- The evidence is now numerous and clear; Bodaken and Lofton must resign to restore full board credibility and investment in the company.
- The top holders of the stock have the votes to make this happen, but it is not clear that their choreography will make changes now.
- The mishandling of the Albertsons merger "process" alone is sufficient to remove The Culpable 2.
- Rite Aid's former Chairman, Mr. Standley, has been replaced with Mr. Bodaken, a long time director, evidencing the same undue influence on the remaining newer directors by virtue of being hired by him.
- Thus far, some of Bodaken's actions suggest that he is taking the board down that same self-serving road again, first protecting the finances and positions of his fellow directors and not first protecting his shareholders.
I. Background of Contributor
As indicated in my last Seeking Alpha Rite Aid article, dated 1/16/20, I have been a shareholder since 2000 and worked quietly behind the scenes visiting Rite Aid stores around the country to see with my own eyes the actual store operations and not just experiencing the rosy words and "happy faces" of senior management and directors at annual meetings. The result of these store visitations up until 2015 was the eventual removal of both East and West Coast regional managers. Given lethargic actions of prior senior corporate management to solve store execution issues, I worked directly with district management to assist them in opening their eyes to issues right in front of them affecting the revenues and profits of the company.
Along the way, as a significant shareholder with shares in excess of directors at times, it was clear that our various Governance Committees over time were not protecting its shareholders. They took great pains to entrench themselves to first protect their own positions and not the equity of their own investors. Therefore, since 2015 I have submitted four (4) shareholder proposals in a row that resulted in the board amending our by-laws to reflect them. These amendments were made, in my opinion, either because the board was afraid of a landslide in "Favor" and implemented them before the vote happened or they won majority vote and the top holders insisted that the by-laws be amended. They were as follows:
1. 2015-Proxy Access- The SEC accepted the Contributors argument to include this Proposal for vote and rejected Rite Aid's argument to exclude it. The top holders demanded that the by-laws be changed prior to the vote to essentially implement it. Now an opposition individual or group can save significant monies by having their name(s) placed on the same proxy card as the nominees recommended by our board when certain criteria is met.
2. 2018-Separation of Chairman and CEO- Again, implemented in the by-laws before the election and vote, which eventually led to the removal of Standley in March 2019. Had it been in place prior to 2017, the Albertsons merger discussions might have ensured that the merger "process" complained about by ISS and Glass Lewis would have been a "kosher" one, in my view. The Culpable 2 must be held accountable for this "enablement" of Mr. Standley which led to a 95% drop in equity value along the way.
3. 2019-Right to Call Special Meetings- Again, the board implemented this proposal at a higher 20% threshold (the Proposal called for a 10% threshold) prior to the Annual Meeting to avoid a landslide in "Favor". Still, the Proposal received an overwhelming 60% vote in "Favor" last July. It is interesting to note that the board waited until two months ago to further amend the by-laws to the original 10% threshold, apparently "to make nice" before our Annual Meeting. The proxy advisors do not like it when a proposal wins majority vote and the board fails to implement it. Had "Special Meetings" been allowed by shareholders prior to 2017, the Albertsons merger might not have progressed for the next six months at huge wasted expense that The Culpable 2 allowed, including millions in retention bonuses.
4. 2020-Claw Back-Stricker Reimbursement Triggers
Given Bodaken's huge waste of shareholder assets for retention bonuses, June 2018. when his Compensation Committee likely already knew that the merger was in trouble, this Proposal was submitted last February. One month later the proposal was implemented with a by-law amendment to avoid a vote and why you do not see it in the proxy now. For the first time, reimbursement can be triggered with senior management acts, or lack thereof, which cause loss of company reputation or financial harm to the company. Previously, only a restatement in earnings (the minimum legal requirement for an NYSE listed company) could trigger a claw back. Had Mr. Bodaken's previous Compensation Committee amended the by-laws prior to 2018, we might have been able to recoup the millions of dollars he threw out the window to his senior executive non-performers who were fired a mere nine (9) months after receiving these monies.
Clearly, all the Proposals above would never have been necessary to be forced upon the directors had they done the work of their committees properly, namely protecting the assets of the company. They viewed the Proposals as a threat to their positions and the monies they felt like bestowing on the very senior executives that were being protected until they could be protected no longer. Cleaning house means removing the last two remaining directors responsible for what happened to the company's equity.
II. The Changing of the Boardroom "Guard"
At first blush, shareholders may want to believe that Bodaken, now Chairman as of October 2018 by default, was responsible for the wholesale eventual removal of the majority of the board, leaving himself, Lofton and Syms still standing. But was that really the case? On July 27, 2018 I filed suit in Delaware Court against Rite Aid and it's directors. The Complaint evidenced serious direct and indirect conflicts of interest of all directors on the Negotiation Committee as well as Standley and other parties involved in the merger discussions. In my opinion, the "process" was sufficiently tainted that had the merger been taken to a vote and won, it was unlikely to win Delaware Court approval. Rite Aid's lawyers likely, in my view, recommended inoculating the Company and its remaining directors by starting a director removal process as a way to say to a future judge that they were immediately taking action to change the board as soon as they found out how conflicted the "process" was that The Culpable 2 just sat there and allowed in the first place.
