Battle Continues at Sparton

Electronic manufacturing services company Sparton Corp. continues to face opposition from shareholders led by activist investor Lawndale Capital Management LLC.
Evidence of investor dissent at the company’s Oct. 24 annual meeting was disclosed in the company’s most recent quarterly statement on Nov. 9. According to a Sparton Securities and Exchange Commission report, roughly 30% of participating shareholders voted to oppose the re-election of three incumbent director candidates Sparton had up for election — not enough to block their election to the board.
Activist investor Andrew Shapiro, director of Lawndale in Mill Valley, Calif., noted that the near-30% opposition represents close to a majority of noninsider shares (roughly 40% of Sparton’s shares are held by “insiders,” primarily Sparton’s management and the heirs of John Smith, who, together with his younger brother, obtained control of the company in a proxy contest roughly 60 years ago). The noninsider investors voted “withhold” on the election of management-backed director nominees, David P. Molfenter, W. Peter Slusser and Bradley O. Smith, according to Sparton’s quarterly report.
“Lawndale considers this vote, comprising close to a majority of all the noninsider shares, to be a very strong mandate for change. We will continue to press change at Sparton and are evaluating our options,” Shapiro wrote in a filing on Monday.
The result follows Shapiro’s decision last month to take his insurgency at Sparton up a notch by publicly reporting to the SEC that he planned to oppose the re-election of the three incumbent candidates. At the time, Shapiro hiked his stake in the Jackson, Mich.-based company to 9.8%.
Shapiro had been complaining that the company has misallocated capital. “To date the series of ventures has culminated in the destruction of shareholder value best illustrated by Sparton’s stock depreciating 61% over the past decade through September 2007,” Shapiro wrote in a letter to Sparton’s board on Oct. 11. Shapiro also lashed out at Sparton chief executive David W. Hockenbrocht. “The truth is that fiscal 2007 was not an isolated event, it was just worse than usual. Clearly Mr. Hockenbrocht and this board are out of touch. Shareholders have suffered long enough.”
The activist investor also accused the company of maintaining an imprudent and large allocation of Sparton employee pension plan’s assets in Sparton’s own stock. “The allocation at June 30, 2007, of 44% of the pension plan’s equity holdings to Sparton’s own stock, so as to entrench insiders who are simultaneously liquidating their personal holdings, has eviscerated the employees’ retirement plan and we believe is a direct violation of Mr. Hockenbrocht’s fiduciary duties to the pension plan’s beneficiaries as well as to the company’s other constituencies," Shapiro wrote. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.