Steel Partners closer to Goal at Point Blank

Activist turned private equity investor Warren Lichtenstein is one step closer to his goal of buying body armor maker Point Blank Solutions Inc. or having it consider strategic options, including a sale.

The insurgent, who manages the New York-based activist fund Steel Partners, took five of seven board seats on the $153 million stock market capitalization company in a proxy contest on Tuesday. The Pompano Beach, Fla.-based company's market capitalization is roughly half its size compared to a year ago, and its former Chief Executive has been arrested on charges of fraud.

"We continue to believe that Point Blank should not remain a standalone company competing on uneven terms against much larger competitors in a weakening market," Lichtenstein said in a statement. "Steel Partners is committed to maximizing stockholder value by exploring all strategic alternatives, including possible sale of all or a portion of the Company on the most favorable terms available to Point Blank stockholders."

Steel Partners, which has a 9.6% Point Blank stake, offered last year to buy the company for $281 million. The company rejected the bid.

Steel Partners, traditionally known for pushing companies to auction themselves or find other means of improving shareholder value, is no stranger to bidding or buying companies. The activist fund, together with Newcastle Partners, another hybrid activist and buyout shop manager, acquired Fox & Hound Restaurant Group in 2006. The two funds later acquired Champps Entertainment Inc. In addition to restaurant chains, Steel Partners focuses a large chunk of its activist efforts on defense industry companies. In 2004, the fund unsuccessfully bid to buy aerospace engineering systems manufacturer GenCorp. Inc.

Naked Short Selling Would Live On

One day after the Securities and Exchange Commission ended its pilot project to clamp down on naked short selling, at least one academic says any decision to extend the plan to the broader market would have some unintended consequences.


Columbia Law School professor John Coffee says he believes that if the SEC chooses to extend the temporary naked short-selling rule to the entire market, it would have the effect of driving short sellers to migrate their investments to single stock futures, the options market and cash settled equity securities, all strategies that could also drive a company stock down. The last option, also known as total return swaps, don't involve real shares but are agreements between investors and bank derivatives dealers where one party pays the other based on the performance of the underlying stock price.

"I'm not saying it's a complete substitution but people who want to avoid preborrowing stock might be able to achieve these things through these other means," Coffee says.

The agency in July set up emergency restrictions on short sales in the shares of 19 financial institutions including mortgage giants Fannie Mae and Freddie Mac through Tuesday. The emergency restrictions required short sellers in these institutions to either arrange formally to borrow shares, "preborrow." Previously, it was enough if the broker could determine that it had a reasonable basis to deliver the securities when an investor sought to borrow shares for a short sale.

It's not clear what the SEC will do after it collects all the data from this effort, but Coffee adds that he believes those investors seeking to engage in naked short selling, the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed, will use these other mechanisms that fulfill the same functions. Coffee does add that even with short sellers finding these other means, he expects broad restrictions similar to those set forth in the emergency order to have some impact on discouraging the naked short- selling practice.

"It would succeed at putting some sand in the gears," Coffee said. - Ron Orol

What Happened to Fiduciary Duty?, asks TCI

ailroad company CSX Corp. still refuses to seat two of four dissident director nominees, partly because the company hopes an appeals court ruling will disqualify a block of shares voted by the activist dissident investor Children's Investment Fund Management (UK) LLP.

But now the independent inspector of elections has put out its report detailing that four of five TCI nominees won election to the board at the company's June 25 annual meeting.

If the appeals court upholds the District Court finding that TCI violated securities laws, it could disqualify many votes TCI cast in favor of the dissident slate by "sterilizing" or disqualify the portion of shares TCI owned while it was allegedly in violation of the disclosure rules. In total, that means 6.4% of TCI's stake could be ruled ineligible.

That would mean dissident directors Christopher Hohn, TCI founder, and Timothy T. O'Toole would have lost the election. According to the inspector of elections, Hohn received 130,506,157 votes, edging out incumbent director Frank Royal, who only got 129,715,745, a margin of about 0.3%. Hohn would definitely not have won had 6.4% of his TCI stake been removed. O'Toole also won with less than 6.4%.

The court isn't likely to rule until September, with oral Arguments scheduled for Aug. 25.

CSX is betting that if the court decides to sterilize those TCI shares it will be easier to keep Hohn and O'Toole off if they are never seated in the first place than if they have to remove them from their seats retroactively.

But until the court acts, what happens to fiduciary duty to shareholders? Hohn and O'Toole could end up losing up to 20% of their term as directors. Will the two dissidents receive an extra few months at the end of their 12 month term if the court doesn't decide to disqualify the votes? Also, what about the two directors Hohn and O'Toole are set to replace? Are Royal and William Richardson off the board yet? - Ron Orol