The New Vote Borrowing

When activist hedge fund managers launch proxy contests to replace corporate directors and pressure for changes, everyone focuses on who has the votes. But according to RiskMetrics Group Inc.'s director Patrick McGurn and Jeffrey Mahoney, general counsel, Council of Institutional Investors in Washington, a greater focus needs to be placed on the subject of pension fund lending shares -- and the votes that go along with those stakes -- out for a fee.
McGurn on Friday told corporate attorneys at the annual American Law Institute-American Bar Association conference on corporate governance that, in addition to concerns that activist hedge fund managers are abusing the system by borrowing shares to effect change (a subject University of Texas Law School Professor Henry Hu has examined), corporations have to begin to concern themselves with borrowed shares that "no one" is voting. When institutions lend the shares out, they basically give away the title to those shares for a period of time. If they don't hold the title over the record date, the institutions are basically giving up their voting rights.
"Many of you corporate executives are look at your list of 20 largest investors think you can guarantee that half of those funds will vote to support your slate," McGurn said. "But at least half of those funds have a substantial amount of those shares out on loan at the record date, and they may not have the right to vote at the meeting. The bigger problem is quite often no one is voting those share positions at meetings."
Mahoney on Friday told corporate attorneys at the conference that the CII was working on a policy to address this issue.
"It [share lending] is something that a number of institutional investors do for an additional fee," Mahoney said. "Then the issue is where are these shares, how do I get them back, so I can vote them under certain circumstances. We don't have a policy about this issue right now, but it is something we are actively looking into. It is a hot issue because some of our members wouldn't be able to tell me where those shares are. That is of significant concern. Hopefully we will have a policy about this that we can add to our best practices in the near future." - Ron Orol

Everest Vs. Concord Camera

The photos being developed at Concord Camera Corp. may be too fuzzy for one activist hedge fund manager. Everest Special Situation Fund LP on Wednesday reported a 5% Concord Camera stake and made public a letter it sent to the company's board explaining how it would help directors there take steps to consider strategic alternatives.
But if alternatives, such as consideration of a sale are not considered, Everest explained that they are prepared to step up their efforts. "The letter also states that if the Board does not take actions ESSF believes are in the best interest of stockholders, ESSF will take whatever action it deems necessary in order to protect its rights as a stockholder, including seeking Board representation at the next annual meeting of stockholders," Everest wrote in a Securities and Exchange Commission filing on Wednesday.
In the letter, which was sent to Concord on Wednesday, Everest explained that it has been a "successful liaison" between corporate turnaround firms and corporations in Concord Camera's situation.
"Everest has, in the past, collaborated with a number of companies in situations similar to Concord's," the activist fund wrote. "We encourage the board to make use of our experience and expertise."
Hollywood, Fla.-based Concord, which develops, designs and makes film cameras, has a $25 million stock market capitalization. - Ron Orol

Private Placements dumped on Market

A hodgepodge of public companies with private placement exposure really took a beating on Friday after new Securities and Exchange Commission rules took effect.
On Friday the SEC eased restrictions on private placements and other restricted securities, which hedge fund managers and other institutional investors buy directly from corporations. The new rule allows holders of restricted securities to sell those securities as soon as six months after the placement, instead of the old regulations that only allowed them to sell between one and two years after striking the deal.
The result, according to Barry Silbert, CEO at Restricted Stock Partners in New York, any private placements sold or issued between Feb. 15 and Aug. 15 became salable on Friday. And while Silbert says he's not certain exactly how many private placements were put up for sale Friday, he points to the action surrounded the universe of small capitalization companies -- those most likely to use a private placement -- to get a feel for the impact of the new regulations.
What to look for? A downward pressure on the stock value of many companies as large amounts of stock becomes available for sale without a sufficient number of buyers.
One example, Terra Nostra Resources Corp.'s stock was down between 10% and 12% on high volume late Friday, dropping from $2.58 a share on Thursday to close at $2.33 on Friday. Other small-capitalization companies appeared to have a difficult time on Friday, Silbert says, because investors dumped private placements and other restricted securities on the open market. He cited Airtrax Inc., Power Air Corp., WorldWater & Solar Technologies Corp., ANTs software Inc., Echo Therapeutics Inc. and Lightspace Corp. as examples.
In observing the small-cap space, Silbert said he identified many companies with unusually high volume of shares coming on the market. "If these stocks on average trade 100,000 to 200,000 a day and they see 500,000 shares come on the market, there aren't enough buyers to absorb the selling pressure," Silbert said.
But he added that Friday's sale pressure could have been worse. "A number of hedge fund managers, anticipating the large amount of equity coming on the market, waited until Friday to buy," Silbert said. - Ron Orol

