Ramius Strikes Back

The battle for the future of Luby’s Inc. intensified Monday after activist hedge fund managers Ramius Capital Group LLC sent a missive to the cafeteria operator's investors pointing out their concerns about the Houston company’s governance.
The activist investor group launched a proxy contest on Oct. 17 to nominate four director candidates to Luby’s 10-person board at the company’s annual meeting scheduled for Jan. 15.
Luby’s, an operator of 130 cafeteria-style restaurants in Texas, on Oct. 31 launched its own campaign, hoping to maintain control of the company's destiny, and the support of its institutional investor base.
The activists on Monday took issue with the company’s granting Christopher Pappas, Luby’s president, and Harris Pappas, his brother, an exemption from Luby’s poison pill, allowing them to own up to 28% of the company’s shares, instead of the 15% allowed for each other shareholder.
While the Pappas brothers argue that increasing their personal financial stake in the company demonstrates their commitment to making sure the company’s share price improves, Ramius is concerned that the greater ownership will mean more votes for management-backed directors (and less for them) at the contentious meeting.
According to Luby’s Oct. 31 proxy statement, the two Pappas brothers invested an additional $11.2 million in Luby’s as a result of exercising stock options granted in 2001, increasing their ownership stake to 24% from 17% of shares outstanding. “No one has more at stake in Luby’s than Chris and Harris Pappas, and your board is extremely pleased with the company’s progress under their leadership and with their continued commitment to Luby’s,” the filing reported. Luby’s also plans to invest more in existing restaurants, expand a culinary contract service business and build between 45 and 50 new stores, based on a new prototype, over the next five years.
Ramius also raised a red flag at Luby’s classified board structure, prohibiting dissident shareholders for taking control of the board. “For six out of the past seven years, Luby’s proxy has included a non-binding shareholder proposal to declassify the Board. Each year, management recommended against the proposal. For five out of those six years the shareholders voted in favor of declassifying the Board. In each instance, the Board chose to ignore the shareholders’ choice and followed management’s recommendation instead,” the Ramius release wrote. — Ron Orol