Starboard muscles in on Depot board

Three directors and a place on CEO selection committee as activist investor takes position on Depot board.

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In what at times seemed like a saga of soap opera proportions, Office Depot and its main shareholder Starboard finally reached an agreement in their board of directors dispute just hours before Depot’s annual shareholders’ meeting on 21 August.

As late as 20 August, it seemed the two sides would go head to head at the shareholders’ meeting after Starboard had apparently rejected a “good faith” offer from Depot. With Depot facing something of a shareholder revolt and it becoming increasingly likely that some of the board members would be voted off and replaced by Starboard’s nominees, news that an agreement had been reached came through just hours before the meeting was due to start.

“We are very pleased to have reached an agreement with Starboard which we believe is in the best interests of all our shareholders,” said Depot CEO Neil Austrian. 

Starboard’s CEO Jeff Smith commented: “As Office Depot’s largest shareholder, we look forward to working together with the Office Depot board with the common goal of maximising value for all shareholders through the OfficeMax transaction and the CEO selection process.”

The tone of the two CEOs was much less conciliatory just 24 hours before those statements were issued. Austrian had accused Starboard of putting its own interests ahead of those of Depot’s other shareholders and of making unreasonable demands. Smith responded by saying Depot had misled shareholders by painting a one-sided picture of negotiations, had made “onerous” demands on the investment firm and had acted in “bad faith”. This was the culmination of several months of heated exchanges as Starboard took legal action in a Delaware court to force Depot to hold an annual meeting and launched a proxy fight to get its nominees elected to the Depot board.

Depot had steadfastly maintained that any changes to the board and to the CEO selection committee would be harmful to the OfficeMax merger and CEO search, but cracks began to appear in its stance after it became clear that shareholders were in favour of Starboard board representation.

The outcome is certainly a victory for Starboard. It has gained representation of almost 30% of the Depot board (despite owning just under 15% of Depot’s shares) and has a say in the CEO selection process. That could be important as Starboard put forward a number of possible candidates for the job. One of those who has made the final shortlist of five candidates could be former Home Depot and Chrysler CEO Bob Nardelli, who Starboard hired as an adviser last year at the same time as ex-Staples exec Joe Vassalluzzo. 

65-year-old Nardelli would be a ‘heavyweight’ candidate for the CEO job at a merged Office Depot/OfficeMax, and fits the bill in terms of a public company CEO with Wall Street experience. However, his appointment would certainly be a controversial one given the question marks over his management style while at Home Depot and his failure to prevent Chrysler sliding into bankruptcy.

But as we have seen in its negotiations with Depot, Starboard likes to play hard-ball, and it will be interesting to see what effect this now has on the integration process with OfficeMax and the choice of CEO for the combined companies. 

Main terms of settlement:

  • Starboard nominees Cynthia Jamison, Jeff Smith and Joe Vassalluzzo have joined the Office Depot board after the resignations of directors Marsha Evans and Scott Hedrick the day after the annual meeting.
  • Office Depot has expanded the board from ten to 11 directors to accommodate the additional director.
  • Following the appointment of the new directors, the board will select a new non-executive lead director.
  • Vassalluzzo has joined the CEO selection committee in the search process for the CEO of the combined company, replacing Evans.
  • If the merger with OfficeMax is completed, Office Depot will include both Smith and Vassalluzzo as continuing directors.
  • Starboard agreed to withdraw its proxy solicitation and committed to vote in support of Office Depot’s director nominees at the annual meeting.
  • Depot will pay Starboard’s expenses and fees related to the investment firm’s legal attempts to force a date for the annual meeting and its proxy vote actions, up to a maximum of $800,000.