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Jana Partners' Investment in Freshpet: Governance Issues and Shareholder Activism
The Background of Jana Partners' Investment in Freshpet
Jana Partners announced its investment in Freshpet in September 2022 after the company's stock dropped by approximately 74%. Jana believed that Freshpet was mismanaged and needed a reconstituted board to institute more focus and management accountability. However, Freshpet had a staggered board, which meant that Jana could only nominate four directors to replace the four whose terms were expiring in 2023.
The Governance Issues at Freshpet
Jana made operational and capital allocation points in its case for change that justified adding Jana representatives to the board. However, replacing almost 40% of the board is a significant step that shareholders should not take lightly. Nevertheless, it is necessary in situations where poor performance is a symptom of poor governance, and that is irrefutable at Freshpet. Freshpet has unique and unprecedented examples of the board not holding management accountable, and at worst, serious conflicts.
Conflict of Interest: Freshpet and Hive Brands
Freshpet's president and COO, Scott Morris, co-founded Hive Brands, which directly competes with Freshpet in the pet food market. Morris's employment agreement states that he will "devote his full time and efforts to the business of the Company." Although there is an exception for non-competitive activities, founding a company that competes with Freshpet is highly inappropriate. Additionally, Freshpet's general ethics policy prohibits engaging in outside work or conflicting outside activities that could adversely affect the reputation of the company or compete with it.
The Rights of Inventions Clause Omission
Morris founded Hive while working as Freshpet's president and COO and receiving compensation from Freshpet. However, Morris's employment agreement did not contain a rights to inventions clause, raising questions about the company's intellectual property rights in Hive. The omission of such a clause appears to be a negotiation tactic on Morris's part, the standard employee agreement includes a provision to assign any ownership or other acquired rights to the company.
The Overlap of Certain Officers and Directors with Competitor Hive
Freshpet's vice-chairman, Richard Kassar, served as Hive's CFO while holding several positions in Freshpet. Additionally, directors J. David Basto and Olu Beck have served in various positions at Hive, according to Jana. Basto resigned from Freshpet's board in May, and Beck served as a formal advisor at Hive. These conflicts of interest are clearly unethical and could significantly harm Freshpet's operations.
Jana's Attempt to Improve Freshpet's Governance
Jana attempted to improve Freshpet's corporate governance by adding new directors to the board. Still, the company seemingly attempted to set up obstacles to a fair election, including expediting the annual meeting and moving it to July from that fall. This could be interpreted as an attempt to partially disenfranchise Jana and entrench incumbent directors. Jana filed a lawsuit in the Delaware Chancery Court, forcing Freshpet to revert governance changes, including postponing the annual meeting to October.
The Conclusion: The Need for Strong Corporate Governance
Freshpet's entrenchment device limits Jana to only four nominees. If the company can settle for less than that, it should take the best settlement it can get and start focusing on running Freshpet. The board's credibility has suffered through its seemingly underhanded tactics, and the company needs to refocus on its operations. Ultimately, this situation illustrates the need for strong corporate governance, as weak governance can have disastrous consequences for a company and its shareholders.
The case of Jana Partners' Investment in Freshpet and the associated governance issues and shareholder activism surrounding it provide an essential reminder that strong corporate governance is critical for any business's success. New companies need to prioritize their corporate governance policies and take steps to ensure that they are not only legally compliant but also ethically sound.
One of the key takeaways from this case is the importance of having a board of directors that can hold the company's management accountable. Having a staggered board may limit shareholders' ability to make changes and influence decision-making, further justifying the need for board members to act in a company's best interest.
Moreover, this case highlights the significance of avoiding conflicts of interest and taking a firm stance on ethical considerations. Companies should have policies in place that prohibit executives from engaging in activities that may compete with the company or have a negative impact on its reputation. Furthermore, it is essential to ensure that employment agreements contain necessary clauses that protect the company's intellectual property and other acquired rights.
In conclusion, the Freshpet case serves as a reminder that ignoring corporate governance can lead to significant consequences. Newly formed businesses should prioritize the development of robust governance policies and the implementation of ethical standards to ensure long-term success and prevent shareholder activism similar to Jana Partners.
Article First Published at: https://www.cnbc.com/2023/06/17/op-ed-in-battle-with-activist-jana-partners-freshpet-unleashes-the-dogs-of-war.html