Games People Play

OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, will tomorrow hold its shareholder vote with respect to the $3.2 billion offer to be acquired by a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC.

This buy-out has been problematical from the start.  OSI's founders, CEO, CFO, COO and Chief Legal Officer are all involved in the buy-out and at times have acted to influence the process.  In addition, the buy-out has been criticized for its low premium and OSI has postponed its meeting three times in order to round up enough shareholder support.  With the last post-ponement, OSI announced that the buy-out group had agreed to increase the consideration offered to $41.15 up from $40.00 per share. 

In connection with the announcement, OSI also agreed with the buy-out group to lower the threshold vote required to approve the merger.  The original vote per the proxy statement required approval by:

a majority of the outstanding shares of our common stock entitled to vote at the special meeting vote for the adoption of the Merger Agreement without consideration as to the vote of any shares held by the OSI Investors.

The revised vote per the merger agreement amendment now requires approval by a majority of the outstanding shares, the required threshold under Delaware law and:

the affirmative vote of the holders, as of the record date, of a majority of the number of shares of Company Common Stock held by holders that are not Participating Holders, voting together as a single class, to adopt the Agreement and the Merger.

OSI Investors and Participating Holders in the above two clauses are the same group:  the executive officers and founders of OSI who are participating in the buy-out.  Careful readers here will note that the change in language above reduces the required vote for approval of non-participating shareholders from a majority of all outstanding shares to a majority of the minority shares. The St. Petersburg Times reports that this change has the effect of lowering the number of required votes to approve the transaction by 4.4 million (from 37.8-million of the 66.8-million shares not owned by OSI participants to 33.4-million votes plus one).

As noted, Delaware only requires an absolute majority, so the required vote in either case is higher.  OSI is requiring this higher vote due to the requisites of Delaware law which require a majority of the minority of OSI shareholders to insulate the OSI participants and the Board from liability by waiving management's conflict.  So, both votes still preserve this majority of the minority aspect (a smart move given managements conflicted metaling in the buy-out process).  But, the special committee's agreement to lower the vote is a dubious one at best, and though probably acceptable under Delaware law, is further evidence of the problems which can arise with management buy-outs generally and the board process here in particular.