Applebee's International, Inc. (NDAQ:APPB) moved up $0.06, or 0.24%, to $25.23 today after Breeden Capital the company's offer for two seats on the Board of Directors. Breeden Capital had been seeking four seats in what has been a long standing battle with the company. We first began covering this story back in December when Breeden Capital expressed disappointment with the company's operating results and valuation. Specifically, the hedge fund pointed out APPB's chronic under-performance compared to other company's in its peer group. They noted Applebee’s performance was 113.3% worse than Darden, 51.7% worse than the S&P 500, and 47.4% worse than the 75th percentile of the casual dining peer group. Moreover, they pointed out the company's deteriorating fundamentals by showing declining same-store sales (5.2% to -1.0%), declining operating margins (16% to 12.4%), and declining return on capital invested (16% to 10%). Clearly, there is cause for concern at Applebees!

So, what does the hedge fund plan to do about it? Well, they outlined several changes that they would make in a past letters to the Board of Directors:

1. Significantly reduce the number of company-owned restaurants by re-franchising a substantial number of restaurants in a multi-year program.
2. Cease all further capital expenditures to open new company-owned restaurants, and minimize capital expenditures to renovate company-owned restaurants pending their sale.
3. Reduce overall expense levels, especially in corporate level overhead, and dispose of non-core assets.
4. Use excess cash generated from these steps and improved performance to increase the return of free cash flow to shareholders.
5. Improve various governance practices, including reducing the number of insiders on the company's board, precluding former CEOs from continued board service, strengthening independence requirements, eliminating the personal use of corporate aircraft and abolishing your staggered board.
6. There should be a moratorium on any incentive compensation for any tier one executives so long as TSR remains negative. Similarly, incentive compensation should be zero if the company remains in the fourth quartile of relative performance in generating TSR.
7. A large proportion of incentive compensation (such as 50-75%) should be based on relative measures of performance compared to the company’s publicly traded casual dining competitors.
8. Growth in average per restaurant royalty fees from franchise operations should be included as an incentive target for relevant executives (including the CEO and CFO), since franchisees represent 73% of the company’s system.
9. The level of free cash flow would be a healthy measure for some portion of incentive opportunities, especially for the CEO and CFO.
10. Minimum relative performance in generating TSR or EVA (such as being in the top 20%) should be a significant part of every executive’s target incentive eligibility. All executives should have a vital stake in the company outperforming its peers.
11. Personal use of corporate aircraft should be banned. Tax gross-up payments made during the last three years should be repaid to the company.

So, what happens now? Well, since Breeden Capital has rejected the two board seat offer, it is up to the company to either produce a counter-offer of four seats or face a possible proxy fight. The first step to watch for that would indicate a proxy fight would be an official declaration by Breeden asking for the company's shareholder records so they could mail proxy materials - which would be found in a future DEF14A filing with the SEC. Meanwhile, if the hedge fund's nominees are elected to the company's Board of Directors, it could mean significant share appreciation over the long-term for the company's shareholders. This makes APPB a stock worth watching!

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