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In a week, shareholders will vote on whether Campbell Soup's board will face its most significant disruption in 64 years as a public company. Activist firm Third Point has been waging a proxy battle against Campbell, demanding that it put five of its nominees on its board.
In this contest for Campbell, it is seemingly no longer a question of whether it will add Third Point nominees but how many.
The number is significant. According to the bylaws, Campbell has 12 board members, with the ability to go to 14, with board approval. (Its bylaws could be amended to boost the board even more.) But the more Third Point nominees it adds, the more control of the boardroom Campbell cedes. That would mark a huge shift for a soup company steeply tied to its tradition of largely being run as a family company. Three of Campbell's heirs sit on its board. The descendant family owns at least 41 percent of the company.
Third Point and its founder, Dan Loeb, which have a roughly 7 percent stake in Campbell, originally wanted to replace the soup company's entire board. Third Point is now aiming to add only five directors, it has said.
If Third Point gains board seats, it doesn't necessarily mean the entire company will get sold. While Third Point originally called for a sale of Campbell, it is unclear there is a buyer at a good price for the entire company.
But Third Point has been urging Campbell to consider a split, a move Campbell said it previously weighed along with a number of other strategic options. Having more influence on the board could make such a move more likely. It may also put pressure on Campbell's owners to act quickly.
Campbell has already offered concessions, publicly stating its offer to add two of Third Point's nominees, as pressure from the investor community has mounted. That's even as Campbell Soup heirs, who hold roughly 41 percent of Campbell, have already pledged their support to the company.
Its recent financial performance is not in its favor. The soup company has delivered 19 percent total shareholder return over the last 20 years, while the S&P 500 has nearly tripled in the same period. Its stock is down 16 percent since January, according to Factset, despite topping analysts' expectations for its quarterly earnings on Tuesday.
Nor is an opinion written by influential shareholder advisory firm ISS. Last week ISS came out in support of all five of Third Point's nominees.
"Given the board's subpar oversight of critical issues such as M&A and succession planning, shareholders may wonder whether the incumbent board is capable of steering Campbell back on track in a timely manner," ISS said.
The advisory firm also raised questions about Campbell's dedication to its dividend despite its poor financial performance.
"Maintaining the dividend may prove to be the right decision, though it raises the question of whether the board, which currently includes three members of the founding family, is truly considering all options," the opinion said.
Campbell has taken a direct shot at two of Third Point's nominees: former Campbell executive Bill Toler and Third Point executive Munib Islam. It has said it would add former Blue Buffalo CEO Kurt Schmidt and Comscore President Sarah Hofstetter to its board, but said Third Point rejected that offer. It has not yet commented on nominee Bozoma Saint John, a former Uber executive who is now at Endeavor.
The issue with Islam, Campbell has stated, is the conflict of interest it perceives due to his work at Third Point.
"We can only consider adding individuals who are truly open to all strategic alternatives and who are free from employment conflicts that would impair that openness or limit the ability to maintain Board confidentiality, which would exclude Third Point employees," interim CEO Keith McLoughlin wrote in a letter to shareholders earlier this month.
Activists have named representatives from their own firms to sit on boards before. Shareholder advisory firm Glass Lewis nonetheless supported Campbell's perspective on Islam, due to the recentness of Third Point's investment, its "lack of meaningful engagement with the board prior to pushing for a sale" and its initial push to replace the entire Campbell board.
The concern with Toler, Campbell said in a statement last week, arises from his work at Campbell, where he worked from 1995 to 2000. After Campbell, Toler worked at Pinnacle Foods and was CEO of Hostess Brands from 2014 through March of this year. Third Point has mentioned Toler as a potential stand-in for the interim CEO role at Campbell.
"With regard to Mr. Toler, we are very familiar with him due to his period of employment with the Company and concluded that he would not be an appropriate director," Campbell said.
Toler was mentioned, though not a named party, in a 2001 class-action lawsuit against Campbell and senior executives that stemmed from Campbell's alleged "channel stuffing," the practice of sending retailers more products than they need, in order to inflate its sales figures.
Channel stuffing is not infrequent but can become an issue if it becomes flagrant, according to a number of people in the industry who spoke to CNBC, some on the condition of anonymity. It was more common years ago.
According to the 2001 lawsuit, the plaintiffs alleged that Campbell offered retailers discounts on its soup cans of 15 percent to 20 percent, rather than the typical 2 percent to 3 percent, to spur orders. Toler, former president of Campbell subsidiary Campbell Sales Company, was accused of holding "frequent and sometimes daily conference calls" to discuss and authorize the alleged discounts. The suit said Toler did so to meet revenue targets his superiors gave to him in order to meet analyst estimates. Campbell settled the lawsuit in 2003 for $35 million and did not admit any wrongdoing.
Facts behind the litigation are part of the reason Campbell believes Toler is not appropriate for its board, a person familiar with the matter told CNBC. The person requested anonymity due to the sensitivities around the issue.
When asked about the lawsuit, Campbell spokesman Thomas Hushen told CNBC that it does not comment on personnel matters as a policy.
In a statement provided to CNBC, Third Point spokeswoman Elissa Doyle said the lengths to which its opponents "will go to rebuff Third Point's highly-qualified board nominees are once again on display in today's sad attempt to use a shareholder strike suit filed 18 years ago in which Mr. Toler is not a named party. "
Doyle added that if Campbell were to use the litigation to support its conclusion it would be "either hypocritical or merely illogical" since "key decision-makers also named in the case or in supervisory roles" continued on as officers and directors at the company after the suit.
Corporate governance experts who spoke to CNBC said the lawsuit is not inherently problematic due to the frequency of such securities class-action lawsuits and the uncertainty regarding the reality or severity of Toler's role in the alleged actions.
They added, though, it is something that Third Point should have known about and been prepared to address. Proxy fights are high stakes — each side looks for flaws in the other party's slate. Third Point brought Toler into the limelight when it put his name forward to act as Campbell's interim CEO.
If Third Point didn't know, said Lawrence Cunningham, a professor at George Washington University, "someone's going to be upset over on the Loeb side."
Third Point spokeswoman Doyle told CNBC in a statement the firm does "deep background research on all of our nominees and agreed with the conclusions of boards at Hostess, Pinnacle, and others who selected Bill to run their companies that an 18-year-old plaintiff strike suit against the Company (not Bill) is wholly irrelevant to his ability to brilliantly operate [a consumer packaged goods] business, create value for shareholders and, most importantly, provide structure and accountability to a management team at Campbell's that, in their own words, has 'lost focus.'"
Campbell, meantime, has accused Third Point of being unprepared in its fight after it has backed away from its initial calls for a sale and echoed Campbell's own sentiments following its strategic review, in addition to reducing the number of directors it is seeking.
Third Point had previously said the only justifiable outcome of the company's review this summer was a sale to a strategic buyer. Third Point later said it would also accept other moves for Campbell, including a breakup.
Correction: This story has been updated to correct that Campbell has delivered 19 percent total shareholder return over the last 20 years and to fix Bill Toler's title.