Conflict of Interest

So what's the most dramatic piece of this puzzle in which I've been trying to interest you this week?

Why should we pay attention especially to the proxy fight over Grubb & Ellis at today's shareholders meeting?

It features a dandy conflict-of-interest charge.

The playbook sometimes calls for the incumbent management to say, "shareholders, please don't vote for the challengers. They, or some of them, or the leader of the gang, owns interests in other companies which have interests that compete with yours and our. If they take over this company, they'll end up running it for the benefit of those competing interests, at your expense."

The charge in this case, as made by the incumbents, is that "Anthony Thompson is attempting to take control of Grubb & Ellis and install Stuart Tanz as CEO with the intention to cause Grubb & Ellis to buy or absorb Thompson's newly formed company, Thompson National Properties, a direct competitor."

Thompson's answer is that the two companies aren't direct competitors. They're both real-estate related but that phrase covers a wide range of actual operations.

As Thompson describes TNP, it is more a customer of G&E than a competitor, having purchased 3 buildings from them in 2008.

What about the claim that Thompson wants G&E to purchase TNP?

Thompson and his slate scoff at this, too. Even if they win the election today, they'll have at most three seats out of the eight, so they couldn't push through such a decision by themselves.

Also, Thompson owns a 14% stake in G&E. So, he asks, why would he press actions that would undermine the value of that stake?

One could speculate about responses to such points. After all:

(1) customers are sometimes also the competitors of their suppliers.
(2) even a consistent customer-supplier relationship could generate conflicts of interest. Conceivably, TNP could want to buy G&E to so arrange things that it could thereafter pay lower commissions when it buys buildings [just a hypothetical off the top of my head folks -- in other words, I just made it up!] but
(3) Thompson could for all I know be angling to have G&E buy TNP at an inflated price regardless of what their relationship to each other has lately been -- and could reckon that his gain on one side of that deal would exceed his loss at the other, and
(4) A three vote block on an eight member board is a formidable one, especially if the other five aren't a cohesive block themselves.

And so forth. Round and round the mulberry bush we could go.

Let's wait and see who wins this one.

Lubys, continued

On Friday, both the incumbent board and the dissident slate in the Lubys proxy contest filed their "definitive proxy soliciting materials" with the SEC.

(By the way, the company itself uses the apostrophe, re-positions it, or drops it according to context, so Lubys, Lubys', and Luby's are each correct.)

As I mentioned yesterday, the Pappas brothers run Lubys. I wasn't so clear yesterday about the fact that the Pappas' also run privately owned restaurant chains under variants of the family name: Pappadeaux, Pappasito's, Pappas Bros. Steakhouse, Pappas Seafood House and Pappas Bar-BQ.

The dissidents argue that this creates a conflict. The interests of the shareholders of Lubys might well be served by competitive actions vis-a-vis those privately owned chains that the Pappas' themselves are unlikely to undertake.

Indeed, the Pappas own the land on which some of the Lubys restaurants sit, and within this landlord-tenant relationship there is further room for dealings at the expense of the tenant's shareholders.

The incumbent board replies that the Pappas' are among the largest sharehholders in Lubys, so their interests are aligned with those of the other shareholders, that they are only two members of a ten-member board, which has "worked diligently to supervise the efforts of Management in turning the company around," and that in fact the Pappas' have turned the company around.

"Luby's today has the financial strength to execute on its strategic growth plan...."

Further, the incumbents take the position that the "conflict of interest" shoe is on the other foot. I'll write tomorrow about Luby's case against Ramius.