Icahn Vs. R2 Investments

What happens when one activist is pitted against another?
We might just find out at XO Holdings Inc., a Reston, Va.-based telecommunications company that raider-turned-activist Carl Icahn took control of in 2003. On Thursday, an activist group of minority investors including R2 Investments LDC sent a letter to three directors on XO's board expressing concern about their understanding that the company is pursuing new financing alternatives. R2 Investments has a 6.6% XO stake.
"Should any of these 'new financing alternatives' being considered include refinancing the debt facility and the preferred equity owned by affiliates of XO's majority stockholder and chairman, Carl Icahn, we write to place you on notice that R2 will challenge any proposed transaction that it perceives to be unfair to XO's minority shareholders or otherwise disadvantageous to XO, and will seek to hold you liable for any such breach of your fiduciary duty," R2 Investments wrote in the letter, which was attached to a Securities and Exchange Commission filing. "Based on your prior actions, we are truly skeptical that you or any member of the current board of directors can act as independent advocates of any shareholder other than Carl Icahn."
The activist investors lashed out at Icahn for bypassing the "most attractive credit market in history" and waiting until the "credit market turmoil" to consider refinancing options. They indicated that he may be seeking to increase his percentage of ownership at the expense of other shareholders. "Clearly, it will be incredibly expensive to raise money now as compared to one year ago -- thereby allowing Mr. Icahn the ability to massively dilute other shareholders should he conveniently be the only source of available financing," they wrote. "This will prove to just be a poorly disguised means of stealing value from the minority shareholders and handing it to Mr. Icahn."
Taking their attack from Icahn's governance playbook, R2 Investments pointed out that the majority of XO's directors are employed by Icahn and "clearly cannot be relied upon to protect the interests of the minority shareholders."
And this is not the first time Icahn has found himself up against the interest of other activist investors. Auto parts and car interior maker Lear Corp.'s shareholders rejected a buyout offer from Icahn in 2007, although he remains the Southfield, Mich.-based company's biggest stockholder. Activist investor Pzena Investment Management LLC launched a successful activist campaign to convince other investors to block Icahn's bid. - Ron Orol

Activists Have First Step Victory at Syms

Activist hedge fund managers at New York discount retailer Syms Corp. have reason to celebrate.

After pressing Syms Corp. for several months to reconsider its decision to delist from the New York Stock Exchange, the company agreed late Tuesday to re-register its stock with the Securities and Exchange Commission and list on the Nasdaq stock exchange.

“This is an unbelievable victory for minority shareholders,” said one investor.

Activist investors Barington Capital Group and Esopus Creek Advisors, who together own 9.8% of Syms, had been pressing for the company to stop its plan to deregister. It filed a lawsuit in in the Superior Court of the State of New Jersey alleging that Syms directors broke their fiduciary duty to investors by enabling the company to delist. The re-registering has rendered that suit moot.

Syms states that it had sought to de-register to avoid new costs, including those imposed by the Sarbanes-Oxley Act of 2002. But investors following the company contend that the real reason why Syms wants to deregister is to lower the value of the stock price so that management, including store founder Sy Sims, 81, could complete a management-led buyout at an inexpensive valuation leaving shareholders with lost value. According to a regulatory filing, Syms disclosed that they have approximately 413 holders of record.

Syms delisted from the NYSE on Jan. 14 and sought to deregister its shares on April 1. Barington Capital Group and Esopus Creek Advisors sent a letter to Syms’ board earlier this month expressing their displeasure with the company's decision to deregister. “The group believes that such actions will destroy shareholder value,” Barington and Esopus Creek wrote in the letter that was attached to a Schedule 13D filing with the SEC.

But investors believe the registration is only a first step towards improving the company’s share value. The activists and some value investors have sought to have Syms find ways to monetize its real estate assets. “If the company really wanted to help shareholders, they would do an appraisal of the real estate and let the marketplace know what it’s worth,” said another investor. -- Ron Orol

REITs: Activist Target #1?

