SCHEDULE 13D/A: Activist Shareholders Launch Proxy Fight at Lifeway Foods, Nominate Seven Directors

A group of significant shareholders, including co-founder Ludmila Smolyansky and former COO Edward Smolyansky, has initiated a proxy contest to replace the majority of Lifeway Foods' board, citing concerns over corporate governance, executive compensation, and the handling of a prior acquisition offer.

Summary

• Edward Smolyansky, along with Ludmila Smolyansky and The Edward Smolyansky Trust 2/2/16, collectively beneficially own 4,163,141 shares of Lifeway Foods, Inc. common stock, representing approximately 27.4% of the outstanding shares as of March 17, 2025.
• Edward Smolyansky sent a letter to Lifeway Foods on March 13, 2025, notifying the company of his intent to nominate seven directors for election at the 2025 annual meeting of shareholders.
• The proposed slate of directors includes Ludmila Smolyansky (co-founder and former Chairperson), Edward Smolyansky (former COO and CFO), Robert Whalen, Cindy Curry, George Sent (former lead independent director of Lifeway), Michael Leydervuder, and Richard Beleutz.
• The filing persons intend to solicit proxies in support of their nominees and advocate for the replacement of Julie Smolyansky as Chairperson, President, Chief Executive Officer, and Secretary of the Company.
• They also seek to commence or accelerate an exploration of the Company's strategic alternatives, including a reevaluation of Danone North America PBC's proposal to acquire the Company.
• Edward Smolyansky plans to sell up to 20,000 shares of Common Stock following this filing and anticipates the costs of the proxy solicitation to be between $100,000 and $300,000, which he intends to seek reimbursement for from the Company.
• Saratoga Proxy Consulting LLC has been engaged for solicitation and advisory services, with a fee not to exceed $75,000 plus expenses.

Sentiment

Score: 3

Explanation: The sentiment is largely negative towards the current management and board, characterized by strong criticisms regarding corporate governance, executive compensation, and strategic decision-making. While the filing group aims to create positive change, the immediate context is one of conflict and dissatisfaction with the status quo.

Positives

• The proposed slate of directors brings diverse and relevant experience in food and beverage, finance, investment banking, and corporate governance, which could enhance board oversight and strategic decision-making.
• The activist shareholders' stated goal is to increase the market value of the Common Stock by improving corporate governance and exploring strategic alternatives.
• The inclusion of co-founder Ludmila Smolyansky and former COO Edward Smolyansky provides deep historical and operational knowledge of Lifeway Foods and the kefir industry.

Negatives

• The filing alleges that the current Board's conduct may have breached their fiduciary duties to shareholders, specifically regarding the grant of 283,337 shares to CEO Julie Smolyansky without Danone's consent.
• The aggregate CEO award of $8.5 million in cash and shares is criticized for equating to more than 94% of the Company's 2024 net income, suggesting a focus on enriching the CEO over maximizing shareholder value.
• The Board is criticized for rejecting Danone's unsolicited offer of $27 per share, which represented a 72% premium over the 3-month volume weighted average price, and for failing to negotiate better terms.
• The Company is currently facing a lawsuit from Danone North America PBC alleging breach of fiduciary duty by directors and breach of contract by the Company and Julie Smolyansky.
• The relationship with Danone, the Company's largest unaffiliated investor for over 25 years, is stated to be in need of repair due to the ongoing litigation and alleged questionable conduct.

Risks

• The ongoing lawsuit filed by Danone North America PBC against the Company and its Board members poses legal and financial risks, potentially influencing the Company's willingness to engage in strategic transactions.
• A proxy contest can create uncertainty and instability within the company, potentially diverting management's focus from core business operations.
• The dispute over the validity of shares issued to Julie Smolyansky or her spouse without Danone's consent could lead to further legal challenges or corporate governance issues.
• The potential for a change in control, if the Smolyansky group is no longer deemed to be acting together with Julie Smolyansky, could introduce new strategic directions or operational shifts.

Future Outlook

Edward Smolyansky intends to prepare and distribute a proxy statement for the 2025 Annual Meeting, solicit proxies from shareholders, and vote all beneficially owned shares in support of his nominated directors. He also plans to advocate for the replacement of the current CEO and a reevaluation of strategic alternatives, including Danone's acquisition proposal. He may also seek to inspect company books and records to facilitate communication with other stockholders.

Management Comments

• Edward Smolyansky: "The Company has reached an inflection point."
• Edward Smolyansky: "The Boards insistent capitulation to Lifeways self-absorbed and self-interested CEO has always been in question, it now must prove in court that its conduct did not breach the directors fiduciary duties to shareholders."
• Edward Smolyansky: "Importantly, the timing and magnitude of the $8.5 million aggregate CEO award in cash and shares equating to more than 94% of the Companys 2024 net income suggests that this Board is far more interested in enriching the CEO than maximizing value for all shareholders."
• Edward Smolyansky: "The Boards failure to maximize shareholder value while enriching the CEO warrants a complete and immediate overhaul."
• Edward Smolyansky: "Lifeway can no longer be burdened with a Board incapable of putting the interests of its shareholders ahead of those of its CEO."
• Edward Smolyansky: "The relationship with the Companys largest investor must be repaired, and an independent committee can be formed to evaluate all strategic alternatives aimed at maximizing value for shareholders."
• Edward Smolyansky: "The proposed slate has the right balance of kefir product expertise, shareholder representation, Board and operational familiarity with Lifeway, and financial and transactional experience, to usher a new growth phase for Lifeway."

