Street Capitalist: Event Driven Value Investments

On January 29th, Steak N Shake ( SNS ) sent a letter to Sardar Biglari, of the Lion Fund that they would offer him two board seats but also amended shareholder bylaws in order to to increase the number of outstanding shares of common stock required to request a special meeting of shareholders from one-fourth to eighty percent.

The result of such action would be a significant set back in Sardar’s plan to gain control. Here is his response:

Dr. John W. Ryan
Chairman of Nominating/Governance Committee
The Steak n Shake Company
500 Century Building
36 South Pennsylvania Street
Indianapolis, Indiana 46204

Dear Dr. Ryan:

I received your letter of January 31, 2008, which offered my colleague, Philip L. Cooley, and me each a board seat. Unfortunately, in the same letter, you informed us that the board amended the company’s bylaw provisions to effectively remove the option for shareholders to call a special meeting. The bylaw amendment to require the holders of 80% instead of the former 25% of the shares outstanding in effect eliminates a fundamental shareholder right to call a special meeting. This revision provides the board immunity, not accountability, and reveals a culture to which we cannot subscribe.

We accept your offer of two board seats provided that the board restores the shareholders’ prerogative to call a special meeting when the votes from 25% of the shares outstanding are cast. Our acceptance of board seats would also require that the board adopt an additional provision that future revisions to this bylaw require shareholder approval. We have made a promise to Steak n Shake shareholders to protect their interests, a promise that we intend to keep. You, too, should think about your fiduciary duty and reputation.

Needless to say, as a byproduct of limitations on shareholder rights and privileges, the costs of a proxy fight and potential litigation pale in comparison to a decrease in the value of everyone’s shares. Curtailing an owner’s power is exactly the kind of behavior we do not approve of. Moreover, shareholders own the company and should be able to vote anyone on or off the board.

I trust that you as Chairman of the Steak n Shake Nominating/Corporate Governance Committee will make the right decision and fulfill your duty and obligation as a board member of a publicly traded company.

Sincerely,

Sardar Biglari

I’m quite glad that Biglari is making the demand for the bylaws to be changed back, it would be significantly more difficult for him to affect the kind of change he needs in order to create and unlock value at Steak N Shake if he is unable to gain more control.

So far though, it seems as if management is at least somewhat receptive to him seeing as they’ve already offered him a bit of an olive branch, but they definitely need to do more.