By  on September 26, 2008

Activist investors are again challenging the Dillard’s family — this time trying to get Dillard’s Inc.’s top executives to effectively relinquish their control over the board by selling their Class B stocks back to the firm.

Clinton Group Inc. and Barington Capital Group, which are among a cohort of investors that holds 5.7 percent of the retailer’s Class A common stock, has sent a letter to the board arguing that public shareholders are penalized by the company’s two-tier share system. The correspondence was filed with the Securities and Exchange Commission.

“Currently, a number of the senior executives of Dillard’s control the company’s Class B common stock through their ownership interests in W.D. Company, which itself owns approximately 99.4 percent of the Class B shares,” the letter said. “While the Class B shares have the same per share economic interest in the company as the Class A shares, such shares provide the Class B shareholders with effective control over the company through their ability to elect two-thirds of the members of Dillard’s board of directors.”

The investors noted that there are 4 million Class B shares outstanding and said the holders of the 70 million Class A shares could buy out the other class at a “substantial premium.”

Clinton Group and Barington Capital endorsed having outside directors in control of corporate boards. “We also believe that the public equity markets in general justifiably reward companies where management teams do not have effective control,” the letter said. “In the case of Dillard’s, however, it is clear to us that the company and its public shareholders are being penalized because of its A/B share class structure.”

The activists had pressured Dillard’s to improve profitability.

The retailer finally relented to appointing outsiders after the activists pushed for disclosure of executive compensation and perks, such as use of the company aircraft and threatened a proxy fight. In June, a slate of four new directors was named, including R. Brad Martin, former chairman and chief executive officer of Saks Inc., and Nick White, president and ceo of White & Associates and former general manager of Wal-Mart Stores Inc.’s Supercenter division.

Shares of Dillard’s closed Friday at $12.84, up 34 cents, or 2.7 percent.

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