What's Going on at Target?

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 |  Includes: TGT, WMT
by: Todd Sullivan

Let's put aside the fact that Ackman seems to know Target's (NYSE:TGT) bylaws better than they do (or at least pretend to). In the revised 13D/ a just filed, Ackman states:

Subsequent to the delivery of the Original Notice, we received a telephone call from your outside counsel informing us that the Board of Directors of the Company (the “Board”) currently consists of 12 directors and that only four directors are up for election at the 2009 Annual Meeting.

As we have explained in detail in a separate letter from Mr. Ackman to Mr. Gregg W. Steinhafel, Chairman, President and Chief Executive Officer of the Company, based on our review of the Company’s Restated Articles of Incorporation and its filings with the Securities and Exchange Commission, we are of the view that size of the Board remains at 13 members. While the resignation of Mr. Robert Ulrich on January 31, 2009 created a vacancy in Class III of the Board, the size of the Board has not changed.

This is pretty simple. Target, recognizing that Ackman is likely to win seats on the Board, is trying to shrink it to minimize whatever effect his nominees may have. But, if you are a shareholder you have to ask, why? Ackman left shareholders of McDonalds (NYSE:MCD), Chipotle (NYSE:CMG), Wendy's (NYSE:WEN) and Tim Horton's (THI) far better off than when he arrived. Shareholders also have to ask, if this guy is the largest shareholder of the company, aren't his interests totally aligned with ours?

Here is the letter Ackman sent the CEO Greg Steinhafel:

Exhibit 99.1

March 26, 2009
Gregg W. Steinhafel
Chairman, President and Chief Executive Officer
Target Corporation
1000 Nicollet Mall
Minneapolis, Minnesota 55403

Re:Number of Directors for Election at the 2009 Annual Meeting of Shareholders

Dear Gregg:
On March 16, 2009, affiliates of Pershing Square Capital Management, L.P. delivered a Notice of Nomination to Target Corporation proposing to nominate five individuals for election as directors of Target at the Company’s 2009 Annual Meeting of Shareholders. The same day, Target issued a press release indicating that its board is comprised of 12 directors and that the Company is nominating only four directors for election at the 2009 Annual Meeting. Subsequently, we received a telephone call from your outside counsel informing us that the Target Board currently consists of 12 directors and that only four directors are up for election at the 2009 Annual Meeting.

We disagree with the Company’s position on this issue. We have reviewed Target’s SEC filings and have found no disclosure to the effect that the size of the Target Board has been changed from 13. We are aware that Mr. Ulrich resigned in January, but a board does not automatically shrink as a result of a resignation; rather, a vacancy is created, in this case, a vacancy in Class III of the Target Board.

Our view is informed by the Company’s Restated Articles of Incorporation, which provide that only the shareholders may reduce the size of the Target Board. Specifically, Article VI of Target’s Restated Articles of Incorporation provides the following:

“The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors consisting of not less than five nor more than twenty-one persons, who need not be shareholders. The number of directors may be increased by the shareholders or Board of Directors or decreased by the shareholders from the number of directors on the Board of Directors immediately prior to the effective date of this Article VI; provided, however, that any change in the number of directors on the Board of Directors (including, without limitation, changes at annual meetings of shareholders) shall be approved by the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as defined in Article IV), voting together as a single class, unless such change shall have been approved by a majority of the entire Board of Directors.” (emphasis added)

Article VI was adopted at Target’s 1988 Annual Meeting of Shareholders. Immediately prior to the effectiveness of Article VI, the size of the Target Board was 13. Under Article VI any reduction in the size of the Target Board requires a shareholder vote. As the Company’s shareholders have not been asked to vote on any matter since the 2008 Annual Meeting of Shareholders, we believe that the size of the Target Board remains at 13. While Mr. Ulrich’s resignation created a vacancy on the Target Board, the size of the Target Board has not been changed to our knowledge.

If the Company continues to believe that the size of the Target Board is 12 and that only four seats are up for election at the 2009 Annual Meeting, we believe that the interests of the Company and its shareholders would be best served by a quick, low-cost resolution of this issue. Therefore, we would suggest that we jointly submit the issue to a binding arbitration that will take place in Minnesota and will be decided by a mutually acceptable arbitrator, pursuant to the AAA Commercial Rules of Arbitration.

If, on the other hand, you agree with our interpretation of the Articles of Incorporation, you can simply nominate a fifth director.

It is in all of our interests to resolve this issue promptly. Please let me know how you would like to proceed. Thank you.

Very truly yours,

/s/ William A. Ackman
William A. Ackman

So, what then is the problem with management? Why are they stonewalling every idea Ackman has to create shareholder value? Do they have other plans? If they do, none have been announced.

Here is the reason. Management is entrenched at Target. They have all been for for a long time. None of them have any experience running the type of organization Ackman is proposing (the Board members he has nominated do) and what they are fighting is the feeling that should he get his way, they become less important or worse, irrelevant. What they fail to realize is by simply dismissing him out of hand, they are doing just that.

How long do they think shareholders will sit for a fallen and stagnant stock price before they want to "see what the other guy can do"? Is there any plan to reverse the same store sales decline that it is over a year old? Shareholders surely have noticed that Wal-Mart (NYSE:WMT) shareholders are not suffering the same fate.

Current management has done a fantastic job bringing the company to its current state, a well respected retailer, probably the second in the nation. But, they are stuck and sitting back and waiting for the economy to lift them out of their funk will not cut it with shareholder as they watch Wal-Mart's tail lights disappear into the distance.

Disclosure: Long MCD, WMT