Shareholders concerned about corporate governance of Rocky Mountain Chocolate Factory


By John jannarone

Rocky Mountain Chocolate Factory, Inc. (NASDAQ: RMCF) may finally have to change its corporate governance recipe.

The confectionery maker and retailer, known for fudge and fro-yo, has seen its shares drop 20% in the past five years as the S&P 500 has doubled. This poor performance contributed to a standoff with 7.5% shareholder AB Value Management LLC, an activist who initially pushed for change in 2019 and struck a deal to secure two seats on the board, including one for AB Value Managing Member Andrew Berger.

AB Value has apparently been pushing for the change, but says it has been blocked. In a press release Monday evening, Berger said the company had “ignored virtually all of my contributions on governance in my first year and a half on the board.”

AB Value is not alone. Another shareholder, Global Value Investment Corp., which owns 7.1% of the company’s shares, has also attempted to negotiate with the company in its own separate talks which have apparently failed. At the end of June, Global Value appointed five directors to the board of directors for a vote at the next meeting. AB Value also submitted its own list of five nominees.

Both shareholders have reason to get started after witnessing so many missteps on the part of the company, especially at the board level. At the end of 2019, for example, Rocky Mountain entered into an alliance with Edible Arrangements that includes a board seat for the latter’s CEO, Tariq Farid. A little over a year later, Mr. Farid resigned.

Other shareholders have also expressed their frustration with the current board. At last year’s annual meeting, some directors, including the CEO, saw strong opposition. Three of them obtained between 36% and 48% of the votes against their re-election.

The independence of Rocky Mountain’s compensation committee is also a cause for concern. According to a press clipping referenced Monday by AB Value, CEO Byran Merryman witnessed the wedding of Brett Seabert, who has chaired the compensation committee since 2019. Another person with close ties to Mr. Merryman who sits on the committee of Compensation is the founder of the company, former CEO and former boss of Mr. Merryman, Franklin E Crail.

Another director, Scott Capdevielle, also recently resigned after allegedly making racist statements on social media. According to AB Value, she brought the matter to the attention of the company just two days before the announcement of her resignation, but the company has not briefed the public on this important background.

The company has taken other steps that seem responsible at first glance, but which were apparently led by AB Value. Probably the centerpiece of a July 21 press release was the decision to separate the roles of CEO and chairman. But according to AB Value, it was the fund itself that requested such a change. Rather than informing Mr. Berger, who is a member of the board of directors, of the impending announcement, the company simply released it without its review.

On top of all this, Rocky Mountain also has anti-takeover provisions in place that could easily be seen as hostile to shareholders. The company did not respond to a phone call from CorpGov at its investor relations department.

Putting aside all the drama of the board of directors, where can shareholders look for value in such a company? Brick and mortar retailers, especially those like Rocky Mountain with large footprints in malls, have been under pressure for years as shopping habits change. The Covid pandemic has also dealt a severe, albeit temporary, blow to the company. But Rocky Mountain is a strong brand that has the potential to attract healthy digital sales – if properly maintained.

After so many displays of bad corporate governance, it’s high time for Rocky Mountain to eat a humble pie and give shareholders the opportunity to prosper.

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