Sun Times Under More Pressure

Already under pressure from activist investors K Capital Management LLC of Boston, Sun-Times Media Group Inc., which announced in February it was considering a sale of assets or a privatization, is now facing a second activist investor.


On Wednesday, Davidson Kempner Advisers Inc. announced an activist tack at the owner of the Chicago Sun-Times, the latest news company to be targeted by activist hedge funds. K Capital, the Sun-Times' largest shareholder with a 9.7% stake, has been a vocal advocate for a sale.

Davidson Kempner, a 5.9% Sun-Times holder, on Wednesday evening said in a Securities and Exchange Commission filing it has had and will continue to have discussions with "third parties and other shareholders and management regarding [Sun-Times], its prospects and potential means for enhancing shareholder value. In these discussions, [Davidson Kempner] may suggest or take a position with respect to future plans for the company, including, without limitation, potential changes in the business, strategy, operations, board composition, management or capital structure of the Issuer as a means of enhancing shareholder value."

The filing doesn't mention whether the two firms are working together, but Davidson Kempner's filing makes it clear that it certainly would be open to talking to a number of investors. - Ron Orol

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

Activist Labor Fund Wants Citi Split

A five-year-old effort to press for changes at Citigroup Inc. by a major activist labor union just went into high gear.

In a letter sent to Citigroup's board late Friday, shareholder the American Federation of State County and Municipal Employees, or AFSCME, said it wants the bank to complete a strategic plan that includes splitting the company into two units in light of its financial problems stemming from the subprime mortgage credit crunch. AFSCME director Richard Ferlauto says he doesn't want to dictate specific terms, but thinks Citigroup should divide its commercial banking division from its investment banking unit.

"We want to see Citigroup spin off its Citi Smith Barney division," says Ferlauto.

AFSCME's letter follows an effort by the labor union fund to have shareholders vote to remove Citigroup directors at the megabank's April annual meeting. According to Ferlauto, between 25% to 30% of shareholders voted against the re-election of some Citigroup directors at the meeting.

"This is a strong indication of unhappiness of the company's direction," Ferlauto says.

Additionally, Citi, which has lost roughly $54 billion due to the credit crisis, has already raised more than $40 billion of new capital mostly from sovereign wealth funds. - Ron Orol

InBev's Anheuser Proxy Contest: No Annual Meeting Necessary

When beer titan Anheuser-Busch Cos. set up its bylaws to allow shareholders to act by "written consent," it probably did not expect the measure would be used by a rival in a campaign to take control of the brewer in an expedited manner. But, in fact, that is exactly what appears to be happening with InBev SA's plan released Monday to use the measure to replace 13 board members, according to a Securities and Exchange Commission filing.

Some corporations permit written consent provisions in their bylaws because they want procedures in place to give investors the ability to quickly endorse debt refinancing programs in cases when shareholder approval is required for those actions. But having such a provision in place also makes the company vulnerable to dissident shareholders seeking to bring in their own director candidates.

Unlike most corporations, Anheuser-Busch has a bylaw provision permitting "written consent solicitation."

To employ written consent solicitations, the activist distributes proxy documents to other shareholders asking them to sign a card saying they want to vote their shares to remove certain directors from the board and replace them with candidates nominated by the dissident. Typically, if investors with more than half of the total shares outstanding vote to remove the incumbent directors, the activist wins and his nominees are installed on the board. The campaign is different from a traditional proxy contest because it does not take place on the day of the company's annual meeting. As a matter of fact, no meeting must take place for the consents to be approved and for the directors to be removed and replaced.

It's likely Anheuser-Busch set up its bylaws to permit written consent solicitations thinking its double-digit billion dollar stock market capitalization would discourage hostile bidders and proxy contests.

But after removing its classified board, it looks increasingly like Budweiser should have killed the written consent solicitation bylaw a long time ago. The majority of other public corporations already recognize why that bylaw shouldn't be in place. - Ron Orol

Insurgent Investor Mark Schwarz Isn’t Taking No for an Answer

After specialty property and casualty insurance company Specialty Underwriters Alliance Inc. rejected his Hallmark Financial Services Inc.’s $6.50 a share, or $115 million, bid to buy the company, Schwarz on July 1, Tuesday, sent a letter to the company’s directors outlining benefits of such a deal.

“Hallmark senior management stands ready to meet with members of the board to answer questions regarding the proposal,” Schwarz wrote in a letter attached to a Securities and Exchange Commission filing.

The specialty property and casualty insurance company last week rejected Schwarz’s unsolicited takeover bid. Schwarz owns 9.9% of Specialty Underwriters.

In the filing, Schwarz points out that his offer represents a 31% premium on the $4.96 a share Specialty Underwriters Alliance was trading at on Friday June 20, the last business day before the company made Schwarz’s offer public, Monday, June 23. Schwarz also argues that SUAI’s business model will be improved by the addition of Hallmark’s strong financial position. This transaction will allow SUAI shareholders to enjoy a much higher return on their pro-rata share of invested capital in a combined company,” Schwarz added.

Schwarz’s investment vehicle, Newcastle Partners is the controlling shareholder of Hallmark Financial. -- Ron Orol