10/04/2023 1

Friendly Ice Cream Corporation

Submitted by Group 3 Advait Bhobe Chandrashekhar Jindal Kanumuri Rajashekhar Raunak Vasandani Sangram Korekar

10/04/2023 2

1. Case Overview

Friendly Ice cream was founded in 1935 by Blake brothers.

Grew Rapidly and operated over 500 restaurants by 1970. Initially they were operating business on the basis of

honesty & fairness. Sold Friendly to Hershey Foods Corporation (HFC) for

$164mn. HFC sold Friendly to Don Smith in a leveraged buyout. Smith purchased friendly through The Restaurant

Company(TRC). Later he sold friendly to public through IPO. Blake bought some shares. Due to decrease in stock price, Blake got worried and

bought 900,000 shares. Issues were raised regarding expenses incurred by

Friendly to help TRC.

10/04/2023 3

Blake expressed his concerns and called for the resignation of Smith. Investigations were conducted but no evidence found regarding expenses occurred.

Blake filed a derivative suit against Friendly and Smith.

SLC committee filed a motion to dismiss Blake’s suit.

Court supported Blake’s claims and denied SLC’s request and announced that their report did not cover some adequate information. Biglari invested around $5mn into Friendly in 2006 through Lion Fund and Western Sizzlin.

He started meeting with shareholders of Friendly. Biglari insisted to obtain seats on the BOD to help the

company but Smith denied. Biglari said that Smith is looking at the company as his

private firm. Smith was not focused to protect the interests of Other Shareholders.

Biglari and Cooley prepared for Proxy fight and nominate themselves to be elected to the board.

Blake keeps on buying share and increased his ownership to 13.2%.

10/04/2023 4

2. Why is Blake purchasing stock in his old firm? What is he trying to accomplish?

Blake felt in that mismanagement had cause a strong company with good brand value to be the undervalued company.

He believed he could unlock significant value at Friendly if he could get on its board and put his ideas into practice & manage the company & force Smith to resign from CEO post.

He bought the stock of the company so that companies debt could be paid off and the company‘s share prices rises & it would in build confidence in the minds of the shareholders

Blake did not need the money as he had become wealthy when he first sold out-but he could not stand to see his company driven into the ground. He had concern about his employees & felt that it was his responsibility to see that the employees are treated well.

10/04/2023 5

3. Are the related party transactions questioned by Blake material enough to warrant a legal battle?

Blake had three main concerns for Friendly Ice Cream Co regarding declining stock prices in the market, Smith’s strategy & management & concerns over the using the jet for his private purpose which was not needed.

Blake also had issue on Smith’s closing the number of restaurants so as to reduce the burden of heavy debts.

Smith had 10% share in Friendly company while he had 70% share in TRC company. He was Chairman of both the companies i.e. Friendly company & TRC company.

Friendly Co was badly mismanaged by the CEO & the employees over the latter stages.

10/04/2023 6

Blake had concerned over that Smith was unjustly profiting by being both head of TRC & head of Friendly because the positions allowed him to shift assets or income from Friendly to TRC or shift costs from TRC to Friendly.

Blake had an issue with Friendly’s payments to TRC for expenses related to Illinois office.

This was done because Smith owned 10% of Friendly Co & 70% of TRC Co.

Also Friendly Chairman Don Smith, was misusing the company’s funds , since then he had publicly badgered the board of directors to turn things around.

10/04/2023 7

4. Which related party transaction is most significant according to you and why?

Aircraft related party transaction is most significant according to us because:

The jet was rarely used by anyone other than Smith or his family and they used it for personal purpose. And they never used to Reimburse Friendly.

Jet was usually utilized by Smith for his personal purpose which did not go well in the eyes of Blake.

Smith was misusing the fund of Friendly Company. There was no written agreement between Friendly

and TRC to share the expenses of the Aircraft. Friendly’s share of the cost was higher than its

share of effective use.

10/04/2023 8

5. What other mechanisms were available to Blake to express his dissatisfaction with the CEO and the board's conduct? Could he have done anything differently?

Blake was dissatisfied with the strategies followed by Smith who is the CEO of the Company & the board of directors.

As internet was just established in USA he could have made use online support & should have created the website.

He should have conducted meetings with the investors, bankers & shareholders who are in connection with the company.

He could also have discussed the problems of the shareholders

Mr. Blake could have gathered support from The Douglas family, Sardar Biglari by discussing and trying to focus on common cause.

10/04/2023 9

6. How do you assess the board's responses to Blake's actions over time? Could the board and the CEO have done something differently to accommodate Blake's requests?

Board was not ready to consider the issue raised by Mr. Blake.

They did not allow him to get a seat in the board, but finally they had to agree.

Every company wants to increase its shareholder wealth, and achieve operational efficiency.

The Director of the board should have listen to the concerns of /mar Blake & understand it in the company’s point of view.

They should have given the thought over his ideas & whether they are feasible.

10/04/2023 10

7. Was there a problem with the independence of the board of directors at Friendly? Do you agree with the Court's conclusions in May 2006?

Yes there was a problem with the independence of the board of directors at Friendly Co as they were unable to control the activities of CEO & Chairman.

Blake had appointed independent directors as he believed that they would manage the company but they failed in their fiduciary duty to shareholders.

The board of directors seemed to view the interest of Smith & Friendly to be one & the same.

One example of this was that both Friendly & Smith had hired the same attorney to defend against Blake’s suit.

Board of Directors in the Friendly did not had unity among themselves.

10/04/2023 11

I agree with the court conclusion in May 2006 as SLC had not been appointed by the majority of the independent directors & SLC had failed to prove that two of the directors were independent.

Friendly’s board of action was also not proper through out the whole process.

The decision taken by the court supported Blake’s position & represented a major blow to Friendly’s board as the directors of company was bias towards Smith, the CEO of the Company.

10/04/2023 12

8. Why didn't other shareholders emerge till 2006? Do you think Blake's actions played a role in Biglari's decisions to invest in Friendly?

The shareholders didn’t know the inside story of Friendly Company till Mr. Blake had flied the suit in the court against the CEO of the company

After 2006, the public came to know about the inside story of the company & financial status of the company.

That was the reason for shareholders to emerge after 2006.

I don’t think Blake’s actions played a role in Biglari’s investment

Biglari had invested in Friendly Company right from the start.

10/04/2023 13

9. How should Friendly's board deal with Biglary? 

Biglary began investing in Friendly’s 2006 & by the end of august he filed the report he had become a 5% owner of the company.

Biglary was interested in Friendly company & since 2006 he started investing in the company.

Bilglary’s company had owned 8% of Friendly & Western Szzlin had owned 7% of the company. The group became the largest holder of the company.

Smith had demanded two seats on the board of directors to help drive change in the company .

The meeting did not go well as Smith was resistant to give him 2 seats.

According to me, Friendly company should have taken the advantage of the presence of Biglary as he was excited in the company.

10/04/2023 14

The CEO should have given 2 seats to him for the betterment of the company.

He wanted to improve the Corporate Governance of the company which had gone for the toss.

He could have successfully unlock the value of the company.

The company should have use Biglari properly optimally.

10/04/2023 15

Questions…..

10/04/2023 16