One of the sectors targeted by activist hedge fund managers seeking opportunities among the casualties of the subprime mortgage mess has been Real estate companies.

Presidential Realty Corp. is just one such target. The activist Libby Frischer Family Partnership reported Monday owning a 7.2% stake in the White Plains, NY Real Estate Investment Trust. The Reit owns shopping malls and real estate directly and through joint ventures. The activist fund’s Charles Frischer says he may take activist actions such as talking to the board, management or shareholders about the company’s governance and strategy for the future. According to a Securities and Exchange Commission filing, Frischer says he may step up his activism by nominating director candidates to the REIT’s board.

“Depending on various factors including, without limitation, the Issuer's financial position, future actions taken by the Issuer's board of directors, price levels of the shares, other available investment opportunities, conditions in the securities market and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, seeking representation on the Issuer’s board of directors, changes in management of the Issuer and potential strategic transactions by the Issuer,” Frischer wrote in an SEC filing.

Another recent REIT activist campaign includes the effort launched Jan. 30 at Educational Realty Trust Inc., a student housing REIT, by insurgent investors Roca Real Estate Securities Fund LP and Greenstreet Real Estate Holdings LP. In its Jan. 28 SEC filing, Roca called for the company to examine possible changes in its capital structure, a sale or merger, and other strategic alternatives.-- Ron Orol

Here I am signing copies of my new book after speaking about it at Reiters bookstore in Washington D.C. on Feb. 7.

Activist Oliver Press Partners: Not Satisfied with Phoenix Companies

Insurance and investment provider Phoenix Companies Inc.’s decision Thursday to sell off an asset management unit is apparently not enough for one activist hedge fund.

Oliver Press Partners LLC, a New York-based insurgent fund, launched a proxy contest to install three director candidates on the Hartford, Conn.-based company’s board earlier this year. The activist fund has been seeking a series of changes at Phoenix Companies. But the decision by Phoenix Companies, announced Thursday, to auction off an investment management division was not enough of a value improvement choice for the activists to call off their proxy campaign.

“We are gratified that the views of leading shareholders have finally convinced the Phoenix board to pursue the first step in our value recovery plan,” the activist fund wrote in a statement. “We are convinced that with the unsuccessful diversion into Asset Management now out of the way, the opportunity is at hand to correct the core issues that have resulted in the declining ratings and low ROE of this company - inefficient capital allocation in the closed book, and excessive cost and overhead structure. We believe that the election of the three nominees that we have recommended at the upcoming annual meeting on May 2, 2008 will best ensure the successful completion of this value recovery program.”

Phoenix Companies has a $1.3 billion stock market capitalization-- Ron Orol

Steel Partners Renews Insurgency at GenCorp

So much for short term activists.

Activist investor Steel Partners is resurrecting a long-silent insurgency effort at aerospace conglomerate GenCorp Inc., a company he first publicly agitated for change in December, 2002.

The activist investor on Thursday launched his second proxy contest at the Rancho Cordova, Calif.-based company, which specializes in rocket-propulsion systems and components.

This time Steel Partner’s Warren Lichtenstein nominated six candidates for GenCorp’s board. Lichtenstein argues in a Securities and Exchange Commission filing that he had been seeking to reach some sort of settlement with the company, but was unsuccessful. The proxy contest was a “last resort,” the filing added.

The activist investor offered $700 million in 2004 to buy GenCorp, after attacking the conglomerate for its subpar financial performance and questioning the company's dealmaking record. After GenCorp rejected the offer, Lichtenstein launched his first proxy contest. In consultation with Steel Partners, GenCorp agreed to add a corporate governance expert to its board, in return for which Lichtenstein dropped his proxy contest. As part of the deal, Lichtenstein was permitted to send a nonvoting representative to GenCorp's board meetings.

GenCorp has another activist investor that it needs to think about. Sandell Asset management Corp., which owns a 6.9% GenCorp stake, launched its public insurgency at the company in March 2005. That year Sandell requested that GenCorp make more changes to improve governance and also sell a chemicals unit. Sandell Asset portfolio manager Thomas Sandell said in letter addressed to GenCorp's board (and included in a recent government filing) that he wants the company to remove a raft of anti-takeover defenses, among them a poison pill and staggered board elections, which make it difficult to mount change-of-control proxy contests. He wants annual elections for the whole board. Sandell also wants GenCorp to allow large stakeholders to call special shareholder meetings.

So much for short term activists.