I’ve mentioned Solitron (SODI) multiple times on the site, most recently here. While the stock is no longer a net cash bargain, they have bought back a decent amount of shares and are still extremely cheap, especially once their NOLs are taken into account.
Last week, the Furlong fund sued the company to hold an annual meeting with an intention to nominating a bunch of new directors. Ragnar had a nice summary of the situation, but I wanted to add my two cents to what’s going on.
First, I think there are some positives. I think the board could definitely use a bit of fresh blood, and anything that would push them towards making an acquisition to utilize their NOLs or repurchasing shares has to be considered a good thing. I also wouldn’t mind if the potential proxy fight forced them to exercise all of their low priced options and put a bit more cash on the balance sheet.
However, I do have a big problem with the nominating slate. From memory, the CEO owns roughly 30% of the company. Furlong fund owns less than 1%. The own a bit more than me and some other small shareholders I’ve talked to. Their proposal calls for them to replace all of the board except for the CEO with their own nominees. Effectively, they will have taken over the company. I don’t understand how a fund that owns less than 1% of shares thinks they deserve to control the company and the board more than the CEO who has 1) built this business over the past 30 years and 2) has the most incentive to create shareholder value, given he’s the largest shareholder.
I also have some issues with their nominees. Ryan Morris is a fine nominee, though I have heard some quibbles with his track record. I also wonder, given he’s running a fund and the chairman of two other much larger companies, how much time / value he could really add.
I like Steven Kiel from my brief interactions with him on twitter, but from reviewing some of his presentations and articles on seeking alpha, it seems he spends much more of his time in the large and mid cap space than in a nano-cap like Solitron. He also doesn’t have much (any?) board experience or management experience, though I think that’s fine for a microcap like Solitron- it’s not a terrible thing to bring someone with a solid value investor perspective on to the board of a company that has a lot of untapped levers for value creation.
My biggest problem, however, is their last nominee. Derek Cash is currently in the marines and a part time law student, and he seems to be a career military man (no business experience). I have tons and tons of respect for the military, but I don’t see how that qualifies him to serve on Solitron’s board here. Instead, the nomination makes it seem like Furlong is nominating their friends rather than people who can actually add value to Solitron.
I also question the timing. The background of the proxy reads as follows
On July 9, 2010 Mr. Rudewicz spoke with CEO Shevach
Saraf on the phone. During the conversation, Mr. Rudewicz
discussed several items with Mr. Saraf including
environmental liabilities and the Company's market
valuation at or near the value of its cash and treasury
accounts.
On January 13, 2013 Furlong Fund filed a Delaware
General Corporation Law ("DGLC") Section 211 motion ("211
Request" or "211 Matter") to compel an annual meeting in
the Delaware Chancery court because after almost three
years as a shareholder and having read various accounts of
other shareholders on financial websites, the Company still
has not had an annual meeting to elect directors in over
ten (10) years.
The background makes it seems like he had a conversation during the middle of 2010, no further contact, and then filed a lawsuit almost 3 years later. That seems a bit off, right? No contact for three years and then just slapping them with a lawsuit?
To wrap this up, I would love to support some new blood on the board. But I absolutely can’t do it in this form. If Furlong would change their proposal to nominating only one or two directors (even two is pushing it given their small ownership), expanding the total board size to six or seven, and then having the CEO nominate another two or three with solid business experience, I would wholeheartedly support the proposal. If they want more seats, then I say buy more shares! If they had 10-15% of shares, then I think we could start talking about them getting 3 out of seven directors. Finally, if they put a hold on the lawsuit for another month or two to give the company some time to arrange an annual meeting and avoid unnecessary legal costs…. even better.
Disclosure- Long SODI
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This sounds like a much better idea. Please keep us updated. Thanks!
I agree with all the concerns you raised. The most important thing is to have owners on the board. I think Mr. Swenson of Groveland Capital or Mr. Schembs would be more logical candidates for the Solitron board. They own a significant amount of stock and have every incentive to push Solitron in the right direction.
[...] once their NOLs are taken into account. Last week, the Furlong fund sued the company to hold an [...] Related [...]
“I don’t understand how a fund that owns less than 1% of shares thinks they deserve to control the company and the board more than the CEO who has … the most incentive to create shareholder value, given he’s the largest shareholder”
Well, I think the problem is that the CEO is not creating shareholder value, he’s creating value for himself as an individual. The recent buyback was a private placement to his friend, not an open market purchase.
That said, I don’t agree that the entire board needs to be wiped clean. Minority shareholders do need a voice, though.
LC – the recent buyback was done at $2.75/share to a longstanding shareholder seeking liquidity – do you have a source indicating it was a “friend.” Even if it were a friend, I’d be very happy to see SODI buy out friends below $3 all day.
Why does a fund with <1% engage in activism which costs money, time and energy? The expected value doesn't add up.
a. it doesn't cost them much.
b. they misjudge the cost.
c. the upside far outweighs the cost.
d. they have solicited supports from other passive shareholders.
e. some other reasons I can't think of.
Why did the fund decide to engage in the proxy fight in 2013 but not in 2010?
a. they were busy with other better ideas before 2013
b. 2013 is the year stated on SODI's filings that restrictions on dividend will be lifted.
c. procrastination
d. they spent all these time to research and prepare for the proxy fight.
e. some other reasons I can't think of.
What are our answers in the spirit of Occam's razor…
John:
Here is a reason for the activism you may not have thought of….
They are choosing SODI as a target/test case.
There are LOTS of nano-caps that are vulnerable to shareholder activism. They could have other “juicy” targets lines up, and they want to use this one as a test case.
If they don’t have too much into it, and something blows up, not a big deal….They’ll learn their lesson and get better for the next time. Try and try again, learn from your mistakes, and eventually you will have success.
As to owning 1% and not being entitled to board seats? PLEASE!!!! If they company is not being run right, and not being run for the benefit of the shareholders, CLEAN THE SLATE!
As to the Marine maybe not being qualified….As long as he is 18+, not a criminal, and of sound mind, I think he is capable. How can he be any worse than the dullards already on the board? Situations like this need IMMEDIATE CHANGE.
Workers in this country get fired/let go at the drop of a hat. Their jobs are actively outsourced…why not bring that to management?
As long as you have something other than a nominal interest (1 share, 17 shares…) you’ve got the right to come in and propose your own BOD.
The days of management hijacking companies and capital for THEIR exclusive benefit need to come to a SCREECHING HALT.
I wish them well, I hope they get the change they seek.
Interesting thought about the value in learning.
The exercise of options could potentially (and I think likely) constitute a “change of control” by IRS rules, which would invalidate SODI’s NOLs.
Who is talking about options? I don’t remember reading anything about someone owning a bunch of options?
Whopper talked about them the end of paragraph 3:
“I also wouldn’t mind if the potential proxy fight forced them to exercise all of their low priced options and put a bit more cash on the balance sheet.”
These option are how Saraf controls so much of the company… He personally (and presently) owns under 10% but can significantly raise his stake by exercising his options, which gives him the appearance of having much more of the stock. This is all in the company’s 10K, but would have been a lot easier to disseminate if the company had filed a proxy!
This is a really important aspect of the company to understand.