Monro Inc. has entered into an agreement with the holders of its “Class C” convertible preferred stock under which the “Class C” preferred stock would be eliminated, subject to receipt of shareholder approval.
Monro’s board of directors has approved the agreement and will recommend that shareholders approve certain amendments to the company’s certificate of incorporation to effectuate the agreement at the 2023 shareholders meeting, which is expected to take place Aug. 15.
In exchange for agreeing that there would be an automatic conversion of any outstanding shares of “Class C” preferred stock that remain outstanding — by no later than the third anniversary of the 2023 annual meeting — the conversion rate of the “Class C” preferred stock to Monro common stock would be adjusted so that each share of “Class C” preferred stock would convert into 61.275 shares of common stock. This would mark an increase from the current conversion rate of 23.389 shares of common stock for each share of “Class C” preferred stock under Monro’s certificate of incorporation.
The adjusted conversion rate represents a premium of approximately $36.60 million, based on Monro’s closing stock price on May 12 (the date of the agreement).
Assuming all “Class C” preferred stock was converted on the date of the agreement at the adjusted conversion rate, the value of the additional number of shares of common stock that the “Class C” holders would receive represents roughly 2.3% of Monro’s total equity value.
Monro’s board appointed a special committee to evaluate and negotiate a recapitalization of the “Class C” preferred stock, composed of five directors. Following negotiations with the “Class C” holders, the committee — with the support of independent financial and legal advisers — unanimously recommended that the board approve the agreement.
“We welcome the perspectives of Monro shareholders and appreciate the active dialogue we have had with them regarding their desire for the board to pursue options for a recapitalization,” Robert Mellor, chair of the special committee, said in an announcement dated May 18. “We believe this agreement will resolve the complexity presented by the company’s legacy equity capital structure and is in the best interests of the unaffiliated Monro shareholders.
“We are confident this step will make Monro a more attractive investment opportunity, simplify the company’s capital structure and enhance our corporate governance by placing all shareholders on an equal footing.”
As you may recall, Ides Capital Management, a New York-based activist investment adviser and shareholder of Monro, in July 2022 sent a letter to the company’s board of directors demanding that Monro address its “deeply broken corporate governance.”
And, 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.
The recently negotiated agreement implements an automatic conversion by inclusion of a sunset period of roughly three years, after which Monro’s dual-class veto-vote share structure, which has been in place since 1984, would be eliminated. This would occur if the recapitalization is approved by shareholders and the “Class C” holders have not previously converted their shares of “Class C” preferred stock.
At the end of the sunset period, all shares of “Class C” preferred stock that remain outstanding would be automatically converted into shares of Monro common stock at the adjusted conversion rate.
Under the current structure, at least 60% of the shares of “Class C” preferred stock must vote as a separate class or unanimously consent to effect or validate any action taken by the common shareholders. This means that the “Class C” holders could effectively veto any matter approved by Monro’s common shareholders.
During the sunset period, the “Class C” holders would have the right to appoint one member of the board. This designee would be Peter Solomon, a current director, so this right would not expand the size of the board.
The recapitalization is subject to approval by holders of a majority of the outstanding shares of common stock unaffiliated with the “Class C” holders and holders of a majority of the outstanding shares of “Class C” preferred stock. And, under the terms of the agreement, the “Class C” holders have agreed to vote to approve the recapitalization at the annual meeting.
The board also has unanimously approved an amendment to Monro’s certificate of incorporation and will recommend that the company’s shareholders approve the amendment to declassify the board, which is currently divided into two classes, with one class elected each year and each class serving two-year terms.
Under its new structure, the board would consist of only one class of directors, all of whom would serve one-year terms.
“We continue to assess potential actions to improve Monro’s governance, including adding director candidates to the board who complement the skillsets and experience currently represented,” Mellor stated in the announcement.
The amendment to declassify the board is subject to approval by at least two-thirds of the outstanding shares of common stock and at least 60% of the outstanding shares of “Class C” preferred stock. According to Monro, the “Class C” holders are expected to vote to approve the declassification amendment at the annual meeting.
