Enterprise Diversified, Inc. v. Woodmont Lexington, LLC

Previously regarding Sitestar (now known as Enterprise Diversified or ENDI but still trading as SYTE), we had a post in 2016 about the activist takeover as well as an interview in Oddball Stocks Newsletter with the new management.

The company put out an 8-K today regarding a dispute with (and lawsuit filed against) the manager that took control of Mt. Melrose, LLC (its divested real estate division in Lexington, Kentucky) in July:

This morning, Wednesday, November 20, 2019, Enterprise Diversified, Inc. (the “Company”) filed a verified complaint in the Court of Chancery of the State of Delaware commencing a civil action against Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”).

As previously reported in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2019, the Company had sold to Woodmont, on June 27, 2019, 65% of the Company’s membership interest in Mt Melrose, LLC, a Delaware limited liability company (“Mt Melrose”), which, as has been previously reported, owns and operates a portfolio of income-producing real estate in Lexington, Kentucky. Since the closing of the Mt Melrose transaction, Woodmont, by its representative, Tice Brown, has made repeated offers to buy out the Company’s remaining interest in Mt Melrose. Woodmont’s most recent offer was received by the Company, in writing, on November 11, 2019, with a deadline for acceptance of 9:00 a.m. Monday, November 18, 2019. All such offers have been rejected or not responded to by the Company, as being unfavorable, undesirable and not in the long-term best interests of the Company and its shareholders.

The present action was filed by the Company in response to repeated claims and demands and injurious conduct by Woodmont and its representative, Tice Brown. The Company is seeking, among other relief available, injunctive, declaratory and equitable relief against Woodmont, along with attorneys’ fees and expenses.

The LLC agreement between Woodmont Lexington, LLC and Enterprise Diversified, Inc. is available as an exhibit here. And here is the most recent investor presentation of ENDI, from November 14th.

The docket shows that Enterprise Diversified has filed a Verified Complaint for Injunctive Relief (Confidential Filing), a Motion for Temporary Restraining Order, and a Motion for Expedited Proceedings, as well as a Brief in Support of those Motions, plus various other documents like proposed Orders. Some of these documents were filed under seal, but the two motions can be seen below:

201911201503 by Nate Tobik on Scribd

The case is currently assigned to Delaware Court of Chancery Vice Chancellor J. Travis Laster. We read a lot of his decisions for the "Delaware Chancery Corner" section of the Oddball Stocks Newsletter - he is extremely sharp. 

Life Insurance Company of Alabama

Life Insurance Company of Alabama (LICOA) is a micro cap insurance company with two share classes, one of which (LINS, the fully voting shares) trades at a modest (~20%) discount to book value and the other of which (LINSA, with limited voting rights) trades at a gigantic (>50%) discount to book value. Note that in addition to the voting rights difference, the LINS shares have 5x the economic interest of the LINSA shares.

The company was written up on Value Investors Club and the story is broadly the same as it was then. Despite the big gap between the trading price and book value per share, management is not buying back any stock, and the valuation gap is not closing.

The State of Alabama Department of Insurance periodically examines the insurance companies that are licensed there and publishes a report about them. It is a report that is very helpful for gleaning more information about an insurance company, and helps fill in the gaps between what is in LICOA's bare-bones annual report or even in its annual and quarterly statements filed with the NAIC.

The old reports are not available on the Department of Insurance website, but they are available to anyone who writes in and asks for them. (And pays $1 per page.) The examination report on LICOA from May 2005 has some interesting revelations on the conduct of the family that controls and manages the company:

“It was noted that Rosalie F. Renfrow was hired as a management trainee in September 2002. Ms. Renfrow is the daughter of Raymond Rudolph Renfrom, Jr., a director, officer and stockholder of the Company and Anne Daugette Renfrow, a director of the Company. Ms. Renfrow's monthly salary for 2002, 2003 and 2004 was $1,900, $2,000 and $2,300, respectively, with her salary being increased in September of each year. Ms. Renfrow is also receiving a monthly automobile allowance. This allowance was $300 per month in January and February 2003 and increased to $550 per month for the remainder of the examination period. Ms. Renfrow did not keep regular business hours at the Company – it was noted by examiners that she was routinely not in the office.”

“Company management is not avoiding the appearance of impropriety. If Ms. Renfrow is being developed for a managerial position, she needs a defined job and training program. Due to nepotism within the Company, the Company's President should either actively supervise the training (before it happens, while it is happening, and after the fact) or delegate it where possible. Ms. Renfrow should report to the manager of each department in which she is training. The examiners find it highly unusual that a recent college graduate would be allowed to set their own schedule while receiving a full-time management salary. The preceding report of examination noted an issue with nepotism and this issue stands to harm the Company due to potential shareholder and/or policyholder lawsuits. It is imperative that the Company avoid the appearance of impropriety with the payment of salaries to family members. Ms. Renfrow should maintain working hours comparable to other employees of the Company and report to someone other than her father, Mr. Raymond Renfrow, in order to avoid internal control weaknesses and the appearances of improprieties.”

It is pretty amazing to see a report by a state regulator pointing out behavior by small company management that could cause "shareholder lawsuits". For one thing, only a certain subset of companies have their operations holistically assessed by a regulator: banks and insurance companies are two. And even then, the reports by bank regulators are not usually going to be seen by investors.

One wonders what was in the "preceding report of examination" as well? Meanwhile, here is the full report from 2003 as well as an excerpt with the section called "Other Compensation Issues".

LICOA 2003 Exam Report by Nate Tobik on Scribd

Pages From LICOA 2003 Exam ... by Nate Tobik on Scribd