October 10, 2014 / 10:09 AM / in 3 years

Darden activist ousts Olive Garden owner's full board

A man talks on his mobile phone in front of the Times Square Olive Garden in New York, June 23, 2010.Keith Bedford

ORLANDO/LOS ANGELES (Reuters) - Activist shareholder Starboard Value LP won its standoff with Darden Restaurants Inc (DRI.N), convincing shareholders to replace the entire board of the Olive Garden parent, a rare victory for dissident investors.

The election of Starboard's 12-director slate, announced Friday at Darden's annual meeting, was a feather in the cap for the New York hedge fund, Darden's second-largest investor with an 8.8 percent stake.

It was a stinging defeat for Darden, which this year alienated investors by brushing off their vote requesting a special meeting to debate the company's then-proposed sale of its struggling Red Lobster chain.

The "extraordinary" and "totally self-inflicted" loss for Darden comes as no surprise given Darden's "tone deafness" to investor wishes regarding the Red Lobster sale, said Charles Elson, director of the Weinberg Center for Corporate Governance in Delaware.

"It was kind of a done deal, wasn't it?" agreed Karl Sooder, a Darden investor and University of Central Florida marketing professor, who attended Darden's annual meeting in Orlando.

The board sweep, which is based on a preliminary vote count, is notable because of Darden's size, experts said. Darden is the largest U.S. operator of full-service restaurants with $8.55 billion in 2013 sales.

Some smaller U.S. companies have suffered similar fates recently.

For example, shareholders in ALCO Stores Inc ALCS.O in September replaced the full board at the retailer that serves small U.S. communities. Last year, investors replaced the whole board at Morgans Hotel Group Co. MHGC.O

Elsewhere, Starboard is agitating for change at Yahoo Inc YHOO.O and attempting to take RealD Inc RLD.N private.

Shares in Darden closed down 1.8 percent at $48.37 on Friday.

"I feel great," Starboard Chief Executive and newly elected Darden director Jeffrey Smith told Reuters on the sidelines of the annual meeting.

"Darden has all the right ingredients to regain the strength and prominence it once enjoyed," Smith said in a joint statement with the company.

Starboard last month unveiled a nearly 300-slide proposal that included plans to sell Darden's real estate, franchise its restaurants, spin off The Capital Grille, Yard House and other chains, and fix its flagship Olive Garden chain.

It also aims to fix Olive Garden's pasta, which it described as poorly handled and generally overcooked.

"Shockingly, Olive Garden no longer salts the water it uses to boil the pasta, merely to get a longer warranty on its pots" said Starboard, which also plans to boost Olive Garden's alcohol sales and dole out fewer of its popular unlimited breadsticks.

James Mitarotonda, CEO of fellow Darden activist Barington Capital Group, in June 2013 approached the company with ideas to improve results and kicked off what became a 16-month battle for the company's future.

"We are extremely pleased that necessary changes have been made," Mitaronda said in a statement.

Additional reporting by Ross Kerber in Boston; Editing by Lisa Shumaker, Meredith Mazzilli, Chris Reese and Gunna Dickson

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