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No demand futility in Biglari transactions

February 17, 2016

The 7th Circuit Court of Appeals has affirmed a decision that a company did not commit demand futility during three transactions in 2013.

Sardar Biglari, CEO of Biglari Holdings, which owns Steak ‘n Shake and Western Sizzlin’, sold Biglari Capital Corp. in 2010, but bought it back in 2013 at a discounted price. Two shareholders of BCC, Chad Taylor and Edward Donahue, claim this and two other transactions, the sale of The Lion Fund and The Lion Fund II, were entrenchment transactions, designed to cement Biglari’s control of the company and enrich him at the expense of other shareholders.

Members of the company’s entire board approved one transaction, and the other two were approved by the Governance, Compensation and Nominating Committee. The plaintiffs claimed the board members are “Biglari’s puppets,” according to the decision.

A judge in the U.S. District Court for the Southern District of Indiana dismissed the plaintiffs' complaint, finding they had failed to demonstrate demand futility as defined in Indiana law.

In the decision, Circuit Court Judge Richard Posner said none of the company’s board members were in danger of losing their seat, so it was unlikely they approved the transactions for entrenchment.

The plaintiffs also argued the board members were beholden to Biglari, and although Posner said there is a possibility one could be since he was Biglari’s professor, the other four members of the board besides Biglari definitely were not.

Plaintiffs argued one member was about to lose her job and needed the salary from the board, but Posner said that person was still employed, just in another role.
Another member is an investor in the Lion Fund and Lion Fund II, and therefore would not have made the move had it not been in the best interest of those funds.
There is simply not enough evidence and enough connection for the other two board members to have made the moves for their interest either.  

Finally, plaintiffs argued the transactions were so improper from the standpoint of benefiting the shareholders as a whole that the board cannot have acted in the shareholders’ interest.

In one transaction, a licensing agreement, plaintiffs argued Biglari would have received 81 percent of revenue if his likeness was used in marketing and he left the company. However, that was not true because the company did not report all of its earnings.

The other is the sale of BCC to Biglari for only $1.7 million. Estimates had BCC worth $8.8 million, but BCC had already distributed $5.7 million worth of assets to Biglari Holdings. Then, the valuation did not reflect any obligation Biglari Holdings had to pay an incentive bonus, which would be $1.9 million.

The court ultimately found this price was not unfair, and that the plaintiffs did not meet the Indiana standard for demand futility, affirming the district court’s ruling.

The case is Chad Taylor and Edward Donahue v. Sardar Biglari, 15-1828.

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