Vintage Capital Management, LLC
(together with its affiliates, "VCM"), the second largest shareholder of
Aaron's, Inc. AAN, today announced that it has delivered a letter to
the independent directors of Aaron's. In the letter, VCM appeals to Aaron's
Board of Directors to immediately correct Aaron's illegal board structure and
improve other governance failings. In addition, VCM strongly questions the
business justification for shifting $7.5 million of annual costs from
franchisees to Aaron's shareholders, as this latest entrenchment action does
nothing to fix Aaron's business. Finally, the letter notes the comments of
Aaron's director John Schuerholz, who recently spoke to Aaron's senior leaders
on the topic of turning around a losing team.
The full text of the letter follows:
March 28, 2014
Aaron's, Inc.
309 East Paces Ferry Road, N.E.
Atlanta, GA 30305-2377
Attn: Ray M. Robinson, Lead Director
Dear Independent Members of the Board of Directors of Aaron's, Inc.:
On March 26, 2014, Aaron's announced that its Board of Directors had adopted
majority voting for directors in uncontested elections. This token step only
highlights the substantial problems with Aaron's governance practices and
further demonstrates the need for change at Aaron's.
As we have made clear in prior letters, Aaron's governance failings go far
beyond a lack of majority voting in uncontested director elections. For
example, Aaron's continues to have a "staggered board" despite the
well-established and documented trend in favor of declassifying boards so
that all directors are accountable to shareholders each year. This is for a
simple reason: numerous studies have documented that staggered boards result
in lower firm value. See Lucian A. Bebchuk & Alma Cohen, The Costs of
Entrenched Boards, 78 Journal of Financial Economics 409 (2005); Olubunmi
Faleye, Classified Boards, Firm Value, and Managerial Entrenchment, 83
Journal of Financial Economics 501 (2007).
Not content with just having a staggered board, Aaron's has contrived a
board structure that is actually illegal. Contrary to Georgia law and
Aaron's own bylaws, both of which clearly state that board classes should be
divided as evenly as possible, Aaron's nine member board is composed of one
class of two directors, one class of three directors and one class of four
directors. Having the three classes divided in this way is both illegal and
illogical. The Board should immediately rebalance itself so that there are
the same number of directors in each class. And if the Board was truly
committed to acting in the best interests of shareholders, it should go one
step further and give shareholders a binding opportunity to remove the
staggered board at this year's annual meeting.
We believe that Aaron's governance problems have only served to perpetuate
the larger business issues facing the company. For example, we recently
noted that Aaron's has engaged in another tactic that can only be described
as a short-term desperation effort to buy the support of certain
constituencies at the expense of shareholders and the long-term health of
the company's business. We are, of course, referring to the decision
announced this week—which we can only assume had the support of the Board of
Directors given its financial impact—to suspend the $800 per month
advertising fee charged to franchisees, with Aaron's and its shareholders
now bearing these costs. With 781 franchised stores, this decision shifts
$7.5 million of annual costs from the franchisees directly to Aaron's
shareholders. What is this other than a bribe to muzzle the open revolt in
Aaron's franchise community? Yet again, Aaron's shareholders are being
forced to pay for management's mistakes, which have resulted in tens of
thousands of customer losses in 2014 alone at a cost to Aaron's, its
franchisees and its shareholders of tens of millions of dollars. Perhaps we
could understand a decision to take $7.5 million from shareholders' pockets
if it was in support of a strategy to win back customers, but we will never
understand a decision to impose a significant cost on shareholders that is
not intended to fix the business. We've said it before, but it bears
repeating: Aaron's current management team is out of time.
At the manager's meeting this week, we understand that John Schuerholz spoke
about how to turn around a losing team. It is a sad commentary on the state
of Aaron's when one of its own directors stands before 2,300 of the
company's senior leaders and talks for 30 minutes about turning around a
losing team. If Aaron's is truly as strong as it has ever been—as management
has repeatedly asserted—it is odd that Mr. Schuerholz would spend any time
discussing turning around a loser and not focus instead on continuing to
build a winner. We hope that each of you were present to hear Mr.
Schuerholz's remarks.
Very truly yours,
/s/ Brian R. Kahn
Brian R. Kahn
Managing Member
Vintage Capital Management, LLC
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