Exec’s Remarks Stir Farmer Bros. Battle

Statements made by the chairman of Farmer Bros. Co. in which he admitted not knowing certain details about important company matters could bolster efforts by dissident shareholders who are seeking changes in how the Torrance-based firm is managed.

In a deposition, 87-year-old Roy F. Farmer said he didn’t remember a key shareholders’ vote at the company’s last annual meeting, was unable to answer specific questions about how Farmer Bros.’ $300-million cash stockpile was invested and also acknowledged that he didn’t know key facts about the firm’s controversial Employee Stock Option Plan.

Farmer, who earned a salary of $850,000 last year, served as chief executive of the coffee company for more than 50 years until March, when he stepped down from the post but retained his position as chairman of the board. His son, Roy E. Farmer, is the current CEO.

The deposition was filed Nov. 14 as part of a bitter family fight and lawsuit brought by the children of Roy F. Farmer’s sister, Catherine Crowe. They are suing to replace their uncle as head of a trust that controls 12.5% of the publicly traded company founded by their grandfather in 1912. The Crowes claim that he has managed the trust in a way that is “hostile” to their interests.

A hearing in the suit is scheduled for Dec. 24 in Los Angeles County Superior Court.

The outcome of the lawsuit could affect the future of company operations. For the last year, a group of large stakeholders has been pushing Farmer Bros. to add more independent directors, provide more financial information, talk to Wall Street analysts and change its bylaws to loosen the grip that Farmer and his management team have had on the company.

As long as Farmer has control of the Crowe family trust, Farmer Bros. management has a clear voting majority of company shares. Without the trust, the stake would drop from about 53% to about 40%.

Such a scenario would boost the voting control of an informal alliance of dissident shareholders, which includes the Crowes, to 33% from about 20%. The shift in balance would give them a shot at blocking an effort by Farmer and the company’s board to reincorporate the business in Delaware, a move that the company has said in regulatory filings would short-circuit two shareholder proposals dealing with the indemnification and election of directors. Farmer Bros. shareholders are scheduled to vote on the proposals Jan. 5.

The battle between family members and large stakeholders and management comes at a time when Farmer Bros., which has a $600-million market value, is seeing its business supplying coffee to restaurants and offices erode. This month, the company said its quarterly profit fell for the eighth consecutive period.

In the deposition, Farmer claimed to be largely unaware of any shareholder dissatisfaction with the way the company has been managed. Asked specifically by Crowe family attorney Adam Streisand whether he knew whether Franklin Mutual Advisors, a mutual fund that owns 9.6% of the company, had voiced criticism, Farmer said: “No. They shouldn’t be dissatisfied.”

Yet, in Securities and Exchange Commission filings dating back at least three years, the mutual fund cited a litany of complaints about Farmer and his management team.

In one filing made in November 2000, Franklin said that “management has consistently ignored the interests of its public shareholders.” Franklin also claimed that Farmer Bros. was managed as a “closely held family operation” rather than a public company and charged that the board had agreed to make “exorbitant payments” to Farmer family members. Franklin also said in its filing that it intended to vote its shares against the reelection of the board of directors.

“It is unfathomable that he would not know of our complaints,” said Franklin Vice President Bradley Takahashi. In fact, several years back, Takahashi approached Farmer at an annual meeting and asked for a tour of the coffee-roasting plant. According to Takahashi, Farmer replied: “No tours for unhappy shareholders.”

Moreover, Franklin presented a proposal at the annual meeting last year -- when Farmer still was chief executive of the company -- asking shareholders to force the business to comply with the Investment Company Act of 1940, which has stringent financial disclosure rules. The board campaigned against the proposal, which was ultimately defeated.

But when questioned about the Franklin proposal, Farmer said in the deposition: “I don’t remember voting on that proposal....I don’t think it came up for a vote.”

In response to questions from The Times, the company issued a statement saying: “As the non-CEO chairman, Mr. Farmer consults weekly with the CEO on the major issues affecting operations, leaving operational details to the executives and attorneys.”

Although the deposition was filed with the court, it has not been signed, and Farmer still has several weeks in which he can make changes to his statements in the transcript, an attorney familiar with the case said.

The company’s outside public relations firm, Abernathy MacGregor Group, did not make Farmer available to comment. But Abernathy executive Jim Lucas noted that in several sections of the deposition, Farmer displayed a keen understanding of coffee pricing and other business details down to specific acquisitions of small companies made decades ago.

In a letter to The Times, Lucas said the format of the deposition was “inherently biased” and its transcript “shows a highly contentious deposition that probes complex legal issues and facts involving family trusts.”

At another point in the 248-page deposition, Crowe attorney Streisand asked Farmer a series of questions about the company’s Employee Stock Ownership Plan. Farmer answered: “I’m not too familiar with the ESOP program. That’s handled by other members of the firm.”

In his letter, Lucas said: “This is in fact a technically correct answer: He is not a lawyer nor did he draft the legal documents that created and govern the ESOP.”

Farmer Bros.’ ESOP is a source of contention between management and dissident shareholders. Management believes the plan, which distributes stock to its workers, provides an incentive for employees to be more productive. Disgruntled shareholders claim it is a tool used by the board and management to increase their voting control. Using loans from the company, the ESOP has acquired about 9% of Farmer Bros.

Farmer’s critics have seized on his responses in the deposition as evidence that he should be ousted.

“His statements are admissions that he has not performed his fiduciary duties and raise questions about whether the other directors should remove him as chairman and a director,” said Gary Lutin, an investment banker who is managing a Franklin-sponsored Internet forum for shareholders.

The chairman of a publicly traded corporation should be more conversant about his firm’s operations and governance, said Stephen M. Bainbridge, a UCLA securities law professor. Bainbridge said that in the landmark 1981 case of Francis vs. United Jersey Bank, the appellate court determined that “the sentinel asleep at his post contributes nothing to the enterprise he is charged to protect.”

But whether shareholders would have some basis for a lawsuit against him for breach of fiduciary responsibility is another question.

“It is not obvious how his not knowing these things has hurt the company,” Bainbridge said.