The latest letter sent by two large shareholders to the management of Dillard's (NYSE:DDS) mocks top management and criticizes the company for not buying out the family-controlled Class B shares.

Dillard's is an apparel and home furnishing retailer with 326 stores located in 29 states. The stores sell a mix of apparel, accessories, home furnishings, cosmetics and other consumer goods.

No Holds Barred
Barington Capital Group and the Clinton Group sent the letter to three directors of Dillard's, which stated:

  • The chain "has not posted an increase in annual comparable store sales since Fiscal 1999".
  • "The average three-year compensation paid to Mr. Dillard is 54% above the median paid to CEOs at peer companies," according to a study by Proxy Governance.
  • When Dillard took over as CEO in 1998, the market capitalization of the company was $4.36 billion, compared to the less than $246 million today.

The latest same store sales figure for September 2008 was down 12% from the same period last year. The stock is selling at $4.07, down from a 52-week high of $23.42.

The letter served as a follow-up to one sent in September 2008 that asked the Dillard's board of directors to hold a special meeting to consider the repurchase "of the Class B shares by the company, permitting Dillard's to have a more customary capital structure". (To learn more about the effectiveness of your CEO, check out Is Your CEO Street Savvy?.)

Tilting At Windmills?
The activist investors may have a long fight ahead. When the company went public, a dual class structure was set up that makes it difficult to unseat the family from control of Dillard's. The Class A shares trade on the New York Stock Exchange (NYSE) and are widely held, while the Dillard family owns virtually all of the Class B shares through its ownership of the W.D. Company.

Although each share of Class A and B gets one vote, the Class B shares elect two-thirds of the board, while the Class A holders elect the balance. Also, 15% of the Class A shares are owned by the Dillard's, Inc. Retirement Trust, which is presumably under the control of the management of Dillard's. Three Dillard family members own another 7.1% of the Class A shares.

It seemed that the activist shareholders and Dillard's had come to a truce back in the April 2008, when management agreed to support the election of four Class A directors that had been recommended by Barington Capital Group, Clinton Group and Southeastern Asset Management, another large shareholder of the Class A shares.

Family Ties
Other companies that operate under this kind of dual structure include Playboy (NYSE:PLA), where founder Hugh Hefner owns 3.3 million of the Class A shares, or 69.5% of the outstanding shares, and 7.9 million Class B shares, or 28% of the outstanding shares. Only Class A shares get votes at annual meetings. The New York Times Company (NYSE:NYT) also has a dual class stock structure. A trust created in 1997 by descendants of the Sulzberger family owns 89.5% of the Class B shares, giving the family effective control of the company.

Another company that was targeted by activist investors recently is Target (NYSE:TGT), where hedge fund manager William Ackman is pushing for the company to monetize its assets.

Bottom Line
Two large shareholders have fired another shot in the long-running battle to wrestle control of Dillard's from the family that has been at the helm for years.

To learn more about these nasty fights, read Activist Hedge Funds and Could Your Company Be A Target For Activist Investors?

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