Carl's Jr. Proxy Fight Would Be Bitter Affair : Corporate control: The founder's fight to regain helm of the company is certain to split loyalties.


No matter which side wins a threatened power struggle at Carl Karcher Enterprises, there will certainly be casualties.

That's because a messy turf battle for control of the Carl's Jr. restaurant chain would force the Anaheim-based company's shareholders, managers and employees to take sides in a potentially bitter feud.

Chairman Carl N. Karcher's move to regain control comes at an inopportune time: The company is readying new marketing strategies designed to boost revenue hurt by fierce competition and the stalled California economy.

Company President Donald E. Doyle's damage control plan includes a plea that employees "keep selling hamburgers" despite the increasingly public feud. But Karcher, the 76-year-old founder who still reports to headquarters for work, felt strongly enough about the challenge to take his case directly to employees in a lengthy memo.

The memo was an early indication of how divisive a proxy fight would be. There will be additional confrontations, observers suggest, if Karcher starts to solicit proxies: the right to vote shares held by other stockholders.

Already some shareholders are grumbling that a potentially expensive proxy fight is not in the company's best interest.

"If they can't settle it amicably, then remove him from his office and responsibility," said Morton Simpson, who directs investments for New York-based Bellmore Asset Management, which represents clients who hold 65,000 shares of company stock. "The chairman is elected and nominated by the board and the board members could vote to remove him."

At first blush, the Karcher bid to regain control of the company he founded 52 years ago would appear to be a sure thing.

Karcher holds 6.2 million, or 34%, of Carl Karcher Enterprises' outstanding shares. Family members are believed to control as many as a million additional shares. And, if a proxy fight were to begin, the charismatic businessman and civic leader would be free to contact hundreds of investors whom he counts as friends.

Karcher will not speculate directly about the likely outcome of a proxy fight, which he originally threatened in a Sept. 1 letter to the board. But Andrew F. Puzder, Karcher's personal attorney, maintains that his client has a strong lead over management: "Ask yourself how many shares Carl controls. . . . Then ask yourself how many shares management controls."

Puzder said that company bylaws would give Karcher a proxy victory if he secured a simple majority of shares represented in person or by proxy at a special shareholders meeting. The fewer shares voted, the stronger Karcher's position, Puzder said.

Company executives, however, insist that Karcher faces a much tougher challenge.

"Our advisers indicate very clearly that to win you need a majority of all (18 million) shares outstanding," said Loren Pannier, the company's chief financial officer. "That's an important consideration."

Other observers question whether Karcher has the wherewithal to complete his highly publicized attempt to regain control. "The two things Carl doesn't have are time and money," said a former company executive who asked not to be identified. "If he had them, he wouldn't be in this position."

Karcher's personal finances have dramatically eroded in recent months. Like many Southern Californians, he has been buffeted by ill-advised investments and the lackluster real estate market.

The fast-food magnate recently defaulted on $30 million in personal loans, jeopardizing his right to vote nearly 4.5 million shares of stock that he used as collateral to secure the loans. Karcher would retain voting rights to just 11% of the company's shares if Union Bank and Santa Ana-based Commercial Center Bank exercised their right to vote those shares backing the loans.

Karcher is confident, however, that the banks would stay out of the fray, Puzder said.

But if there is a proxy fight, "you can be sure that senior management is going to get their points across to the banks," said John W. Cornwell, an executive with D.F. King & Co., a New York company that specializes in proxy solicitations.

Banks won't be the only target.

Karcher and company management would also court individual investors, who hold about a third of the company's stock; and institutional investors, whose large blocks of stock represent the rest of Carl Karcher Enterprises' shares.

Investment banks, retirement funds, insurance companies and the like, which collectively hold more than 30% of the company's stock, would be the major targets. Though many individual investors ignore proxy fights, institutional shareholders almost always vote their shares, said Anne Hansen, deputy director of the Council of Institutional Investors in Washington.

"Senior management is going to visit those (institutional) decision-makers, not just send them a letter," Cornwell said.

Institutional investors who have contacted the company "are offering very strong support for the strategy we have in place," Pannier said. "They're very encouraging to management and are telling us to keep our focus on the business strategies that we've researched, outlined and implemented."

