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Analysis: Men's Wearhouse alterations could backfire on retailer

The Men's Wearhouse sign is seen outside its store in Westminster, Colorado September 11, 2013. REUTERS/Rick Wilking
The Men's Wearhouse sign is seen outside its store in Westminster, Colorado September 11, 2013. REUTERS/Rick Wilking

By Nadia Damouni and Olivia Oran

NEW YORK (Reuters) - If Men's Wearhouse Inc was hoping that activist shareholder Eminence Capital LLC was going to go away quietly after the retailer boosted its anti-takeover defenses, it's likely to be sorely disappointed.

Although Jos. A. Bank Clothiers Inc walked away from a deal earlier this month after Men's Wearhouse board rebuffed its $48-a-share offer, and prevented it from conducting due diligence, the suitor's language that it still felt a deal was in the best interest of shareholders for both companies has resonated with investors.

Eminence and other hedge funds that hold about 30 percent of Men's Wearhouse shares see the retailer as an undervalued stock that would benefit from striking a deal with its competitor. Some of these new holders have even crept into the top 20 shareholder list, according to sources at the funds.

And over the past week New York-based Eminence has been trying to persuade other hedge funds and investors to go on the offensive to get the reluctant company to accept a takeover from Jos. A. Bank.

"It certainly does add to the pressure if lots of stock is flowing from long-term investors to shorter-term, event-driven investors," said Spencer Klein, a partner at law firm Morrison Foerster.

Eminence, known for investing in deeply undervalued stocks, is waiting for regulators to approve a consent solicitation that allows investors holding a combined 10 percent stake in Men's Wearhouse to call a special shareholder meeting by February 14 of next year.

At that meeting, Eminence will try to overturn a company requirement for two-thirds of shareholders, or a "supermajority," to amend the bylaws instead of a majority or 51 percent. If that passes, then a second special meeting would be called to vote on replacing Men's Wearhouse board of directors.

"This is a provision that will strike a chord in both sets of investors. Probably more so with the long-only investors who, quite frankly, want to be long-term investors. They support a company for a number of years, they have a stock price that has underperformed," Eminence's Sandler told Reuters Wednesday.

Men's Wearhouse adopted several defense mechanisms in October in an attempt to fend off Jos. A Bank, including raising the voting requirement to amend bylaws, to make it more difficult for a shareholder such as Eminence to get the votes it needs to take over. The company also added a poison pill that prevents parties from individually amassing a 10 percent stake.

‘SUPERMAJORITY' PITFALLS

For the most part, lawyers said the defense measures that Men's Wearhouse adopted are very common. Still, some of the bylaw changes could be vulnerable to court challenges.

"The substantial changes to the bylaws, particularly moving the vote to two-thirds as opposed to a majority...that might be subject to greater scrutiny because it affects the shareholder franchise and the ability to make changes to the board," said Pat Dooley, a partner with Akin Gump Strauss Hauer & Feld LLP.

One top Men's Wearhouse investor said changing nomination thresholds and bylaws is not good governance. "I don't like what Men's Wearhouse did on the governance, so I'm glad someone stood up and took a stance."

Proxy advisers and large asset managers also tend to frown on supermajority voting requirements. Even though these amendments tend to have no influence on their investment decisions, investors said they often seek to vote down such provisions during the annual shareholder meeting.

This year, eliminating supermajority requirements was one of the most frequent of shareholder proposals, according to data from Institutional Shareholder Services.

At Quest Diagnostics Inc , the board eliminated the supermajority voting requirements from its bylaws in August. At Procter & Gamble Co , the board put forth its own proposal to reduce certain supermajority requirements, while Eastman Chemical Co's board similarly recommended eliminating its supermajority voting requirements.

"It's definitely a sign of fear, not of optimism about the relationship with shareholders," Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance said of Men's Wearhouse's decision to add the supermajority vote provision.

It may prove to be a long, drawn-out battle. The last person to push the company to sell itself was its founder, George Zimmer. In June, Zimmer, known to U.S. TV audiences for his advertising catch phrase "You're gonna like the way you look," was ousted by the board after arguing for a sale of the whole company to an investment group.

Eminence's Sandler said no decision has been made on waging a proxy contest, and that the fund would first focus on the "most shareholder unfriendly issue," meaning the supermajority voting requirements.

If Eminence succeeds in getting two-thirds of the shareholders to support a change to the bylaws, Akin Gump's Dooley said it is equally as important that Men's Wearhouse acknowledges a sufficient number of its shareholders are disgruntled with the direction the company is taking.

"The threat of a proxy contest could motivate a company to consider the options suggested by the fund," Dooley said. "It doesn't mean selling the company, although it might."

(Additional reporting by Ross Kerber in Boston; Editing by Christian Plumb, Frank McGurty and Leslie Gevirtz)

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