Office Depot and the Evolution of a Proxy Contest

As noted on The Race to the Bottom, proxy contests are uncommon among large companies due to the time and money required for a legitimate campaign.  The circumstances surrounding Office Depot illustrate some of the reasons why this is the case. 

In the months leading up to the Office Depot board meeting, Woodbridge Equity Fund LLLP and Levitt Corporation (“Woodbridge”) sought to elect two new directors in place of Steve Odland (CEO and President) and David Fuente. Woodbridge objected to Mr. Odland’s $17.8 million in compensation, and accused Odland of failing to properly oversee operations and vendor payment. Woodbridge also criticized Fuente’s sale of $44 to $45 million of Office Depot shares while the stock was near its all-time high.

Woodbridge nominated Mark Begelman and Martin Hanaka to replace Odland and Fuente. Begelman is co-founder and former CEO of Office Club, an office supply chain that merged with Office Depot in 1991, and former COO and President of Office Depot. While with the company, he tripled the number of stores, and sales revenue grew 511%. Hanaka is a former COO and President of Staples, Inc.

Woodbridge sought to elect Begelman and Hanaka in response to Office Depot’s steadily declining share price, and its underperformance over the past two years compared to its primary competitor Staples, Inc. and the S&P 500. From May 2006 to May 2008, Office Depot’s shares declined about 76% while Staples’ share prices dropped about 22%, and the S&P 500 fell only 2%. Over the past five years, Office Depot’s share price dropped around 10% while Staples’ rose by over 70%.

As discussed on The Race to the Bottom, Office Depot rejected Woodbrige’s board nominees on grounds that it failed to follow the bylaw’s “advanced notice” provision. In other words, in addition to the costs associated with solicitations, the insurgent shareholders were forced to incur litigation costs.  The court in Levitt Corp. v. Office Depot, held that Woodbrige gave proper notice by nominating its directors before the annual meeting. Thus, the court allowed Woodbridge to proceed with its proxy contest.

In the weeks following the decision in Levitt Corp., Woodbridge’s campaign failed to gain approval from proxy advisors. According to statements from Office Depot, several major proxy advisors recommended shareholders reject Woodbridge’s board nominees. Despite its victory in the Delaware Courts, Woodbridge abandoned its proxy contest, claiming that it accomplished its primary goal of drawing attention to the unsatisfactory conditions within the company. Some speculate that Woodbridge abandoned its campaign because of the lack of approval from the proxy advisors and little shareholder support.

As a final gesture, Woodbridge asked that dissident shareholders refrain from voting as a sign of dissatisfaction with the current board. Ultimately, shareholders reelected the incumbent directors and Office Depot published a statement reasserting its confidence in the board.  Shareholders, therefore, have to incur significant expenses, often with limited likelihood of success.