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Weekly UpdatesHOSTILE DILLARD'S INC. investors are trying a new approach to get the attention of the retailer's board of directors.
Since May, two derivative lawsuits have been filed that accuse the Little Rock retail chain's directors of mismanagement and breach of fiduciary duty for allowing Dillard's to lag behind other retailers while paying above-average salaries to company executives.
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In a derivative lawsuit, shareholders sue on behalf of the company. If investors win, the board members will be responsible for paying the judgment and the money will go to the company, not the plaintiffs. The plaintiffs, though, benefit because the company will have increased value.
In addition to recovering an unspecified amount of money for Dillard's, shareholder Billy K. Berry, a retired pharmacist from Yell County, wants better oversight on the board--especially on the compensation committee, said one of Berry's attorneys, Joe P. Leniski Jr. of the law firm Branstetter Stranch & Jennings PLLC of Nashville.
It's still unclear how successful Berry will be. Other activist shareholders have tried to change Dillard's with little success. The key hurdle for all frustrated shareholders is the company's two classes of stock, which allows the Dillard family to choose eight of the 12 board of directors.
Even though activist shareholders won four seats on the retailer's board of directors in 2008, it didn't appear to help the company or sooth the shareholders' relationship with Dillard's. Within months of the proxy vote, investor Barington Capital Group of New York, led by James A. Mitarotonda, continued to demand changes at Dillard's and have access to records.
Finally, earlier this year, Barington and another investment firm, the Clinton Group of New York, sold most of their Dillard's stock.
Trendsetting
Derivative lawsuits have been on rise in recent years as a weapon to get publicly traded companies to make changes, said Kevin LaCroix, a partner of OakBridge Insurance Services in Beachwood, Ohio, which deals with issues involving liability of directors and officers.
He said the success of such lawsuits depends on the merits of each case.
Derivative suits usually settle before they reach a jury, said attorney Stephen Crain, a partner with the law firm Bracewell & Giuliani of Houston, who isn't involved in the Dillard's cases.
The cases are successful "to some degree" in recovering money for the company and making changes on the board, Crain said. But they primarily seem to be successful in generating attorneys' fees for plaintiffs' lawyers, he said.
Leniski said the lawsuit wasn't filed so his firm can collect fees.
"We were contacted by a Dillard's shareholder," he said. Berry "has seen the business prospects dwindle over time while simultaneously watching the directors' and some of the executives' salaries and bonuses go up over time."
Shareholder Steven Harben of Georgia filed his derivative lawsuit against Dillard's on May 27 in U.S. District Court in Little Rock. Harben is represented by James Bruce McMath of Little Rock and attorneys from Barroway Topaz Kessler Meltzer Check LLP in Radnor, Pa., but none of those lawyers could be reached for comment.
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No Change
No one factor pushed Berry into filing the derivative lawsuit in Pulaski County Circuit Court on June 10, Leniski said.
"The company has been on a decline for quite some time," Leniski said.
For fiscal 2006, Dillard's sales were $7.6 billion, with net income of $245.6 million. By fiscal 2008, sales had fallen to $6.8 billion, and the company had a net loss of $241 million.
Other shareholders had notice the decline and demanded changes. Activist investor Mitarotonda started the call for changes at Dillard's in 2007.
In June 2007, Mitarotonda asked Chairman and CEO William Dillard II for a meeting to discuss several ways to improve the company, including better merchandising and unlocking the value of Dillard's real estate portfolio.
But Dillard blew him off, even though Mitarotonda's firm and the Clinton Group represented investors who owned more than 5 percent of the outstanding Class A common stock.
Dillard, whose father founded the company in 1938, was in control because the company has two classes of stock. The holders of Class B stock--the Dillard family members--get to choose eight directors. Those eight directors include Dillard and his family: President Alex Dillard, and EVPs Mike Dillard and Drue Matheny. The Dillards have also chosen for the board the company's chief financial officer, James I. Freeman; Warren Stephens, CEO of Stephens Inc. of Little Rock; Peter R. Johnson of San Francisco; and Robert C. Connor of Dallas.
