HomeFinanceOp-ed: In battle with activist Jana Partners, Freshpet unleashes the dogs of...

Op-ed: In battle with activist Jana Partners, Freshpet unleashes the dogs of war – UnlistedNews

In September 2022, Jana Partners invested in Freshpet after the company’s shares dropped approximately 74%. The company really liked the company and its business, but thought it was mismanaged and needed a reconstituted board to institute more focus and management. responsibility. Because Freshpet had a staggered board, one in which a portion of the directors are elected each year, Jana could only nominate four directors to the board last month to replace the four whose terms expired in 2023.

Jana made a lot of good capital allocation and operating points in her turnaround case that only justified adding one or two Jana representatives to the board. However, it’s a big step from adding two new directors to four new directors. Replacing nearly 40% of the board is not something shareholders should do lightly, but it is necessary in situations where poor performance is not just the problem but a symptom of poor governance, and that couldn’t be more of course in Freshpet.

Forget corporate governance violations like a staggered meeting, which itself is a red flag. Freshpet had unique and somewhat unprecedented examples of, at the very least, board failure to hold management accountable and, at worst, serious conflicts.

In 2020, Freshpet President and COO Scott Morris co-founded Hive Brands, a grocery and retail delivery service that focuses on the sustainability and environmental impact of the products offered. Those products include high-quality pet foods and treats in direct competition with Freshpet. I almost hesitate to bring up the “direct competition” point because it implies that this would be fine if Hive weren’t a competitor to Freshpet. Clearly, it wouldn’t be right. Morris’s employment contract states: “During the Period of Employment, the Executive shall devote all his time and efforts to the business of the Company.” While it also states that “The Executive may engage in non-competitive business or charitable activities for reasonable periods of time each month, provided such activities do not interfere with the Executive’s responsibilities under this Employment Agreement”, I do not believe that “activities ” include participation in the launch of Hive, capital increases and management. Furthermore, Hive is a competitor of the company by Freshpet’s own definition. The same employment contract defines a competitor in part as “(i) participating[ing] in the manufacture, sale or distribution of (A) fresh, chilled, frozen or raw pet food; or (B) dry pet food with more than 30% meat content.” But you don’t have to be famed legal scholar Laurence Tribe to figure this out: It’s highly inappropriate for a top executive of one public company to work for another. company. at the same time.

Additionally, many standard employment contracts include an invention assignment provision in which the employee agrees to assign to the company any property or other rights they acquire through their work or services. Morris’ employment contract has no such provision. But this doesn’t appear to be an oversight so much as an omission through negotiation. Section 7 of your employment contract governs non-compete and non-solicitation. Section 8 governs confidentiality, and Section 9 is where you would normally see rights to inventions covered. However, there is no such section 9. Instead, that section is a standard advertising provision. Also, that’s not how it appeared to be in the original draft of the agreement. Section 5(e) of Morris’s employment agreement states: “The confidentiality and obligations of the rights to inventions set forth in Sections 8 and 9 of this Agreement shall survive termination of this Agreement pursuant to this section.” It seems that someone may have missed removing a cross reference in the document.

Ultimately, Morris took a valuable interest in founding Hive at a time when he was serving as president and Freshpet COO and being paid by Freshpet to be “involved in all aspects of the Company’s development and day-to-day operations.” Between 2019 and 2021, Morris received $13.4 million in compensation from Freshpet while founding Hive. If the invention rights clause remained in the agreement, the company would have a very credible claim to its interest in Hive.

To make matters worse, Freshpet’s current VP and former CFO Richard Kassar simultaneously served as Freshpet’s VP and Hive CFO until August 2022. He later took over as Interim Freshpet CFO in September 2022, a position he held until December of that year. Additionally, directors J. David Basto and Olu Beck have served as a formal director and advisor, respectively, at Hive, according to Jana. Coarse resigned from Freshpet’s board of directorsas of May 31, according to a filing with the Securities and Exchange Commission.

This situation appears to run counter to the company’s general ethics policy, which states: “Team members should not engage in outside work or conflicting outside activities that have, or may have, a material effect on the team member’s duties.” equipment for the Company; involves sponsorship or endorsement by the Company; adversely affects the reputation of the Company; or otherwise competes with the Company”.

Jana attempted to address this by talking to Freshpet about improving business governance and adding new directors identified by Jana to the board. The company could have walked away with Jana’s offer to (i) replace two directors chosen by Freshpet with directors from Jana, (ii) address ongoing conflicts and governance issues (including the overlap of certain officers and directors with the Hive competitor); and (iii) allow Jana to provide input and feedback on any potential future board chair. Jana even agreed to defer (ii) above until after Jana’s appointed directors joined the board.

The Freshpet board of directors should have seen this as a godsend. Instead, the board went in the opposite direction and apparently tried to set up roadblocks to a fair election, including speeding up the annual meeting by moving it to July starting that fall. This could be interpreted as an attempt to partially disenfranchise Jana and consolidate the incumbent directors. Jana was forced to spend time and money to file a lawsuit in the Delaware Chancery Court, a move he made on June 1. Less than a week later, Freshpet reverted the governance changes to the way they were before Jana’s involvement, including postponing the annual meeting to a date in October.

These types of tactics by Freshpet accomplish three things: (i) it causes both Jana and the company to spend unnecessary time and money; (ii) creates self-inflicted distractions for management, the kind that companies typically complain about whenever an activist starts a power struggle, and (iii) damages the board’s credibility with other shareholders and Institutional Shareholder Services. . Shakespeare referred to the release of “the dogs of war” as creating a force that, once released, is very difficult to control. By making those ill-advised entrenchment governance changes, Freshpet has done exactly that, even though it has tried to undo it. The damage is already done.

If this were not a tiered board, I think Jana would have a good chance of getting a majority of the board seats given the behavior and performance of the company. It’s only because of Freshpet’s entrenchment device that Jana is restricted to four nominees. If the company can settle for less than that, they should count their lucky stars, agree to the best deal they can get, and start focusing on running Freshpet—and only Freshpet.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. Freshpet is a stake in the fund. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving the ESG practices of portfolio companies.


Sara Marcus
Sara Marcushttps://unlistednews.com
Meet Sara Marcus, our newest addition to the Unlisted News team! Sara is a talented author and cultural critic, whose work has appeared in a variety of publications. Sara's writing style is characterized by its incisiveness and thought-provoking nature, and her insightful commentary on music, politics, and social justice is sure to captivate our readers. We are thrilled to have her join our team and look forward to sharing her work with our readers.


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