not Teamster, or the shareholder, can successfully sue the board of directors of Darden is presented.
Rule
Board of directors are simply stated supposed to act in the best interest of the corporation. The fiduciary duties that board of directors owe to the corporation are: 1) the duty to act within one’s authority and within the power of the corporation, 2) the duty to act diligently and with due care when conducting affairs, and 3) the duty to act with loyalty and good faith for the benefit of the corporation (Barnes, Dworkin, Richards). That duty to act within authority includes acting accordingly to the articles of incorporation, bylaws and statute. If directors act outside their authority, they can be held liable. The duty of due care and diligence includes following the Model Business Corporation Act (MBCA) rule of acting as prudent person would, which includes the board of directors acting in 1) good faith, 2) as an ordinary prudent person would under similar circumstances, and 3) under the belief that they are acting in the best interest of the corporation (Barnes, Dworkin, Richards). Lastly, the board of directors owes a duty of loyalty and good faith by acting in the best interest of the corporation and to not seek to personally profit at the expense of the corporation. (Barnes, Dworkin, Richards).
When board of directors make decisions, there are some decisions that need to be voted on by shareholders, while some decisions can solely be made just by management without consulting with shareholders. Any fundamental change to the corporation needs to be voted on by shareholders, or considered to be given board initiative. Fundamental changes include, amendments of the articles of incorporation, sell of all or a substantial amount of the company’s assets, and voluntary dissolution of the corporation (Barnes, Dworkin, Richards). However, if any of the above mention fundamental changes or other fundamental changes are noted in the bylaws or articles of incorporation not needing approval of the shareholders, this ruling does not apply