ATCHISON, KAS. — MGP Ingredients must hold its annual meeting on Aug. 26 after a judge in Atchison County District Court on July 26 ruled that not holding an annual meeting would deny stockholders their right to elect directors who are up for election.
MGPI adjourned its 2013 annual meeting of shareholders scheduled for May 23 due to a lack of quorum of preferred stock shareholders. According to a May 24 filing with the Securities and Exchange Commission, two members of the board, Karen Seaberg and Cloud Cray Jr., refused to attend at the meeting, citing a “growing concern with the lack of profitable growth, deterioration in the corporate culture, efforts to sell certain parts of the company’s business, efforts to amend the bylaws that would limit accountability to shareholders and increase the power of the chief executive officer, and the level of compensation paid to the chairman of the board of directors and the c.e.o. of the company.”
Over the past two months, the two sides in the dispute — the Cray Group led by Ms. Seaberg and Mr. Cray, and MGPI’s other independent directors — have fired shots back-and-forth across the bow detailing the other’s perceived weaknesses in an effort gain favor with stockholders.
Cray Group seeks change
Ms. Seaberg and Mr. Cray (along with Laidacker M. Seaberg, Cray Family Management L.L.C. and Cray MGP Holdings LP) said in a May 24 filing they actively were seeking to change the board, as well as influence the board and officers “to improve business and financial performance, ensure accountability to shareholders and restore a corporate culture that is positive, is empowering and reinforces the company’s goals.”
Specifically, Ms. Seaberg and Mr. Cray said they were seeking the removal of Tim Newkirk as c.e.o. and requesting his resignation as a director, as well as the resignation of any other directors of the board who are not supportive of the their goals and related actions.
Other changes sought by Ms. Seaberg and Mr. Cray include an amendment that would allow large stockholders to call a special meeting, an amendment that would eliminate the staggered board and provide for the annual election of all directors and, once approved, effect the destaggering immediately allowing the prompt removal of all directors who do not support the proposed changes.
Under the MGP articles of incorporation, preferred shareholders are entitled to elect five of the nine directors (B directors) with the common shareholders electing the balance (A directors). A majority of the preferred stock is controlled by the Cray family (including Ms. Seaberg, his daughter). In effect, this ownership gives the family the ability to elect a majority of the MGP Ingredient directors, over time.
Of the nine directors, only two Group B and one Group A directors were up for election at the 2013 annual meeting – Mr. Cray and John E. Byom, the former chief financial officer of International Multifoods Corp. The Group A director nominated in the proxy was John R. Spiers, who serves as lead director. All three currently serve on the MGPI board and were nominated for re-election.
Other Group A directors include Linda E. Miller (term expiring 2015), Daryl R. Schaller (term expiring 2015) and Gary Gradinger (2014). The remaining Group B directors are Michael Braude (2015), Mr. Newkirk (2014) and Ms. Seaberg (2014).
When the annual meeting does reconvene, Ms. Seaberg and Mr. Cray said they intend to vote their shares of preferred stock in favor of Mr. Cray and another Group B nominee they will nominate, and will not vote their shares in favor of John Byom, who is the Group B nominee nominated by the company’s board of directors. Ms. Seaberg and Mr. Cray also said they intend to vote their shares of common stock, and to solicit proxies from other holders of common stock, to vote in favor of a nominee they will nominate at the 2013 annual meeting, and will not vote in favor of John Spiers, who is the Group A nominee nominated by the company’s board of directors.
A trust controlled by Mr. Cray owns 2.6 million shares of MGP Ingredients common stock, or just under 15% of the outstanding common stock.
Directors cite ‘self-serving agenda’
Nearly two months later, the six independent directors of the board of directors of MGPI on July 12 sent a letter to stockholders urging them to reject the Cray Group’s dissident nominees and proposals put forth by Ms. Seaberg.
In the letter, the directors cited four reasons for wanting stockholders to reject what they described as Ms. Seaberg’s “self-serving agenda.” Those reasons are:
• “Mrs. Seaberg’s proposals are bad for common stockholders and only serve her interests.
• “She is trying to seize control of MGP for personal gain without fairly compensating common stockholders
• “She has no plan for MGP and would derail MGP’s strong progress and good governance.
• “Mrs. Seaberg’s hostile actions are unnecessary and wasting MGP resources.”
The letter was signed by board chairman John R. Speirs and five directors: Michael Braude, John E. Byom, Gary Gradinger, Linda E. Miller and Daryl R. Schaller.
In making the case for stockholders to reject the Cray Group’s proposals, the directors cited their own collective business experience.
“We have a deep understanding of MGP’s challenges and opportunities,” the directors wrote. “Along with MGP’s talented management team, we are working hard to ensure MGP continues to increase profitability and stockholder value.”
The directors said MGPI is executing “a carefully designed plan to grow profits and deliver long-term value to all stockholders.
“To mitigate the negative impact of the significant commodity volatility on the business and generate greater cash flow, our board and management team have refocused MGP on a higher value sales mix, developed a more effective supply chain and increased productivity across our asset base,” the directors noted. “By implementing this strategy, MGP is well positioned to capitalize on the strong growth of the distilled spirits market, particularly the surge in popularity among high-end and super-premium whiskeys. In 2012, U.S. whiskey sales increased by 3.6% — higher than growth for vodka, gin and tequila and the largest such increase in 30 years. Our focus on expanding our presence in higher margin businesses like premium distilled spirits, as well as nutritional health innovations, while also ensuring we remain a low cost white goods producer is generating real results.”
The company said net sales in fiscal 2012 rose 20%, while gross profit margins more than doubled from 3% in 2011 to 8% in 2012. In addition, the first quarter of fiscal 2013 marked MGPI’s fourth consecutive quarter of growth in income from operations.
The independent directors said they are confident their strategy “will continue to drive revenue and cash flow generation, leading to higher profits and value for all stockholders.” To that end, the company said it is exploring a strategic review of alternatives. But contrary to what Mrs. Seaberg has said, the alternatives do not necessarily mean the company will be sold, the directors noted.
“The board is reviewing a wide range of alternatives,” the directors said. “The process may take several months to complete, and it is critical that the company continue to progress and execute at the highest levels during this time.”
Ruling allows voting disclosure
In addition to setting an Aug. 26 deadline for the annual meeting, the judge said stockholder tabulation data must be provided immediately for inspection, a ruling Mr. Speirs was not happy with.
“While we look forward to recommencing the annual meeting, it is unfortunate stockholders may now be deprived of the ability to have complete information regarding the validity of the voting trust controlled by members of the Cray Group before that meeting takes place,” Mr. Speirs said in a July 26 memo. “In addition, we find it troubling that the Cray Group has access to the identity and voting result of each vote cast prior to the adjournment of the annual meeting, which we view as directly in conflict with their proposal seeking confidential voting. As independent directors, we are committed to ensuring that all stockholders have the ability to participate in a fair process and express their views regarding the future of MGP.”