Industry Context

This announcement highlights a significant internal struggle within Lifeway Foods, a key player in the cultured dairy and probiotic products industry. The dispute, involving the founding family and a major long-term investor (Danone), underscores challenges related to corporate governance, executive compensation, and strategic direction within the consumer packaged goods sector. The emphasis on 'kefir product expertise' and 'strategic alternatives' suggests a focus on both operational efficiency and potential M&A activity, reflecting broader trends in the food and beverage industry where consolidation and brand innovation are key drivers.

Comparison to Industry Standards

• The proposed nominees bring extensive experience from various sectors relevant to Lifeway's business: George Sent (Managing Director at Cascadia Capital) has over two decades in investment banking, specializing in Food, Beverage & Agribusiness M&A, including prior experience as Lifeway's lead independent director and Audit/Corporate Governance Committee Chair.
• Cindy Curry (CFO of Rakuten Advertising, former CFO at BBDO Worldwide, IPG Mediabrands, Broadwind Energy) offers over 30 years of experience in accounting, financial planning, corporate strategy, and M&A with global, publicly held companies, providing expertise in financial oversight and digital marketing relevant to consumer brands.
• Robert Whalen (Senior Advisor at AIR Asset Management, co-founder of Atlys Group) has over three decades in financial services, investment management, and capital markets, including leadership roles at American Express, which could bring valuable insights into capital allocation and investor relations.
• Richard Beleutz (Founder and CEO of AIR Asset Management) has nearly 30 years of experience in the investment industry, private equity, investment banking, and hedge fund operations, offering expertise in structured finance and investment strategy.
• Michael Leydervuder (CEO and Managing Partner of L Development) brings over 20 years of experience in real estate and business development, which could be relevant for operational footprint and asset management strategies.
• The activist group's criticism of the CEO's compensation package (equating to over 94% of 2024 net income) implicitly compares it unfavorably to industry standards for executive pay relative to company performance and shareholder value creation, though no specific comparable companies are named for this metric.

Management Changes

Corporate Governance

Legal Proceedings

• On March 3, 2025, Danone North America PBC filed a lawsuit against Lifeway Foods, Inc. and each member of its Board of Directors in the Circuit Court of Cook County, Illinois, Law Division.
• The lawsuit alleges that the Company's directors breached their fiduciary duty of loyalty.
• The lawsuit also alleges that the Company and Julie Smolyansky committed a breach of contract by violating the Stockholders Agreement (and, in the alternative, that their conduct was barred by promissory estoppel) by issuing shares to Julie Smolyansky or her spouse without Danone's consent.

Related Party Transactions

• Julie Smolyansky, daughter of Ludmila Smolyansky and sister of Edward Smolyansky, is the Chairperson, President, Chief Executive Officer, and a director of the Company.
• Jason Burdeen, Julie Smolyansky's spouse, is employed by the Company as the CEO's Chief of Staff, with a total compensation of $242,031 in 2023.
• The filing persons dispute the validity of shares purported to have been issued to Julie Smolyansky or her spouse without the consent of Danone North America PBC.
• Ludmila Smolyansky and Edward Smolyansky are parties to Joint Filing Agreements, Settlement Agreements (Edward's terminated, Ludmila's ongoing), and a Non-Disclosure Agreement (NDA) with the Company.
• Ludmila Smolyansky and Edward Smolyansky are parties to the Stock Purchase Agreement and Stockholders Agreement, dated October 1, 1999, and a related letter agreement, dated December 24, 1999, involving Danone and other family members.
• Ludmila Smolyansky's past transactions include sales and gifts of shares by the Ludmila Smolyansky Trust and receipt/gift of shares by the Ludmila and Edward Smolyansky Family Foundation.
• Edward Smolyansky's past transactions include sales of shares, gifts of shares received, and gifts of shares to his minor son and the Ludmila and Edward Smolyansky Family Foundation.
• Edward Smolyansky disclaims beneficial ownership of shares held by Smolyansky Family Holdings LLC (shared voting/dispositive power with Julie Smolyansky) except for pecuniary interest, and shares held by his son.
• Ludmila Smolyansky and Edward Smolyansky disclaim beneficial ownership of shares held by the Ludmila and Edward Smolyansky Family Foundation.

Stakeholder Impact

• **Shareholders**: The proxy contest aims to maximize shareholder value by proposing a new board and exploring strategic alternatives, potentially leading to a higher stock price if successful. However, the contest itself introduces uncertainty and potential for prolonged internal conflict.
• **Employees**: A change in management and strategic direction could lead to shifts in company culture, operational priorities, and potentially personnel changes, especially at senior levels.
• **Customers**: Changes in leadership and strategy could influence product development, marketing, and distribution, potentially impacting product availability or brand perception.
• **Suppliers/Creditors**: Stability and strategic clarity are important for relationships with suppliers and creditors. A contested board could introduce uncertainty in these relationships, though the filing does not directly address this.
• **Regulatory Authorities**: The SEC filing itself is a regulatory disclosure, and the ongoing lawsuit with Danone highlights regulatory scrutiny and potential legal ramifications for the company's governance practices.

Next Steps

• Edward Smolyansky intends to prepare and distribute a proxy statement for the 2025 annual meeting of shareholders.
• Edward Smolyansky intends to solicit proxies in support of his nominated directors.
• Edward Smolyansky may exercise his right to inspect certain books and records of the Company to identify and communicate with other stockholders.
• Edward Smolyansky intends to sell up to 20,000 shares of Common Stock following the filing of this Amendment.
• The 2025 annual meeting of shareholders will be held, where the nominated directors will be put forth for election.
• The lawsuit filed by Danone North America PBC against the Company and its Board members will proceed.

Key Dates

Keywords

Lifeway Foods, LWAY, Schedule 13D, Proxy Contest, Shareholder Activism, Corporate Governance, Board Nomination, Director Election, Kefir, Dairy Industry, Danone Lawsuit, Executive Compensation, Strategic Alternatives, Shareholder Value