I've posted about Solitron Devices (SODI) many times on this blog. They're an undervalued electronics manufacturer located in Florida. The company is a perennial net-net that froze investor dollars in place for years at a time. The undervaluation is due to two factors, a complicated bankruptcy in the 1990s with associated environmental liabilities and corporate governance issues.
I took action and wrote the company a letter urging them to resolve the undervaluation, and in response the company repurchased some shares and announced the intent to hold an annual meeting this year. It wasn't as easy as writing a letter, my letter woke up the sleepy shareholder base. Once the company realized people actually cared about them, and were watching their every move they started to take action.
It seemed things were moving in a good direction, the company was resolved to hold an annual meeting, and with environmental liabilities finally settled maybe cash would be returned. Then out of no where a small hedge fund (Furlong Fund) in DC filed a lawsuit against the company. You can read the actual suit here on Jeff's blog.
The lawsuit appears strange to my non-lawyer eyes. It's really a mix of a few items. First, the fund is suing to compel Solitron to hold their annual meeting in April. Second, the fund is trying to force Solitron to pay their legal fees, and finally they bundled a proxy with this whole thing.
To the first argument the fund states that Solitron hasn't picked a date for their annual meeting yet and they want the Delaware court to force them to hold a meeting in April. The company responded that this wouldn't give them enough time to release their annual report before the annual meeting and they'd prefer to hold it in June. I am personally in favor of June because I plan on spending a few extra days in Florida around the annual meeting swimming and sitting at the beach. While the water is acceptable in April I prefer June. Further I would prefer to attend an annual meeting where the company could discuss their full year results.
I believe the reason the fund wants the meeting in April is so they can speed along their proxy agenda. They are pushing the company to change bylaws and push through their slate of directors.
The third item is concerning as a shareholder, and a little strange. If this fund wanted to maximize their investment in Solitron they wouldn't sue the company and then ask for the legal fees. Any legal costs Solitron pays diminishes what they could ultimately receive from the company. Solitron could play the scorched earth strategy and spend all of their excess cash on lawyers defending themselves.
The fund's position is small, they own 18,000 shares worth $67500. If they spend $45k in legal fees a 100% return on investment becomes a ~25% return for fund shareholders. If Solitron doesn't pay the fund's legal fees it's hard to imagine them earning a good return at all. I am wary of an investment thesis which includes suing a target company and the company paying legal expenses for things to work out.
As for the proxy I would encourage all shareholders to read the filing here with the descriptions of directors. If this fund got their way they would effectively control the company after buying 18,000 shares and filing a suit. If the fund is serious about Solitron I don't know why they don't put their money where their mouth is. For filing a suit I'd expect at least a 5-10% position if not more. Either this fund isn't serious, or they don't have much money, I'm not sure which it is.
I'm worried this fund is using Solitron as something to build their resumes. The problem is as a shareholder they're using my money to build their resume, not something I take lightly. I've talked with some of the major holders of Solitron and can say they aren't exactly warm to the proposals either.
There have been indications that Solitron was moving in the right direction on their own without costly lawsuits and some simple prodding from shareholders. Holding a company accountable doesn't require an appearance in a Delaware court. Many CEO's are reasonable people, Saraf included, and with some prompting and discussion do the right thing.
Talk to Nate
Disclosure: Long Solitron
Looking for value in the overlooked margins of the market.
Hi Nate
ReplyDeleteI share your feelings on this - the approach is aggressive, and somewhat overreaching in its demands.
My concern is that this lawsuit simply confirms Saraf's view of outside shareholders, and shuts down (or severely limits) future "reasonable" discourse between shareholders and management.
Enjoy your writing as always
Jonathan
Wow that is a pathetic ownership stake to start a proxy, and I agree with Jonathan, it's really a shame because the management team seemed to be making baby steps towards being more transparent. Then a small rogue institution with an ownership stake less then most luxury cars likely ruins it.
ReplyDeleteNate:
ReplyDeleteIt is rare that I disagree with you 100%.
A). If the Furlong fund is successful in their suit, they should be reimbursed reasonable legal fees. They are bringing the suit on behalf of ALL the shareholders. If management is derelict in their duty, they should be sued & replaced. They are paid to do a job. They have a fiduciary duty. If they can't perform, they need to go...Same with the BOD.
How do you come up with the figure of $45k in legal fees? I would be shocked if it is this high. If the Furlong Fund is bringing suit, it should be a relatively open & shut case...
Has the company had a shareholder meeting? YES/NO? Management can defend themselves VERY EASILY by having or scheduling a meeting within a reasonable time frame. They have to do it by LAW.
