Robert Mondavi, Shareholder Governance and the Role of Independent Directors

Last Friday, the Wall Street Journal carried an excerpt from a book, "The House of Mondavi:  The Rise and Fall of an American Wine Dynasty."  As the title suggests, the book essentially chronicles the ousting of the Mondavi family from Robert Mondavi, Inc.

What makes the article particularly interesting is that the Company had a dual class capitalization, with the Class B shares having supervoting rights.  This is the structure in place at Dow Jones, where the Bancroft family can retain a minority of equity and a majority of the voting power.  The Securities and Exchange Commission tried to end this structure when it required stock exchanges to impose a one share one vote standard, something ultimately overturned by the courts in Business Roundtable.  We have written a post on that Pyrrhic victory here.  In ousting the Mondavi family, the board had to overcome this structure, something that required concerted effort by the independent directors.    

The December 2004 proxy statement for Robert Mondavi, Inc. (beginning on page 14) disclosed that that board had, in June 2004, voted to "investigate a recapitalization that would result in the elimination of Class B shares".  By August, the Mondavi family had agreed to a recapitalization.  Essentially their supervoting shares would be converted into ordinary shares at a ration of 1.165 Class A shares for each Class B.  With the Mondavi family giving up absolute control, a takeover became possible.  By December 2004, the wine company had merged with Constellation Brands, with the Mondavi family interest acquired for cash.

How did this happen? 

The Company went public in 1993, with the market offered an opportunity to by the Class A shares (each with one vote) while the family retained the Class B supervoting shares.  The two classes voted together on everything except the election of directors.  As the 2003 proxy statement described:  

• "October 20, 2003 has been fixed as the record date for determining the holders of Class A Common Stock and the holders of Class B Common Stock entitled to notice of and to vote at the Annual Meeting. As of the close of business on the record date, the Company had outstanding 9,856,904 shares of Class A Common Stock and 6,509,734 shares of Class B Common Stock. Only holders of Class A Common Stock are entitled to vote in the election of Class A Directors. Only holders of Class B Common Stock are entitled to vote in the election of Class B Directors. On all matters other than the election of directors, the holders of Class A Common Stock and the holders of Class B Common Stock vote together as a single class, with each Class A share entitled to one (1) vote, or a total of
  9,856,904 Class A votes, and each Class B share entitled to ten (10) votes, or a total of 65,097,340 Class B votes."

With respect to the board of directors, the Class B elected seven and the class A elected three.  

In 2003, the family owned somewhere around 45% of the equity but held more than 80% of the voting power.  There were three Mondavi's sitting on the board, with son Michael the chairman and son Timothy the winemaker.  A bit over a year later, the family was out and the company sold. 

A year later much of this had changed.  Michael Mondavi, the 91 year old founder of the Company, found himself over committed financially, in part because of philanthropy that included a $25 million to UC Davis to create a wine and food institute.  Dissention arose within the family (according to some reports, the father was pitted against the two sons), and share prices plummeted, a result in large part from a flood of low end competition  (particularly "two buck chuck").   

With all of this going on, the independent directors on the board developed a strategy to reduce the family's influence and eliminate the A-B capitalization structure.  At the heart of the proposal was an agreement (validated by a special committee of the board) to pay a premium for inducing the family to accept Class A shares in place of the Class B.  As the Journal article noted:

• "As the family sat around a U-shaped table, the outside directors presented a plan to end Mondavi's dual-class structure, which gave the family control over about 85% of the votes. The family would get a 15% premium for converting their B shares into A shares, worth a total of about $30 million at the time to them as a group. Besides dramatically easing Robert's financial crisis, the plan would preserve the possibility they could bid for their beloved Oakville winery. In return, they'd have to sign a voting agreement that would lower the family's combined votes to about 40%, which meant they'd relinquish control, allowing the independent directors to explore selling all or parts of the company."

Members of the family objected.  They did not want to give up control.  In the end, however, they accepted the arrangement in part because the outside directors threatened to take action of they did not.  "Then the outside directors wielded their most powerful weapon: They told them they would quit en masse unless the Mondavis agreed to get rid of their supervoting shares. If the outside directors resigned, the news almost certainly would have sent Mondavi's shares falling further, increasing the chance that Robert would face insolvency."

Ultimately, therefore, the independent directors were able to use the threat of resignation and the possibility of further decline in share prices to induce the family members (at least one of which was financially strapped) to induce them to agree to give up control.  By August 2004, the family had agreed to the arrangement and by December 2004 Robert Mondavi Inc. had been acquired by Constellation Brands.

In many ways, the case study illustrates the important role of independent directors, something enhanced in the aftermath of Enron and Worldcom.  Nasdaq, where Robert Mondavi was traded, requires a board with a majority of independent directors. See IM-4350-4.  Nasdaq also requires that the independent directors meet in executive session on a regular basis.  In addition, SOX required exchanges to adopt listing standards that required members of the audit committee to meet an even stricter definition of independent.  See Section 301 of SOX.  But for these changes, one wonders whether the Mondavi family would still be in control and share prices suffering.