With the stroke of a pen on April 30, Gov. Jennifer Granholm gave Fremont MI InsuraCorp. powerful protection against a potential hostile takeover by Steak ’n Shake. But that doesn’t mean the publicly held insurance company in Fremont has heard the last of Steak ’n Shake.
The same day Granholm signed the new law in San Antonio, Texas, Biglari Holdings (Steak ’n Shake’s new corporate name) issued a press release, threatening legal action and blasting the Fremont company for diluting the rights of shareholders and “spending shareholders’ money to lobby the Michigan legislature to pass a law, Senate Bill 1174, that benefits top management and its directors.”
The new law, which took effect May 1 and lasts only until May 1, 2012, requires a vote of at least 66.67 percent of shareholders in Fremont MI InsuraCorp, the parent company of Fremont Insurance, to overrule its board of directors if they are blocking a hostile takeover attempt. It previously required a simple majority. The new law also requires a two-thirds majority of shareholders to elect two or more members of the board. Biglari Holdings says that new requirement would make it “almost impossible” for shareholders “to elect board members not supported by a majority of Fremont’s existing board of directors.”
Biglari Holdings owns almost 10 percent of Fremont MI InsuraCorp stock. Back in December, Sardar Biglari, chairman of Steak ’n Shake, sent a letter to the directors of the Fremont company expressing a desire to buy all other shares of stock at $24.50 a share. He asked that Fremont waive its anti-takeover provisions and said Steak ’n Shake wanted “all members of the management team, other than the CEO, to remain in place.”
On Dec. 23, Fremont MI InsuraCorp. CEO Richard Dunning issued a press release, rejecting the “unsolicited proposal” from Steak ’n Shake, explaining that “this hostile takeover attempt is not in the best interest of Fremont, our shareholders, our policyholders or the Fremont community.”
The Legislature sprang into action in January, after word got around that people in West Michigan feared Biglari would move the insurance company and its jobs out of state. Steak ’n Shake was headquartered at that time in Indianapolis. Along with the recent name change was a move to San Antonio.
The law that was passed in April was unusual in that it is “really designed for a specific company. The law was so narrowly worded to really protect Fremont Insurance Co.,” said Wayne A. Walkotten, senior vice president of Marsh, Berry & Co., a Grandville consulting firm that serves insurance agencies and keeps tabs on what insurance carriers like Fremont Insurance are doing.
Sen. Gerald Van Woerkom, R-Norton Shores, whose district includes Fremont, sponsored the original bill that is now law.
“You have to give him credit for protecting his constituents, but it does go contrary to what you typically see as giving shareholders rights,” said Walkotten.
Dunning disagrees with Biglari Holdings’ assertion that the law dilutes shareholder rights.
“I don’t really feel that it dilutes shareholder rights at all, because the law is only applicable in a hostile (takeover) attempt, and a hostile attempt occurs when a company is not for sale. Fremont insurance has not been for sale for 134 years, so this was an unsolicited hostile attempt,” said Dunning.
Fremont MI InsuraCorp. went public in 2004.
“We think most investors would agree that the idea of passing legislation that protects the chief executive officer of a single company is simply prejudicial and worse, unethical,” states the Biglari Holdings April 30 press release.
Biglari also stated that its “current intention is to file a derivative action against the directors.” A derivative action is a lawsuit brought by a corporation shareholder against the directors, management, or other shareholders of the corporation for an alleged failure by management. The suing shareholder claims to be acting on behalf of the corporation; if successful and damages are awarded, the money goes to the corporation, not the individual bringing the suit.
“If the Michigan legislature is going to interfere to deprive shareholders of the option to remove directors of public companies domiciled in Michigan whenever their boards are challenged, why would investors allocate capital in a state that deprives them of their rights? When shareholders purchase interest in a company, they do so with the right to change its board; after all, the board’s obligation is to work on behalf of the shareholders,” stated Biglari Holdings.