Farmer Bros. Investor Seeks Rule Change

One of Farmer Bros. Co.’s largest outside shareholders is attempting to gain leverage over management by attacking the Torrance-based coffee roaster’s ability to indemnify directors from lawsuits and other actions.

Franklin Mutual Advisors, which owns 9.6% of Farmer, said in a regulatory filing Friday that it had proposed changing the company’s rules for director indemnification.

Indemnification is a common corporate practice that protects board members from financial liability stemming from lawsuits and regulatory actions.

Securities and Exchange Commission Chairman William H. Donaldson said in a recent speech that investors should be concerned “about companies that under permissive state laws indemnify their officers and directors.... This just isn’t good public policy.”

All seven of Farmer’s directors can tap corporate funds for legal services. The Franklin proposal would allow them to receive legal defense funds only with the approval of shareholders or upon a judge’s order.

Franklin said such a measure was necessary because Farmer’s board was unresponsive to outside shareholders and worked to protect the interests of the family that founded and still controls the business, which the stock market values at $641 million.

“The threat of having to pay to defend yourself is going to make them pay more attention to the shareholders,” said Bradley Takahashi, a Franklin Mutual Advisors vice president.

Franklin said that under California law the directors would be blocked from voting on the proposal, which is expected to be on the agenda of the company’s next shareholders meeting late this year.

That’s important because board members hold the voting rights for more than 50% of the company’s stock.

Farmer Bros. declined to comment on the Franklin proposal, saying SEC regulations prevented it from discussing such measures until after publication of its proxy statements.