III. The Allowed Negotiation Committee Process of The Culpable 2
There was a close long time direct business relationship between Standley and Albertsons' Miller (puppet of Cerberus who owned Albertsons), who Standley reported to at Rite Aid from 2000-2005, when Miller was Chairman/CEO of Rite Aid. Additionally, and unbelievably, Standley placed Savage on the Rite Aid board in June 2015 and thereafter on the Negotiation Committee. What many shareholders did not clearly understand in the proxies was that Savage, among other potential conflicts, was a direct representative of Cerberus on their minority owed Supervalu board. Standley was also on that board until two months before the Savage board appointment at Rite Aid. So Cerberus had the advantage, not available to any other potential acquirer, to hear all other offers being made to Rite Aid, and even more importantly how things were progressing over at The FTC reviewing the Walgreens merger.
All of the above, in my opinion, guaranteed the Delaware Court would trigger a showing on the fairness of the price and the "process". The Culpable 2 just looked the other way and caused damage to the Company and its shareholders when:
1. As stated in the merger proxy, page 107 for the date 9/19/17, the board knew that Standley would likely be tapped to be the CEO for the merged ACI company. That was the ethical moment to form what turned out to be the highly conflicted Negotiation Committee. Instead, that "window dressing" event waited until January 24, 2018, less than one month before the merger was announced. Standley's allowed late recusal from negotiations would unlikely not be enough to obtain merger protection in the eyes of the Delaware Court.
2. the Committee did not exclude anyone with a direct or indirect relationship in the merger. All three members were tainted and unsurprisingly have resigned from the board, proving the point.
3. the Committee did not have their own unconflicted legal and financial advisors, separate from the full board.
4. the Committee did not have full negotiating power to reject the transaction; only the full and mostly conflicted board could do that.
5. the Committee was not formed early in the transaction before any material transaction terms were agreed to.
6. the Committee did not have the power to say "no" to the merger transaction and without fear of retaliation, although given the conflicts the word "no" was not in their vocabulary one could surmise.
7. the Committee had obvious limits on their mandate with no authority given to them in formal resolutions.
This Contributor is not a lawyer nor are most readers here reviewing the article. However, we do not have to be, given the above is mostly common sense if you want to engage in an ethical merger "process" by representing your shareholders only. The Culpable 2 took a pass on common sense but more importantly failed in their fiduciary duties to their shareholders paying them good salaries. The top holders must hold them responsible and accountable and vote "Against" them remaining on the Rite Aid board. By continuing to "enable" Standley's undue influence on the rest of the board for their full five (5) year tenure when the merger was announced, The Culpable 2 caused a 95% equity drop. Shareholders can only erase the past by removing them from the board to prevent future damage to the Company and its shareholders.
IV. Bodaken Has Not Risen to the Occasion as Chairman
A.The ink was hardly dry on Bodaken's Chairmanship, bestowed on him by default 10/18, when he agreed to further reward all directors, mostly new and hardly showing their worth yet, with an immediate 100% vesting of annual restricted Rite Aid shares, effective 2019. Previously, granted annual restricted shares vested at 80%, 10% and 10% in the first three years, to at least give the illusion that they were aligned with shareholders. This event, and at a time that shareholders are suffering by the prior acts of the board is pure and simple greed at its worst. The board's vocabulary should include the word "no' when consultants are brought in, at shareholder expense no less, to do the board's bidding.
B. As previously discussed at length in the prior Seeking Alpha article, including a published article detailing the behavior of Marcy Syms at the helm of Syms Corporation while a director at Rite Aid, which ISS objected to as well, it has taken The Culpable 2 seven (7) years to take action. This, despite the fact that since 2013 at nearly all annual meetings I repeated:
1. she approved the worst acquisition in Rite Aid's history of Eckerd in 2006, causing our $3 billion in debt
2. she bankrupted Syms Corporation, but not before delisted a stable $17. NYSE Syms Corp stock, and threw it on the "pink sheets" for reasons not accepted by ISS, the proxy advisor or this Contributor.
3. she invented a company in 2013, TPD Group, as its lone employee as President, operated out of her spare bedroom, according to her. This company suddenly appeared after she was challenged in 2012 as appearing to have no self-made accomplishments in the proxy. That company vanished last year, due to Contributor pressure apparently, as either an embellishment or another failed business. When questioned on a director up for re-nomination last year, Lofton, as Chair of the Nominating Committee, refused to utter a word on her vetting process, an annual requirement of that Committee. Rather than Bodaken directing Lofton to answer a legitimate question before a vote on Syms (all three of which just happen to comprise the Nominating Committee), Bodaken jumped in and made a ten second comment about her value on the board.
