Hedge fund files proxy in looming board battle with H&R Block

Date: Monday, July 9, 2007
Author: David Twiddy, Chroniclejournal.com

 KANSAS CITY, Mo. (AP) - Breeden Capital Management LLC filed a proxy statement Monday urging H&R Block Inc. shareholders to support its three nominees for the tax preparation giant’s board of directors.

The Greenwich, Conn.-based investment fund, which owns 1.86 per cent of H&R Block’s shares, said last month it planned to push its own slate of board nominees when H&R Block holds its annual meeting Sept. 6.

In a statement to shareholders filed with the U.S. Securities and Exchange Commission on Monday, Richard Breeden, the fund’s chief executive officer and a former chairman of the Securities and Exchange Commission, said he and the two other nominees would push for H&R Block to focus on its tax preparation business and exit the mortgage lending, investment advising and banking businesses. He said the last three businesses have robbed the company of momentum.

Breeden also said H&R Block shares have fallen in value by 19.9 per cent over the past two years while the S&P 500 index rose 26.2 per cent, a lag he said cost shareholders up to US$4.5 billion.

"We believe this loss of potential return stems from a strategy of diversification that isn’t sound, as well as ineffective execution," Breeden wrote. "The board of HRB should insist on much more for shareowners."

The company last month reported an annual loss of $433.6 million, compared to a profit of $490.4 million during the previous year. The period included an $808 million loss on discontinued operations, most from H&R Block’s troubled Option One subprime mortgage division, which the company plans to sell later this year to a subsidiary of Cerberus Capital Management LP.

Last week, the company said it lost a $1.5 billion line of credit for Option One, taking it down to the $8 billion credit line minimum required in its deal with Cerberus.

Besides Breeden, the fund is nominating Robert Gerard, a former assistant secretary of the Treasury Department and current chief executive of telecommunications developer Royal Street Communications LLC; and L. Edward Shaw Jr., former independent counsel to the New York Stock Exchange and a former general counsel to Aetna Inc. and Chase Manhattan Bank.

Breeden said that because the firm would control only three of 11 members of H&R Block’s board, "we cannot guarantee that our ideas will be implemented. However, we can guarantee that we will serve as advocates of change in the boardroom" and push for greater accountability from company officers.

When Breeden initially announced his plan to nominate his own candidates to the board, H&R Block had said it had met with Breeden several times to review his concerns and that company officials "welcome input from all of our shareholders."

The company hasn’t filed its own proxy for the meeting, which is typically held near its headquarters in Kansas City.

H&R Block spokesman Brian Levinson said the company welcomed input from its shareholders.

"We respect our shareholders’ opinion and share their interest in increasing shareholder value," he said. "As always, we continue to maintain an ongoing dialogue with our investors."

Levinson said H&R Block would file its own proxy statement for the meeting later this month.

This is the second Kansas City-area company whose board has fallen into Breeden’s crosshairs.

Following a brief proxy fight, the management of restaurant operator Applebee’s International Inc., based in nearby Overland Park, Kan., this spring agreed to give Breeden two seats on an expanded 14-member board.

H&R Block shares, which have traded in a 52-week range of $18.31 to $24.95, rose two cents to $22.53 Monday.