The scandal isn't that a suit is under way. The scandal is that a suit has to even be brought in the 1st place.
What is management's defense? We didn't feel like it? We were too busy? We don't have enough chairs to accommodate the shareholders?
If SODI's management spends all their cash defending the company and loses, then what? They should be held personally liable. The Furlong Fund is only asking for what is due to the shareholders.
It is really just so simple...hold a darn annual meeting. I don't think it is going to matter if it is in April or June, as long as they hold it.
The other thing is the also need to release financial data to shareholders on a timely basis. If they want the meeting in June to coincide with the annual report then fine.
As to Furlong proposing their own board, THAT IS GREAT! If you think they will do a better job, vote for them. If not, then don't.
Too many companies have ossified management and BOD. Things need to get shaken up in corporate America.
I would think you would be behind Furlong 100%...
Thanks for the comment, comments like this make this blog valuable. I guess my gripe is how they went about it, from what I've read it appears Furlong has had zero contact with Saraf and is going full out bull in a china store with this. I say this because I know other shareholders have been working with Saraf and actual progress is being made on these fronts, the annual report amongst other things.
DeleteI agree that Solitron needs an annual meeting, and their initial date of six weeks after the annual report seemed fine. If they failed to schedule it once the annual report was out then this seems completely appropriate. Instead this seems like pre-emptive action especially when the company had been moving forward. My concern is this pisses off Saraf and now he digs in his heals whereas he was more open before.
Look, I don't love the Solitron Board either, I'm not even sure you can call it a Board. I think new blood needs to be in there as well. What rubs me the wrong way is Furlong buys up 18k shares, sues the company and proposes a new Board and gains control of the company. What's Furlong's proposal to enhance value? Do they understand the business? They're working hard to alienate the one guy who runs the place. I don't love Saraf but I also realize he is Solitron. It seems more useful to work with him instead of against him.
On a grand scale I completely agree with Furlong, shareholders need to sue for what they are entitled to. I am aware of so many companies that don't hold annual meetings completely disregarding the law. You seem to be plugged in on these legal costs, how much does it cost to sue and compel a company for an annual meeting? I'm aware of the Randall Bearings case which took years and cost close to $100k to compel the company to release an annual report and hold a shareholder meeting.
Nate:
ReplyDeleteThank you for the reply.
Yes, you are correct, Furlong is acting like a "bull in a china shop". If I were them, I would have contacted SODI first...Perhaps there has been no contact between management & Furlong because management would not return Furlong's calls...we don't know...
I also suspect that Furlong may be treating SODI as a "test case". I hope they go after other companies too.
HOWEVER, it is not Furlong that is at fault or at error. SODI has a bad track record when it comes to governance and shareholder relations. Perhaps Furlong thought this method was most appropriate...
How do you figure that they are "going to take control of the company"? Especially with 18k shares? Furlong is going to have to get a lot of other shareholders to come along with them.
You are correct, there are many companies that are flouting the law and not holding meetings or disclosing financials. This is EXACTLY the sort of thing that attorneys should be set loose on. Shareholders of SODI should be cheering Furlong on.
As to Furlong understanding the business...Does the current management understand the business? They've been running it for a long while now, what are the results? I would suggest that there is STRONG possibility that management DOES NOT understand the business.
How has management enhanced shareholder value? Would management reply that "without us, we'd be out of business!" Perhaps that is a good outcome! If there is a lot of capital that is not earning anything for extended periods of time, sell it or liquidate it.
I would argue that, excepting certain odd instances, companies that are trading for a significant discount to NCAV are "prima facie" being mismanaged.
Running these small companies isn't "rocket surgery".
The cost to compel a company to have an annual meeting should not be more than a few thousand dollars. What is the defense the company will bring up? I am not sure what the cost should be exactly, but I would think you could hire a competent attorney for a couple of hundred dollars an hour. This matter shouldn't be more than a dozen of hours or so, and some filing fees. The unemployment/underemployment rate for attorneys is STAGGERING. There are lots of hungry attorneys out there.
I do not know why the Randall Bearing case was $100k, there may have been other issues going on there other than simply holding a meeting/financial disclosure.
As for Fulong INSISTING that the annual meeting be in April, perhaps they are concerned that a delay till June will result in further delay...perhaps there are other timing issues we are not aware of...
Management is in the wrong...there is no question of that.
As a side comment, management in the USA has been ruthless about cutting costs, outsourcing jobs, squeezing more work from employees. Why should management not be subject to the same thing? Saraf is being paid $1,000 a day, every single day. Is he simply a "caretaker"? Employees are not given years to turn things around. If management can't perform up to par, they should be let go. Bring in new/younger managers if possible, if not, liquidate the company.