Shareholder Activists At Friendly Ice Cream Akshay Goyal (A) Group 6

Tarun Bansal Puneet Khanna Ashutosh Pandey Gaurav Gumber Jitesh Agarwal

Question 1

Case Overview

Friendly Ice Cream The First Outlet Founded by Prestley Blake and Curtis Blake in

1935 in Springfield, Massachusetts Started with double dip cones and entered the ice cream business Added a collection of ice cream desserts, breakfast, lunch and dinner items over time Became a chain of full-service, mid-priced casual restaurants

The Chain Grows The company grew from 2 restaurants in 1940 to

10 by 1950 and 50 by 1960 More than 500 restaurants by 1970 : 316 self owned and 205 franchises Sold through over 4,000 grocery stores Manufacturing facility in Massachusetts producing ice creams, syrups and toppings Revenues stood at $531 million in 2006, 75% coming from its own restaurants

The Baby Is Sold! First public issue comes out in 1968; The Blake

brothers retain 40% of the company Blake sells the company to Hershey Foods Corporation in 1979 for $164 million, retains no ownership Hershey sells Friendly to Donald Smith in 1988 for $375 million amid deteriorating performance issues Friendly finally sold to public in 1997, Smith retaining 10% of the company

Question 2Why is Blake purchasing stock in his old firm? What is he trying to accomplish?

The Old Duffer Share price fell to $5 from $26 in just 4 months by

June 1998 By late 2000s, it fell to less than $2 Closure of 150 restaurants to cover debt Blake suspected Smith of using the company to support his own company, TRC, and his personal expenses Buys 12% stake in the company at $2 per share Wanted to save the company from bankruptcy and exercise control over the management Concerned for the 13,000 employees; planned to sell the stock to them at a later time Did not like the rampant misuse of company funds and the idea of closing down restaurants to cover debt

Question 3Are the related party transactions questioned by Blake material enough to warrant a legal battle?

Use of leased company Jet by Mr. Smith. No reimbursement by Mr. Smith for the private

Yes these related party transactions questioned by Blake seem sufficient to warrant a legal battle.

use of company assets. Maintaining an office in Illinois, where Friendly have very little operation. Appointing only those people for investigation who were close to Mr. Smith. Using his position Mr. Smith used Friendlys financial assets to finance operations of TRC and Perkins. Not giving proper time to Friendly the as an CEO.

Question 4Which related party transaction is most significant according to you and why?

There are two transactions which I feel are very important. 1. Use of company Jet for private purposes by Mr. Smith for which he was not paying back to company. He himself said there is no need of this Jet.2.

He was using Friendlys assets for TRC and Perkins. In these companies Mr. Smith had major shareholding. IT seems as Mr. Smith was working as CEO of Friendly for financial gains only.

Question 5What other mechanisms were available to Blake to express his dissatisfaction with the CEO and the board's conduct? Could he have done anything differently?

What did Blake do? Purchase of 12% stake in Friendlys Questioned the related party transactions with TRC,

Perkins and TICC and demanded investigation Filing of a suit1 Questioned Smiths and other directors integrity towards Friendly and the shareholders Cost -Blake: 1million $

Company 2 million $

1-with regard to jet usage expenses, Illinois office expense

What he could also do? Publicity campaigns Create an internet portal to create shareholder

awareness (as done by Biglari) Ask for the restructure of the Board (preferably majority stake holders) This would ensure alignment of the objectives of the shareholders and the company. Negotiation with the board to dissolve the 15% poison pill and put it to shareholders vote Gain confidence of other stakeholders and the Douglas family; partner and jointly voice concerns

Question 6How do you assess the board's responses to Blake's actions over time? Could the board and the CEO have done something differently to accommodate Blake's requests?

Ignorant The chairman was Smith and all the other directors trusted him blindly. During the trial, the directors stated/ pretended to hold no information regarding the related party transactions. Reliance on Smith for the decisions without crosschecking for the material facts. Manipulative: In response to Blakes request for investigation of the aircraft leasing expenses, the board tried to escape by creating a special committee under Aaron B. Parker (special counsel to TRC) Termination of aircraft sharing agreement. SLCs enquiry into RPTs lacked substanace2

2. Exhibit 8: Courts conclusions with Blakes claims and SLC report

Recommendations: the CEO and Board could have paid heed to Blakes requests instead of relying on Smith An external firm could be appointed to assess the company for its related party transactions. Checked into the documents personally and discussed in the annual meeting to retain shareholders confidence.( and Blake) Publish in the newspaper daily and the internet portal, the report of the external auditing firm to retain transparency and trust.

Question 7Was there a problem with the independence of the board of directors at Friendly? Do you agree with the Court's conclusions in May 2006?

As per revised clause 49 of the Listing Agreement the definition of the term independent directors would mean a non-executive director who:1.

Does not have a pecuniary relationship with the company, its promoters, senior management or affiliate companies.

2.3.

Is not related to promoters or the senior management.Has not been an executive with the company in the immediately three preceding financial years.

4.

Is not a partner or executive of the auditors/lawyers/consultants of the company for the last three years.Is not a supplier, service provider or customer of the company.

5.

6.

Does not hold 2 per cent or more of the shares of the company.

Yes there was a problem with the independence of BoD at Friendly. Yes we completely agree we the Courts decision given in May, 2006.

Question 8Why didn't other shareholders emerge till 2006? Do you think Blake's actions played a role in Biglari's decisions to invest in Friendly?

Huge Debt Closing & Selling restaurants in order to pay

down the debt. Stock price below 2 dollars per share

Huge expenses on transactions between Friendly

and TRC and Perkins. Very little confidence in Friendlys BoD

Yes Blakes actions played a major role in Biglaris decision to invest in Friendly.

Question 9How should Friendly's board deal with Biglari?

Friendly already has several poison pills to make any hostile takeover difficult. But the problem of friendly was not the Briglari and his takeover; it is its board members. The company was already passing through a lawsuit and was underperforming. Briglaris intentions were only towards favor of the company. So instead of trying to sideline him, board must give him the seats he was asking for and together all of them should work towards the improvement of the Friendly.