4. The above should have been enough for a good Chairman to take timely action, and for the full board who already possessed all the above information in a letter submitted to them last August, but apparently they wanted more and it was provided last February, in yet another letter, as provided in the Walgreens merger proxy:
On March 3, 2015 Rite Aid and Walgreens entered into a mutual Confidentiality Agreement to allow the potential merger parties to begin due diligence and continue discussions. On March 5, 2015 both parties met again in Palm Beach, fl. with Walgreens expressing interest in a merger... In the weeks following they continued discussions. Mr. Standley communicated that he would review Walgreens proposal with the board of directors (highlighted for emphasis).
On 4/10/15 Ms. Syms sold 150,000 of her (free) shares @ $8.26 (as did Anderson who left the board last year), on non-public information and at a minimum violated Rite Aid's rules on insider trading of its shares.
Rite Aid pays its directors quarterly in arrears; it should not have waited until next month to "retire" Ms. Syms. Indeed The Culpable 2 have looked the other way since 2013 when there was sufficient information to take action then. So, while our senior executives have recently said that they are "looking under rocks" to find ways to save money for shareholders, our Culpable 2 directors seem to want to save monies only when they are forced into it. I can assure them that this Contributor has better things to do than play babysitter for its board of directors.
C. It appears that the pandemic will cause Mr. Bodaken to take advantage of his shareholders in setting very strict rules of "decorum" during our upcoming Annual Meeting of shareholders conducted in an audio-only format, which already appear to violate the proxy advisor guidelines for conducting a virtual meeting. The guidelines carefully consider whether shareholders will have the same opportunity for participation with the board and senior management as they would have at a typical physical such meeting.
I have been advised, in writing, that my shareholder proposal on "Director Compensation" will be allowed a maximum of two (2) minutes to introduce it at the Annual Meeting. Worse still, Mr. Bodaken has elected to hide 90% of the proposal from shareholder view, electing to omit the Supporting Statement from the proxy in its entirety which assists shareholders to vote intelligently on a matter before them.
Let me be clear, in nearly twenty (20) years of attending Rite Aid's Annual Meetings, never has there been a time limit on a shareholder Proposal introduction, and never has a full Proposal (including the resolution and supporting statement) been kept from the eyes of its voting shareholders. Further, all questions will be screened, before "relevant" questions posed in writing during the meeting are allowed through to be answered. All this suggests that only a struggling board Chairman could even entertain this kind of censorship and is beneath the remaining good reputation that our newer directors wish to maintain.
It was entirely proper not to dismiss the full pre-2018 board immediately after the aborted Albertsons fiasco. So, the piecemeal removals were the best shareholders could hope for to remain a stable company, if stockholders are forced to consider losing 95% of its equity value as being stable. However, shareholders still needed a functioning board. Some of the newer directors will be on the board going on two years soon and can stand on their own two feet now, without being burdened with the controversies facing The Culpable 2.
Even if the top holders wanted to give them a second chance, Bodaken rushing to shovel over even more immediate equity and vesting in restricted shares to his fellow directors after becoming Chairman, means only one thing, namely greed pure and simple while he continues to observe the suffering of his boss, the shareholders. Further, his report card on the board is candidly seen on page 43 of the proxy by his own top holders who likely insisted that those remarks be memorialized in the proxy statement. However, the proof of why Bodaken must be removed from the board is shockingly found on the previous page of the proxy, page 42, when Bodaken announces "We do not reward executives for imprudent, inappropriate or unnecessary risk-taking". Obviously, a false statement not worthy of the damage to the Company and the stress he visited upon his many stockholders. He may want to erase his past on the Rite Aid board before becoming Chairman, but Wall Street is unlikely to erase Rite Aid's past until The Culpable 2 are removed from the board. These statements and actions, many untimely, of Bodaken do not speak of someone who can cause sufficient investor confidence to invest in Rite Aid. The top holders have spoken on page 43, in effect saying "Guilty as Charged" right there in the proxy for all to see.
Good judgment is also a board requirement. So when Bodaken indicated in the 2018 proxy that "the Board firmly believes that John Standley is best situated to serve as Rite Aid's Chief Executive Officer" and immediately proved himself wrong by firing him and others six (6) months later, that was not the kind of business judgment that shareholders pay their directors for. The only further insult was paying out massive retention bonuses, changing the goal post on other bonuses mid-year and , of course, those massive "parting gifts" to non-performing senior executives, once again compliments of the Compensation Committee that Bodaken used to serve on.
In order to "turn over a new leaf" instead of rocks, the top holders must vote to remove The Culpable 2. Then, new investors will have the confidence to put their new monies to work here. I can control the facts, which I have presented to you now, however, I can not control the politics of the top holders and the proxy advisory firms, sad to say.
This company still has tremendous potential under the leadership of the senior executives who are working in a difficult drugstore space these days. Hopefully, we will see the tide change for the better in the near future. In the interim, and available for correction right now, shareholders must restore board credibility and accountability-The Culpable 2 must be removed.
Analyst's Disclosure: I am/we are long RAD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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