Ides Capital Management, a New York-based activist investment adviser and shareholder of Monro Inc., sent a letter to the company’s board of directors on July 14 stating that Monro’s independent directors should create a formal strategic committee to revise the company’s governance structure or tender their resignations.
At the company’s 2021 annual shareholders meeting, 88% of Monro’s shareholders voted in favor of an Ides proposal that the board adopt a recapitalization plan for all outstanding stock to have one vote per share in each voting situation and to eliminate any veto power held by one class of stock over the voting power of another class of stock. However, the holders of Monro’s Class C preferred stock did not vote in favor of the proposal, so it could not be put into effect.
According to Monro, independent members of the board of directors and the company’s management team engaged with shareholders who collectively owned in excess of 50% of Monro’s outstanding shares of common stock to discuss the vote and solicit their views on the proposal to eliminate the Class C preferred stock control rights.
“The board has carefully considered the results of the shareholder proposal and continues to analyze both the costs and benefits of recapitalizing the company’s dual-class stock,” Monro wrote in a Schedule 14A filing with the SEC dated July 7. “The company does not have the right or power to unilaterally ‘recapitalize’ its equity capital structure to eliminate Class C preferred stock whether by conversion, buyback, redemption or amendment of the company’s restated certificate of incorporation, but rather can only do so with the approval of the holders of Class C preferred stock.
“Consequently, in weighing the costs and benefits of any such recapitalization, the board has considered a number of factors, including the likely significant consideration required to be paid to obtain the requisite consent of the holders of the Class C preferred stock as well as the other risks that such a recapitalization and the attendant changes in governance could pose to the company. Our board of directors will continue to monitor and consider shareholder concerns regarding our equity capital structure. At this time, the board believes that it is in the best interests of all of its shareholders that the company focus its financial and other resources in pursuit of its plans to maximize long-term shareholder value for all shareholders without the financial, legal and other risks that would result from a recapitalization.”
In its July 14 letter to the Monro board, Ides called the company’s governance structure “retrograde” and expressed surprise that the board would disregard shareholders’ interests.
Regarding not unwinding Monro’s dual-class structure, Ides wrote that: “we can infer from this statement that the Class C preferred holder has potentially sought an inordinate benefit for his shares notwithstanding Monro’s persistent underperformance.”
In its letter, Ides asserted that the scenario in no way relieves Monro’s other directors of their fiduciary duties to the company and its shareholders. “The board’s failure to act is par for the course for what we view to be a genuine country club approach to governance and casts the recent shareholder outreach into the more appropriate light of a smoke and mirrors exercise to create a bare minimum facade of accountability to the 98% economic owners of Monro who merely hold common shares,” Ides wrote.
“We profoundly disagree that the board, in the face of overwhelming shareholder support for the elimination of Monro’s corporate golden share, has no options at its disposal. On the contrary, Ides strongly believes that the board does indeed have alternatives that it must consider without delay, including the following two courses of action,” Ides wrote. “First, the board should immediately create a formal strategic review committee. Ides is aware that parties have attempted to approach the company to express their interest, only to be rebuked, told the company is not for sale and sent on their way. Given the long-term underperformance at Monro, we fail to understand how the board is comfortable shunning what are almost certainly better alternatives for common shareholders.
“Critically, we note that Monro trades at an approximate 30% discount to its public peers and trades at a commensurate if not even more meaningful discount to premiums paid by buyers of similar businesses. If, through the company’s recent proxy statement, the board is somehow indicating that the Class C preferred holder has demanded a control premium so onerous as to significantly collapse these valuation spreads, then the board has had an obligation to report this material fact to its investors and the market. Its failure to do so thus far, along with its failure to consider strategic alternatives and approaches, constitutes a potentially patent disregard of both the board’s fiduciary obligations to its common shareholders as well its obligations under the SEC’s disclosure regime.”
Ides also wrote: “Second, if the board feels it is not only unable to undertake the recapitalization shareholders clearly want but is equally unprepared to commence a strategic process due to the aforementioned obstinance, Monro’s independent directors could immediately submit notices of resignation in light of their inability to act as effective agents for common shareholders. This drastic step would be, as we see it, the only remaining course of action available to Monro directors who wish to retain any semblance of credibility as reliable shareholder representatives and corporate fiduciaries.”
Additionally, Ides suggested in its letter that shareholders send “a strong message” to the board by withholding their support for each one of the directors up for election at the 2022 annual meeting scheduled for Aug 16.
Ides and its affiliates have been Monro shareholders since 2017. Ides has been vocal in the past. In late 2020, Ides demanded that Monro make a series of changes to improve the company’s performance, including diversifying its workforce and board room. — Marc Vincent