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From Securities Regulation Daily, February 17, 2016

Biglari, fellow directors fend off suit over 'entrenchment' transactions

By Anne Sherry, J.D.

Directors of Sardar Biglari's holding company fought off a shareholder lawsuit for failure to plead demand futility. The plaintiffs challenged three 2013 transactions that allegedly entrenched Biglari's control of Biglari Holdings and enriched him at shareholders' expense. Affirming an Indiana district court, the Seventh Circuit held that under Indiana law, which in some respects is stricter than Delaware's on demand futility, the transactions were not so oppressive as to call the board's business judgment into question (Taylor v. Biglari, February 17, 2016, Posner, R.).

Biglari Holdings owns Steak 'n Shake and Western Sizzlin' restaurants and acquired First Guard Insurance Company and Maxim Magazine following the challenged transactions. One of those transactions was a stock offering approved by the entire six-member board; the other two were approved by the four-director subset that made up the Governance, Compensation and Nominating Committee.

Indiana's pro-management approach. The court explained that Indiana's statutory scheme establishes a strongly pro-management version of the business judgment rule. A plaintiff suing derivatively is excused from making demand on the board if the derivative claim poses a significant risk of personal liability for the directors. However, a director is only liable for actions or inactions constituting willful misconduct or recklessness.

Majority of the board was disinterested. While only Biglari stands to benefit financially from the challenged transactions, the plaintiffs claimed that the transactions "entrench" him and the other five Biglari Holdings directors in their board seats. But the district judge compellingly pointed out that the plaintiffs did not allege any of the directors were in danger of being removed; without that link, it was unlikely that they were motivated by entrenchment. Although one director had close personal ties to Biglari, the other four—the entire committee membership—were independent. That left the plaintiffs to argue that the transactions were so obviously improper that the board could not be thought to have been acting in shareholders' interests.

Transactions did not oppress shareholders. One of the transactions, a licensing agreement allowing the company to use Biglari's name and likeness in advertisements for free if he remains as CEO, but for a royalty fee otherwise, was not onerous enough to have an entrenchment effect. The plaintiffs also challenged Biglari Holdings' sale to Biglari of Biglari Capital Corporation. The holding company bought BCC from Biglari for $4.2 million in 2010 and sold it back to him in 2013 for $1.7 million. The reduced price was justified by several business reasons: prior to the sale, BCC had distributed most of its assets to the holding company, and the sale came with the holding company's obligation to pay an incentive bonus for increases in book value attributable to BCC.

Finally, the circumstances of the rights offering did not suggest an entrenchment motive. Biglari had the same right to purchase shares as any other shareholder and, in fact, he increased his ownership stake in the holding company by less than a percentage point, from 15.4 to 16.1 percent.

The case is No. 15-1828.

Attorneys: Avraham Wagner (The Wagner Firm) for Chad Taylor. Christopher J. Clark (Latham & Watkins) for Sardar Biglari.

Companies: Biglari Holdings Inc.; Biglari Design Inc.; Biglari Real Estate Development Corp.; First Guard Insurance Company; Maxim Inc.; Steak n Shake Operations, Inc.; Western Sizzlin Corp.; Biglari Capital Corporation; The Lion Fund; The Lion Fund II

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