Activist investor Groveland Capital sent a letter to Biglari Holdings Inc. shareholders Thursday, making a series of recommendations to the Steak ’n Shake owner that includes ending a controversial license agreement and additional oversight of chairman and CEO Sardar Biglari’s compensation.



The Minneapolis-based investment fund’s recommendations are designed to improve the company’s corporate governance.



“We believe that good corporate governance practices can drive significant value to all shareholders, as well as accrue to the benefit of management over the long-term,” Groveland wrote.

Nick Swenson, Groveland founder, CEO and portfolio manager, would not comment for this article, citing SEC rules.



Groveland, a Biglari Holdings shareholder, owns less than 1 percent of the company’s shares. The investor has nominated six people to replace Biglari Holdings’ six-person board, including Biglari himself.



In the letter, Groveland said it wanted the board restructured to include two members elected by company management, two members elected by Groveland and two independent members selected jointly by the two.



Groveland said the recommendations should be adopted in advance of the company’s annual meeting, which would “save the company the time and expense of a proxy contest and allow management to focus on the day to day management of the company.”



Groveland wrote that Biglari Holdings’ board practices “have ranked at the bottom” of a rating range from Institutional Shareholder Services, a proxy advisory firm that closely watches corporate governance practices.



“We believe that good corporate governance practices can drive significant value to all shareholders, as well as accrue to the benefit of management over the long-term,” Groveland wrote.



The effort is the first real test of Biglari’s hold of the company since he won seats on the Steak ’n Shake board in 2008. He was named chairman the following year and renamed the company after himself.



Yet the proxy faces a stiff challenge because of the steps Groveland is targeting with its recommendations. The most notable is a license agreement, which triggers in the event of a change of control. That would be the case should Groveland win a majority of seats on Biglari Holdings’ board.



Biglari has a licensing agreement with Biglari Holdings and with Steak ’n Shake for the use of his name, after the company renamed the restaurants “Steak ’n Shake by Biglari” in 2013.



In the event of a change of control, Biglari would get 2.5 percent of company sales for at least five years. On its own, 540-unit Steak ’n Shake’s sales in its 2014 fiscal year were $765.6 million; 2.5 percent would be more than $19 million. Biglari Holdings’ restaurant operations reported $18 million in net earnings last year.



The licensing agreements “could create the prevention of a transaction involving a change of control of the company, or deterrence of a potential proxy contest,” the company said in its most recent annual report, which lists the agreements among the company’s “risk factors.”



Groveland also wants additional board oversight of Biglari’s compensation. Biglari receives a pay deal in which he gets a bonus based on the growth in value of Biglari Holdings. The pay is capped at $10 million.



But, in 2013, Biglari Holdings transferred more than $300 million to The Lion Fund and a related entity, Biglari Capital Corp., in exchange for a limited partner interest. Most of that was in the form of stock in Biglari Holdings and Cracker Barrel. Biglari controls The Lion Fund and Biglari Capital Corp.



Those funds do the investing work for Biglari Holdings and receive a similar bonus deal to the one Biglari has with Biglari Holdings — only without the $10 million cap.



Groveland wants a board committee with members who are independent or who have no longtime association with Biglari to oversee the compensation and fees he receives from investment partnerships.



Groveland wants to unwind the complex relationship between Biglari Holdings and The Lion Fund. The hedge fund owns 16.1 percent of Biglari Holdings stock and has been acquiring shares.



That stake enables the fund “to exert significant influence on actions the company may take in the future that require shareholder approval, including change of control transactions,” according to the annual report.



Biglari Holdings owns a limited partner interest in The Lion Fund. Groveland wants that interest redeemed, and that any shares of Biglari Holdings bought with company money to be treated as treasury shares or retired.



Contact Jonathan Maze at [email protected]n.com.

Follow him on Twitter: @jonathanmaze