Luby's, Inc. (NYSE:LUB) has decided to fight back against a syndicate of activist hedge funds looking to take over its board. The company announced a broad program aimed at appealing to institutional investors in an effort to turn them against the hedge funds' proxy campaigns. The company is concerned that the hedge funds will use the board control to improve short-term shareholder value at the expense of long-term growth.

Ramius Capital - the head hedge fund in the fight - nominated four candidates to Luby's board of directors saying that it will strengthen the quality of the board by adding valuable restaurant industry and corporate finance expertise. Moreover, the hedge fund believes that the nominees and prove valuable in helping management evaluate and execute on its new growth strategy, explore various strategic and financing alternatives to enhance shareholder value, and ensure that the company is being run solely for the benefit of shareholders.

Luby's sent an open letter to shareholders arguing against voting Ramius affiliates onto the company's board of directors. The board insisted that they were committed to creating value for all of Luby's shareholders. Under their guidance, the company has returned to profitability, eliminated more than $120 million in debt, experienced same-store sales growth, improved overall product offerings and improved store-level execution.

Luby's CEO and COO - Chris and Harris Pappas, respectively - have also extended their employment contracts through 2009 without an increase in salary. The two have also invested an additional $11.2 million into the company, bringing their stakes up to 24% of outstanding shares. Nobody has a greater stake in the company than these two officers.

The board also insisted that they have been very open with all shareholders. Recently, some of them recommended that the company releverage its balance sheet through the sale and leaseback of real estate; however, the company determined that keeping the real estate is in the best interest of shareholders long-term. Owning rather than leasing property generates better operating margins and greater cash flow returns.

Finally, the board outlinedthe Luby's new strategic growth plan. First, the company wants to grow its footprint by building 45 new stores over the next five years that will focus on a fast casual dining experience. Secondly, the company wants to continue updating existing locations. And finally, the company wants to expand its culinary contract services business, which has grown to eight accounts so far this year.

In the end, sometimes activist hedge funds aren't doing what's best for everyone in the long-term. Ramius' motives are still unclear, but typical actions taken by activist hedge funds are designed to unlock value in the short-term. The proposed sale and leaseback of property is one great example of this type of activity. Regardless, LUB is definitely a stock to watch!

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