The Solitron Proxy Battle

It's refreshing when a little sunlight is finally shines on a dark corner of the market.  Solitron Devices (SODI), a Florida chip manufacturer was one such company deserving of sunlight.  They operated in the shadows of the market for close to twenty years after emerging from bankruptcy in the 1990s.

When a management team is used to darkness they feel like they can do whatever they want.  They don't answer to investors, they only answer to themselves.  Sunlight is an incredible disinfectant and a little goes a long way towards killing harmful attitudes and behaviors.  Solitron is/was being run by the CEO/CFO/Executive-everything Shevach Saraf for the benefit of himself at the expense of shareholders.

After emerging from bankruptcy Saraf directed the company's free cash flow into Treasury bonds as an insurance policy against ongoing environmental litigation.  It's debatable whether this was necessary or not.  While shareholders received nothing Saraf paid himself handsomely in both cash and in options.  He willingly granted himself options and as far as I can tell never purchased shares on the open market.  It must be nice to be in a position where you can take wealth from public shareholders and redirect it to yourself without anyone batting any eye.  To put things in perspective Saraf takes home about 15% of the company's gross profit as a salary.  These are the sort of things that happen when companies operate in the dark.

In business school theory, a Board of Directors answers to shareholders, and company management to the Board.  It doesn't work like this in the "real world".  No one answers to shareholders, and the Board answers to management.  This is especially true for Solitron.  The "Board" consisted of Saraf and two of his friends.  One them appeared to have a background in the business and the other was unresponsive and abusive to shareholders.  It's hard for me the fathom how a Board that is opposed to shareholders can answer to them.

I've highlighted Soltron numerous times on this blog (Google "site:oddballstocks.com Solitron").  I helped get the ball rolling that resulted in the first annual meeting in decades.  What's important to note is I didn't force the meeting, all I did with this blog was start to shine a little sunlight on the situation.  An undervalued company plus a lot of sunlight creates incredible opportunities for value investors.

After that first annual meeting Solitron brought on a few more directors.  And brought back a director shareholders fired.  It was as if Saraf looked shareholders in the eye and said "yes, we'll listen to you" and then proceeded to pull out a giant stick that he stuck in our eyes.  If Saraf wants to run Solitron like he owns the company he should just buy us all out.  Let me repeat, if Saraf wants to run Solitron like his own little fiefdom he needs to tender and buy us out, with his own money!  If he doesn't then he has no right to act like this, and it's time for shareholders to take an ever bigger stick and poke right back.

Thankfully shareholders have a hedge fund that's willing to wield the stick that we're going to collectively poke at Solitron.  Cedar Creek Partners, a hedge fund run by Tim Eriksen has gone activist on the company.  Cedar Creek has filed a preliminary proxy in order to elect Tim and David Pointer as directors.

Tim has put his money where his mouth is, his fund owns 6% of the outstanding stock.  Why doesn't any of Solitron's Board outside of Saraf own that much stock?  Why do some members own nothing? How can a director with ZERO shareholder interest stand up for shareholders?  They can't, instead they take a payment from Solitron and act in management interest.  When you want to know how a director will act look at their own financial interest.  Directors with shareholdings will act in shareholder interest, directors just collecting a paycheck will act in management's interest.

Eriksen Capital (Cedar Creek's managing partner) has proposed two individuals who will stand up for shareholders and continue to shine sunlight where it deserves to be shined.

Solitron has responded to Eriksen's proxy with an attack letter.  They initiated a dividend (in response to shareholder action) and a buyback (in response to shareholder action) and then go on to attack the credentials of Tim and David.  Management is hoping that their dividend and buyback persuade shareholders that they're doing enough to keep their seats.

I have a large capacity to forgive, I believe that people can reform themselves, but I believe in actions, not words.  If someone is an alcoholic and claim they're clean, but continue to drink it's the actions not the words that tell the story.  Solitron is no different, they claim they've changed but their actions say they haven't.  They aren't listening to shareholders, they re-instated the Director that we threw out.  They've initiated shareholder friendly actions because shareholders have been putting a lot of pressure on the company.  It seems to be that if shareholder pressure is needed for these changes then we need more of it.

Solitron attacks Tim and David saying they don't have the proper credentials or industry experience to be on the Board.  I find it ironic that an executive with title inflation (Saraf is Chairman/CEO/President/Treasuer/CFO) is saying the lack of titles is a stumbling block.  Maybe if Tim and David could hand out titles themselves it wouldn't be an issue.  Solitron sets up a straw man with this argument.  Would they really be willing to take on outside directors looking to return capital if they went to Harvard and worked in defense?  If those directors were opposed to management then I'm sure their credentials wouldn't be good enough.

I could disassemble the Solitron letter piece by piece, but by doing that I'd give credence to it.  I don't want to give credence to a company who says they've changed yet their actions show otherwise.  This is a company that has been living and enjoying it's dark space and is now cowering in the sunlight.  Shareholders aren't petitioning for job cuts.  We're asking that management answers to the rightful owners, returns excess capital, and operates in a shareholder friendly manner.  If management doesn't want to do this then they need to sell the company, or buy shareholders out.

Until management tenders for 100% of the shares, or sells to another company I have a feeling the sunlight will only grow more intense.  A little disinfectant goes a long way.

I'll be voting my shares for Eriksen Capital and I hope you do as well.

Disclosure: Long Solitron