That new direction includes corporate cost-cutting, including 70 layoffs at corporate headquarters; test-marketing menu items that are designed to sate the demand for better values and changes in restaurant operations made to cut costs and get food on customers' tables more quickly.

Some investors are encouraged by Doyle's strategy.

"Don Doyle has done a great job on operations," said Simpson of Bellmore Asset Management. "He's doing things that should have been done, but weren't done, under Carl's tenure."

The company revealed its stance in a possible proxy campaign earlier this month when it used an SEC filing and a shareholder letter to emphasize its assertion that Karcher stands to reap substantial personal financial gains if he regains control of the company.

Karcher has acknowledged that he wants to use a handful of Carl's Jr. restaurants to test market Mexican-style food products prepared by Anaheim-based GB Foods Inc. But he soundly rejects company claims that he would receive a $6-million loan from GB Foods Chairman William M. Theisen if the deal is completed. Karcher at one point said that he has considered selling $6 million worth of his stock to Theisen.

Karcher wants his company to test market GB Foods' products in a handful of Carl's Jr. restaurants. Karcher argues that the addition would bolster per-store sales, but the majority of the board believes the move would bump up costs and bring little benefit to shareholders.

If the company can prove that Karcher stands to gain personally in this joint-marketing deal, "then he's not going to get much support among the institutionals," Cornwell said. "They're going to take a long, hard look at that."

Institutional investors also are awaiting word of whom Karcher would nominate to replace board members he wants removed.

Karcher's only indication of his proposed board's makeup came early this month when he told the company that he wanted Theisen to join the board as vice chairman even if the test marketing plan doesn't go forward. Theisen founded the Godfather's Pizza chain in 1973 and expanded it to 950 restaurants nationwide before selling it. He now owns more than half of GB Foods' publicly traded shares.

Observers predicted that the company would respond by reminding shareholders that the current seven-member board was hand-picked by Karcher.

Experts disagree on how the two sides would attempt to persuade individual investors.

"In most cases people have had very little experience with a proxy fight," said Ken Janke, president of the Detroit-based National Assn. of Investors Corp., which represents thousands of individuals and dozens of stock-investing clubs. "It's said that most (individuals) are inclined to vote with established management rather than against them."

But shareholders would have two sets of familiar and trusted faces between which to choose: those of Karcher, and the longstanding board of directors that he personally appointed.

Karcher reportedly wants to replace lawyer Daniel W. Holden, a longtime personal friend, Furon Corp. Chairman Emeritus Peter Churm and former Nordstrom executive Elizabeth A. Sanders. Remaining board members include Doyle and former Vons executive Kenneth Olsen. Karcher and his son, Carl L. Karcher, who is also a board member, supported the GB Foods proposal.

Investment analysts said that Karcher's threats are sending mixed signals to the investment community.

Karcher, who earlier this year turned daily management of the company over to Doyle, now seems intent on reversing key parts of the company's competitive strategy, said Doug Christopher, a restaurant industry analyst with Crowell, Weedon & Co., an investment banker in Los Angeles.

"The new management team appears to be implementing a strategy, and here comes Carl, giving them headaches," Christopher said. "If Carl were to take over the operation and force everyone else out, investors would be advised to stay away."

But Puzder maintains that Karcher is acting in the best interest of all shareholders.

Karcher is "moving forward on his own internal schedule" and won't be rushed into a fight, Puzder said. Karcher has hired a New York-based law firm that specializes in proxy fights and is lining up a board slate to challenge the current board of directors.

Explaining Proxy Battles

* What: Proxy battles are waged to gain control of companies by replacing all or part of a company's board of directors. They are governed by strict Securities and Exchange Commission regulations.

* Who: Only shareholders can initiate them. In this case, Carl N. Karcher is acting as both chairman of the board and as a 34% shareholder.

* Where: They usually take place during a company's annual meeting, but larger shareholders have the right to call a special meeting.

* How: Both sides solicit "proxies" or the right to vote on behalf of shareholders.

* When: Prior to distributing proxy cards, both sides will court shareholders through mailings, newspaper ads and personal visits.

Source: Stradling, Yocca, Carlson & Rauth; Researched by JANICE L. JONES / Los Angeles Times

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