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Office Depot and Starboard fail to reach agreement

BOCA RATON, Fla. (AP) -- Office Depot Inc. said Tuesday that it has failed to reach an agreement with its biggest shareholder over its board composition.

The retailer said last week that it was willing to strike a compromise with Starboard Value LP, which holds about 14.6 percent of Office Depot's outstanding stock, ahead of its annual meeting on Wednesday.

Starboard wants to replace four board members, which Office Depot has said would impair the search for a CEO to lead the new company that will be formed in a tie-up with OfficeMax. Office Depot and OfficeMax Inc. are working on a $1.2 billion merger that is expected to close by year's end. Two of the directors Starboard is seeking to oust are seated on the CEO selection committee.

Office Depot said that after negotiating through the weekend and into the night Monday, it proposed a settlement that included two of its directors resigning and the nomination of three of Starboard's candidates who were supported by two outside proxy advisory firms.

The company also said that it offered for one of these candidates to join its CEO selection committee, replacing one of the current directors. It suggested that any decision on the remaining three director seats be completed after the merger.

However, the retailer said Starboard refused to settle and it is urging shareholders to vote in favor of all 10 of its nominees at the meeting.

"Today's extremely disappointing outcome should serve as a warning call for all investors," Neil Austrian, Office Depot's chairman and CEO said in a statement. "We put forward what we viewed as an attractive offer that was not only responsive to (shareholders), but to Starboard's demands .... Yet, despite all of its proclamations about wanting to ensure the merger is completed successfully and overseen by the best possible directors, Starboard continued to make demands that ultimately ran contrary to that goal."

Starboard said that Office Depot is deliberately misleading shareholders about negotiations.

Jeffrey Smith, CEO and chief investment officer of Starboard said that the firm has been working for months to engage in constructive settlement discussions but it is only in the days leading up to the meeting that Office Depot, under pressure from shareholders and proxy advisory firms, has engaged.

"Unfortunately, they have painted a highly misleading, self-serving picture of the settlement discussions that took place to try to make shareholders believe we are being unreasonable," Smith said. "The truth is that we made every attempt to work with Office Depot over the past few days to reach a compromise that would vastly improve the current Board and the Pro Forma Board.

Smith said the company was entirely unwilling to entertain a settlement offer that would have replaced three of its directors with three of Starboard's directors. He also said that the company failed to mention that Starboard made a counter-offer that included many of the retailer's provisions but required that the board be composed of 10 directors in total, including three Starboard nominees. He said Office Depot wants to increase the size of the board to 11 to keep its members on.

Starboard said that Office Depot has also refused to remove a provision that would prevent the shareholder from nominating directors until 2015.

"Do not be misled," Smith said. "The settlement discussions did not break down because of Starboard."

Starboard said it also wanted to continue negotiations but the company imposed an arbitrary deadline. They urged shareholders to vote in favor of their slate of nominees.

Shares of Office Depot, based in Boca Raton, Fla., increased 10 cents, or 2.3 percent, to hit $4.25 by Tuesday afternoon, outpacing broader market gains.