Friendly Ice Cream Corp. (AMEX:FRN) may soon find itself embroiled in a proxy battle as The Lion Fund vowed to solicit proxies at the company's next annual meeting in 2007 to institute two of its nominees onto the company's board of directors. The 14.92% holder has been engulfed in this battle with the board since August. Sardar Biglari, Managing Partner of The Lion Fund, also addressed shareholders in a letter attached to his 13D/A filing with the SEC yesterday. In this letter, he outlined the fund's frustrations with the company's performance and his intent to nominate new board members at the company's next annual meeting:

"The optimal avenue to achieve good corporate governance and to envision wise means to enhance long-term value is to place very significant shareholders on the board to ensure a proper alignment of interests between the board and the shareholders.

Our concerns over Friendly’s arise from its poor corporate governance, poor operational performance, poor stock performance, and its weak balance sheet. To illustrate, the company’s escalating legal costs directly result from poor judgment on corporate governance issues, which has led to extensive litigation. Good corporate governance contributes to good corporate health. If you are a long-term stockholder, you care about the health of the corporation, which cares about all of its constituencies — franchisees, employees, creditors, customers, and shareholders. Good corporate health will support long-term shareholder value creation, the ultimate objective of a company. Friendly’s must make better capital allocation decisions and improve its capital structure if it is going to survive and then thrive.

We seek alteration in the composition of the Board of Directors to provide greater presence of directors who are autonomous and who therefore are able to represent the best interests of all stockholders. As directors, Phil and I would be technically and psychologically independent.

Over the coming months we will be communicating with you regarding our ideas for Friendly’s. Our Web site, www.enhancefriendlys.com, will be the prime source of information that we will communicate to you on important matters. Our guideline is to tell you the facts that we would want to know if our roles were reversed. We are applying this principle in our communications with you now and will apply no lower standard when we serve as stewards of your capital in our role as board members. Shareholders are entitled to no lesser standards and consideration; all shareholders of Friendly’s should be treated equally. We encourage shareholders to visit our Web site regularly and to share their thoughts with us about Friendly’s." (Read More)

Although Friendly's stock has increased significantly so far this year, it can be partially attributed to the strong buying by The Lion Fund and other shareholders seeking changes in the company's direction. The company's relatively small float makes the share price vulnerable to this amount of buying or selling. If The Lion Fund is successful in obtaining board seats and implementing their solutions for the company, it could mean a justification for these prices and an even larger return in the long run. This makes FRN a great stock to keep an eye on into the 2007 shareholders meeting.

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