Friendly Ice Cream Corp's (NYSE:FRN) battle with The Lion Fund escalated recently, after yet another series of letters were exchanged. The two have been in conflict for some time now, with The Lion Fund attempting to obtain board seats after expressing concern with the company's "classified board" and failure to implement strategies to enhace the company's share price.

In the company's recent letter, they noted:

"Friendly Ice Cream Corporation (AMEX: FRN) today announced that Sardar Biglari rejected the Company's offer of two seats on its Board of Directors for Mr. Biglari and his colleague, Phillip Cooley. The Company's offer contained only one condition - that they agree not to solicit any proxies for additional board seats or other matters not recommended by the Board. The Board's offer was intended to respond favorably to a significant shareholder's request for a voice on the Board, while avoiding the unnecessary expense and distraction of a proxy contest.

In rejecting the Company's offer, Mr. Biglari increased his demands to include the submission of a proposal to Friendly's shareholders to remove the Company's three classes of directors. Donald N. Smith, Chairman of the Board, said, '(W)e gave Mr. Biglari what he asked for. Now he wants more. What does he really want? His demands, together with his actions at the publicly traded Western Sizzlin Corporation ("WSC"), raise concerns regarding his true intentions. It appears that he isn't interested in just a voice on the Board - he wants to control the Board.'

In a letter to shareholders dated January 2, 2007, Smith stated, '(t)he results of WSC suggest that it would not be in the best interests of our shareholders to allow Mr. Biglari to control the Friendly's Board. After Mr. Biglari took control of WSC, rather than reinvesting in the restaurant business of WSC, Mr. Biglari used WSC's surplus cash, its bank credit facilities and a brokerage margin account to purchase Friendly's stock. It appears that Mr. Biglari is leveraging the credit of WSC and his hedge fund to purchase our stock.'

Smith added, 'Under Mr. Biglari's leadership, WSC's operating cash has dwindled, year to year earnings from operations have declined, franchised restaurants continue to be closed, and its stock price has declined significantly. While he continues to offer criticisms of our company, he hasn't offered any plan, vision or strategy for increasing Friendly's shareholder value. If Mr. Biglari gains control of your Board, he could change the Company's financial agreements to allow him to invest Friendly's cash in other companies, like he has done at WSC. We believe that Mr. Biglari wants to gain control of the Board in order to redirect corporate assets for purposes other than the continued growth of Friendly's. The Friendly's Board will take all actions necessary to prevent this from happening. Friendly's is a restaurant company not a hedge fund or investment company.'" (Read More)

Then today, The Lion Fund fired back with their response in their recent Schedule 13D/A filing with the SEC:

"On January 2, 2007, Donald Smith, Chairman of Friendly Ice Cream Corp., issued another letter that we believe was intended to misinform you. I am not surprised: Mr. Smith and the board will take any action necessary that would divert your attention from the company's dismal performance. Mr. Smith, along with the board, has failed to create shareholder value since Friendly's went public a decade ago at $18 per share.

In his letter, Mr. Smith neglects to tell shareholders that we recently proposed just one change to Friendly's corporate governance -- to declassify the staggered board -- but the board rejected our idea of putting the suggestion to shareholder vote; instead it opted to protect its interests, not yours. Shareholders are the true owners of Friendly's; consequently, they should decide whether or not an entrenched board is good policy. Clearly, the board does not want to be held accountable.

We believe the board will continue to make decisions to protect its own best interests at the expense of the shareholders' well-being. The cost of an entrenched board imposes a heavy burden on Friendly's value. Since we disclosed our large ownership in the company, its stock price has risen to a level reflecting the expectation that positive change is in the offing. While we cannot promise future returns, we can guarantee we will do our best to create shareholder value by seeking to institute corporate governance reform, improved operational performance, and improved financial performance -- all revisions which promote the right behavior -- thereby putting the shareholders first.

Furthermore, we are seeking just two board seats to serve the best interests of all shareholders. We don't want unequal footing with other shareholders. Mr. Smith does. For instance, he is permitted to purchase more than 15% of the company without triggering the company's "poison pill" rights plan. We will continue to share with you other decisions made by the board designed to provide immunity not accountability, and in the process to disenfranchise us shareholders.

We lack confidence in the current board but have confidence that you will support our position when we seek your votes to bring much needed independent
thought and demanding, impartial financial discipline." (Read More)

Both of these parties have a point: The company did try to avoid an expensive proxy contest by offering two seats that were rejected by The Lion Fund; however, they failed to address other critical issues, including the "classified board" issue. Even if the hedge fund would have taken two seats on the board, they could have been marginalized by the fact that it was a classified board. Now, the hedge fund will be soliciting proxies in an attempt to take over the company. Whether or not they are successful depends on how shareholders respond to these letters. This is definitely a stock to watch as this situation unfolds.

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