Herschel Segal, the Montreal retailing veteran seeking to force out the board at DavidsTea Inc., insists retail investors remain receptive to his effort after two proxy-advisory firms came out against the takeover plan.
In separate reports over the weekend, Glass Lewis and Institutional Shareholder Services (ISS) both recommended investors vote to elect management’s incumbent slate of six directors and reject the dissident’s proposal. Mr. Segal, 87, appeared undeterred by the development and dismissed the reports as inherently biased.
“My fellow DavidsTea shareholders, and not proxy advisory firms, will choose the new board,” Mr. Segal said in an e-mailed statement on Monday. “After speaking with many individual shareholders, I am confident that they share my vision for DavidsTea and will support our slate. The choice is simple: Their slate wants to sell it and we want to fix it.”
Investors will decide the future of DavidsTea, a leading retail brand that has fallen on tough times in recent years, at its annual meeting June 14. Micro-cap companies such as Davids dominated proxy contests in the country last year as dissidents won most battles, ending a three-year winning streak for management in these fights, according to data from law firm Fasken.
The fight pits Mr. Segal’s Rainy Day Investments holding, Davids’s largest shareholder with about 46 per cent of the equity, against the retailer’s current management and three next largest shareholders. The trio, investment funds TDM Asset Management, EdgePoint Investment Group and Porchlight Equity, hold roughly 36 per cent of the shares.
Mr. Segal has tried to characterize the clash as one pitting a “private club” of international financiers against his all-Canadian team of retailing experts.
The company casts the contest as an effort by an obstinate former director to take control of the company without making a formal bid and paying a premium. It insists selling itself is only one among many strategic options under review.
Mr. Segal, who founded Davids in 2008 with his cousin David Segal, quit the board earlier this year after losing patience with management and a group of directors he said is divided. The dissident wants to stabilize Davids’s U.S. operations, cut costs and revive a “tea culture” among loyal customers he says have been neglected.
Rainy Day Investments has “failed to make a compelling case” to oust Davids’s incumbent directors or to vote in any of its own director nominees, Glass Lewis said in its report. While DavidsTea’s financial performance has been highly unfavourable in recent years, Mr. Segal bears considerable responsibility for this poor performance given his role as Davids’s co-founder and largest shareholder, the proxy firm said.
“We are concerned that the dissident is attempting to usurp the board and that its nominees and plans would cause further disruption at a critical time for the company,” Glass Lewis said. The incumbent board and management team have outlined a clear and sensible turnaround strategy, it said.
Institutional Shareholder Services also opposed Mr. Segal’s effort to control the board, saying he failed to present a detailed plan to fix the retailer while current management is making progress with its e-commerce platform and other measures. Still, ISS said making room for two of Mr. Segal’s director candidates on the board might help ensure a smoother turnaround while recognizing his equity interest.
In a statement released on Monday, DavidsTea said it has repeatedly offered Mr. Segal a compromise that would have provided him with fair, proportionate representation on the board that is consistent with the ISS recommendation. The offers were rejected, the company said.
Mr. Segal rejected the conclusions of the proxy-firm reports, saying the advisory firms get paid by investment funds like the ones he is opposing in this contest. The two proxy firms have an inherent bias in favour of management, he said.
Shareholder support of 50 per cent plus one is required for Mr. Segal to put his board in place. Although the path to victory seems short for the octogenarian, Davids says there is a long tail of shareholders that own small pools of equity and that winning their backing is not a given.
Montreal-based Davids is coming off losses in four of its past five fiscal years, a period during which it nevertheless managed to double annual sales to $224-million as of Feb. 3. Although the company’s Canadian stores have fared well, a push into the United States has proved costly as Davids struggled to adapt its offering to American tastes. Same-store sales growth for its entire 240-store network has declined in each of the past three years.