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Super-Sized Legal Woes Eat into Steak 'n Shake's Owner Biglari Holdings

Steak 'n Shake under Biglari Holdings
photo from Steak 'n Shake webpage

SAN ANTONIO – While Steak ‘n Shake’s litigation heats up with franchisees in Colorado and Missouri over the franchisor mandating franchisees fall in line in offering fixed low menu prices, chain owner Sardar Biglari has been dealing with his own legal problems.

Not only has he been sued by two shareholders on behalf of the Biglari Holdings, Inc., he also recently settled with the federal government on antitrust claims. Biglari was ordered to pay $850,000 for violating “premerger reporting laws,” connected to his 2011 attempt to claim a stake in the Cracker Barrel restaurant. The final judgment was issued May 30.

It does not end there. Mr. Biglari's business dealings with his company is also being investigated by a securities litigation firm over his “approved” compensation package in 2010. Shareholders’ rights litigator Robbins Arroyo announced on June 17, 2013 that its investigation showed that certain Biglari officers and directors were failing to act in the company’s and shareholders’ best interest by causing or allowing Mr. Biglari to receive inflated compensation and near total entrenchment in the company. The board of directors provided the chairman and CEO a salary of $900,000, with additional payments up to $10 million each year the company’s book value increases by 6%. Then on January 11, 2013, Biglari Holdings entered into a trademark license agreement with him, stating it would pay Biglari 2.5 % of the company's gross revenues for five years under these conditions:

  • If there is a change of control at Biglari Holdings
  • If Biglari is terminated from the company without cause
  • If the CEO/chairman resigns from his employment due to an involuntary termination event

Based on Biglari Holdings’ 2012 revenue, Mr. Sardar Biglari would receive approximately $18.35 million of the company’s $383.82 million operating income. If one of the triggering events occurred, a substantial amount of the company's value would likely be lost.

Biglari Holdings' shareholders have the option to pursue a shareholder derivative action through which shareholders aim to hold insider wrongdoers accountable for their actions, prevent future misconduct, and bring long-term value back to the company.

Cracker Barrel sign in Kentucky. photo by bmm
photo by bmm

Current dispute updates

It was reported this week that “activist investor” Sardar Biglari was again rejected by Cracker Barrel to be on its board of directors, after one of its members resigned. Biglari Holdings, Inc. is the single largest shareholder of Cracker Barrel, with a nearly 20 percent stake worth about $470 million. This is the second time the Iranian-immigrant has attempted to push his way onto the board position.

A report by the Tennessean said Cracker Barrel felt his nomination was not in the best interest of their company or its shareholders. One reason given was Steak ‘n Shake is considered a competitor of Cracker Barrel’s. It also said Biglari forced his way onto the board of Steak ‘n Shake in a similar way.

On the franchisee front, St. Louis-based Druco Restaurants, which owns Steak ‘n Shake stores in Missouri, filed a lawsuit against the franchisor over its $4 meal promotions. They are seeking court action to give them the right to stop selling the value meals because they allege they are not making money off them.

In a separate Colorado litigation, a federal judge ruled on Tuesday that Steak ‘n Shake will have until September 9 to give its reasons why it should be allowed to obtain an injunction against the franchisees who it terminated for not complying with its low-priced $4 menu. The Baerns family, who own two restaurants, continue to operate with their own menu pricing during the ongoing litigation.

Biglari has refused to talk to the media about the franchisee litigation. Although setting product prices have historically been an area that franchise owners could control to make sure their businesses stayed in the black, the San Antonio Express quoted Biglari saying last April at the company’s annual meeting, “If you are not going to comply with the standards, we will kick you out.”


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