Mitarotonda appeared to make progress in 2008, when he struck a deal to elect four members to the board to avoiding a proxy fight. Those new members included Nick White, president and CEO of White & Associates of Rogers; James A. Haslam III, CEO of Pilot Travel Centers LLC of Knoxville, Tenn.; R. Brad Martin of Memphis, former chairman of Saks Inc., and Frank R. Mori, co-CEO and president of Takihyo Inc. of New York.
The honeymoon was short. Within months, Mitarotonda and George Hall, CEO of the Clinton Group, demanded access to company records relating to the Dillard family and other business relationships with the board.
It is unclear if Mitarotonda and Hall ever received the documents. A spokesman for Barington couldn't be reached for comment, and the company has not commented since revealing in a Securities & Exchange Commission filing that it had sold virtually off of its Dillard's stock by March 31. Dillard's spokeswoman Julie Bull also was unavailable for comment last week.
The hold the Dillard's family has on the board will be an advantage in the plaintiffs' case, Leniski said.
"Now in this situation, it will be our argument that because the Dillard family controls so much of the company that their actions need to be viewed with even more scrutiny," he said.
But winning might not be easy.
"I don't want to say the deck is stacked in favor of the directors, but it kind of is," said Steve Shappell, managing director of Aon Financial Services Group of Chicago, an executive liability broker.
He said judges typically don't scrutinize the business decisions of boards of directors, especially if there are policy and procedures in place. "The courts don't want to be in the business of second-guessing directors and officers who do this for a living and doing the best job they can," Shappell said.
Company issues
A number of the same allegations of mismanagement that Mitarotonda made show up in both derivative lawsuits. Harben, one of the plaintiffs, accused the members of the Dillard family of treating the company as "if it were a private company."
Both lawsuits also target board member Warren Stephens. The lawsuits complain that Dillard's kept a lid on its payment to Stephens Inc. for consultation fees involving Dillard's ownership interest in CDI Contractors LLC of Little Rock. In August, Dillard's bought the half of the construction company that it didn't already own for $9.8 million. A spokesman for Stephens declined to comment on the lawsuits.
The lawsuits also questioned the pay for the executives.
"The average three-year compensation paid to Mr. Dillard is 54 percent above the median pay to CEOs at peer companies, while the average three-year compensation paid to the Company's other executive officers is a staggering 185 percent above the median paid to executive at peer companies," Berry said in the lawsuit.
Berry doesn't want to see any board members replaced, though, Leniski said.
"What we're talking about is director accountability," he said. "The shareholders deserve better disclosure and better information."
Dillard's hasn't filed a response yet in either of the cases.
Derivative Lawsuits On the Rise
WHILE NO AGENCY TRACKS HOW MANY derivate lawsuits are filed each year, several attorneys say this type case is on the rise.
"There's been an explosion of it," said attorney Stephen Crain, a partner with the law firm Bracewell & Giuliani of Houston. "It's a very easy claim to make."
A number of shareholders are fed up with the way corporations are run, said Steve Shappell, managing director of Aon Financial Services Group of Chicago, an executive liability broker.
Previously, angry shareholders would turn to securities class-action lawsuits in an attempt to get companies to make changes.
To bring a securities class-action case now, though, "you must be very specific," Crain said. "Plaintiffs are really required to set out in great detail the factual bases for their allegations."
Derivative lawsuits typically are easier to get to a jury. Still, the law requires the plaintiff first bring the allegations of wrongdoing to the company's board of directors so it can investigate the charges.
Usually what the board will do is appoint a special litigation committee to investigate the allegations to determine if there's a claim, said Kevin LaCroix, a partner of OakBridge Insurance Services in Beachwood, Ohio, which deals with issues involving liability of directors and officers.
"Sometimes it happens that the special litigation committee does conclude that there is a bases for a claim and the company will pursue the claims against the individuals on the company's own behalf rather than through the form of a shareholder derivate suit," LaCroix said.
Still, plaintiffs often skip that step and file the lawsuit, Crain said. "They alleged it would have been futile to give notice," he said.
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