Proxy fight looms for Freshpet

A New York-based activist investor firm threatened to take Freshpet Inc. to court unless the Secaucus-based refrigerated pet food maker rolls back several recent leadership changes.

Jana Partners – which holds a nearly 10% stake in the company – believes a move to cut the number of directors standing for re-election at this year’s annual meeting is an attempt to prevent a proxy fight. In a letter from its lawyers, Jana Partners said it plans “to exercise any and all available means to remedy the board’s blatant breaches of fiduciary duties” and may take the matter to Delaware Chancery Court. The company is incorporated in Delaware.

“For months, the board has been aware of Jana’s intent to contest the election of the four Class III directors up for election at the 2023 annual meeting,” the firm’s attorney said in a letter. “In the days leading up to the board’s recent actions, Jana and the board engaged in discussions about appointing individuals proposed by Jana to the board.”

After those talks fell apart, Jana Partners said Freshpet took several steps when it became clear a board room challenge was coming.

Currently, Freshpet’s board comprises three classes – Class III members are up for election at the 2023 annual meeting, while Class I and Class III directors will seek election in 2024 and 2025, respectively.

The changes announced May 17 include expanding the size of the board from 10 to eleven members and appointing David Biegger as a Class I director. The company also said that Charles Norris, a Class III director, would be retiring and not seek re-election this year.

“The board then used Mr. Norris’s retirement as a pretext to reduce the size of the board back down to ten directors such that only three seats would be up for election at the 2023 Annual Meeting,” Jana Partners said.

“The board’s game of musical chairs has had the effect of reducing the number of directors up for re-election at the annual meeting from four to three. Plainly, that was the board’s intention,” the firm said.

“Had the board simply wished to replace Mr. Norris with Mr. Biegger, it could have nominated Mr. Biegger for election to the seat to be vacated by Mr. Norris. Instead, knowing that Jana intended to nominate four candidates, the board manipulated the corporate machinery by eliminating the Class III seat Mr. Norris will vacate and moving his replacement to Class I,” Jana Partners said.

The board also moved the date of its annual meeting up two months, from late September to July 25, which accelerated the deadline for nominations.

Barry Rosenstein and Scott Ostfeld, managing partners at Jana Partners, commented, “The Freshpet Board has a track record of poor decision making, lax oversight and apparent disregard for corporate governance. “

“The board’s latest stunt—reducing the number of directors up for election amid a contested annual meeting and abruptly accelerating its date—is an overt attempt to influence the shareholder vote, and underscores why board change is desperately needed. The board must immediately remedy its corporate governance failures and permit shareholders to participate in a fair and democratic election of directors,” they said.

Jana Partners wants Freshpet to expand the board by May 30 so that four seats are up for election this year. If the board refuses to do so, Jana Partners said it may seek an order compelling Biegger to stand for re-election in July as a Class III director.

Calling for change

For months, Jana Partners has called on Freshpet to consider operational changes, as well as explore a sale to other players within the pet food space.

In a May 24 letter to Freshpet shareholders, Jana Partners criticized Freshpet’s use of capital, the scheduling of the pet-food company’s annual general meeting and the wider business interests of Scott Morris, the company’s president and chief operating officer.

“Freshpet has consistently struggled to execute and failed to achieve its potential, leading to a 74% decline in its stock price in the year prior to our involvement in the company,” the letter read.

In response, Freshpet said despite engaging “extensively” with Jana Partners to “understand their perspectives and address their concerns,” the firm “has made clear to us that their sole purpose is to force a sale of the company without consideration of all paths to value creation.”

“We remain hopeful to avoid a distracting proxy fight as the management team continues to focus on driving growth and margin expansion as demonstrated in recent quarterly performance,” the pet food maker added, saying, “The board and management remain focused on driving shareholder value and building on the significant momentum in our business.”

After initiating a turnaround plan last summer aimed at improving logistics, commodities and quality, Freshpet made a flurry of changes to its leadership, including the appointment of Todd Cunfer as chief financial officer; Jay Dahlgren as executive vice president of manufacturing, technology, and supply chain; and Dirk Martin as vice president of customer service & logistics.

In its update this week, Freshpet touted continued progress on that effort.

“We grew revenue by 27% in Q1 2023 while continuing to improve performance in logistics, quality, and other operational areas of our business. Looking ahead, we expect continued strong revenue growth and adjusted gross margin expansion for full year 2023,” Freshpet said.

In October 2022, Freshpet opened a state-of-the-art kitchen in Ennis, Texas, as part of a plan to incorporate new technology to meet demand and enhance efficiencies.

Describing the facility as “a transformative development” and “a meaningful value enhancement opportunity,” the company said, “Ennis will help accommodate our growth for the next five years, enabling us to increase net sales to $1.8 billion by 2027, with accelerated margin expansion.”

Founded in 2006, Freshpet manufactures, markets and distributes fresh, natural pet food and pet treats that are made from fresh meats, vegetables and fruits and are free of preservatives, additives and artificial ingredients.