Fighting the Family
When management owns a majority interest in a company, other shareholders are potentially at an extreme disadvantage.
By Andrew Feinberg
From Kiplinger's Personal Finance magazine, March 2005
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Yes, It Gets Worse
The legal fireworks were just beginning. In November, Troy sued various Tilson entities and Osmium Partners for securities violations. The claim states that "they have tried to shake down Troy and the Dirks" and misrepresented their investment intentions. Troy also sued Tilson for defamation. The lawsuit claims that Tilson e-mailed a group of friends, including a Wall Street Journal reporter, and said of the Dirks, "Are these guys the biggest crooks on the planet, or what?" An indiscretion, for sure.
If my first error was not realizing how treacherous it is to invest when the CEO's family is majority owner, my second was not working hard enough to extricate myself from the mess I'd made. In hindsight, my weakness was excessive politeness. I had talked to Tilson and Lewis early on, but, not wanting to be a pest, I hadn't followed up. Now I know that investors can't afford to worry about such social niceties.
Had I spoken to them again, I would have learned that, once they realized that their suits against Troy would fail, they decided that their best hope lay in exercising their appraisal rights. This provision of the law in Delaware, where Troy is incorporated, allows minority shareholders in mergers to have the true value of a company determined in court. I, too, could have exercised my appraisal rights with a two-sentence letter to Troy, but the November 9 deadline had passed.
Occasionally, appraisal rights can yield a bonanza. In several recent going- private cases, including one involving the Quiznos sandwich chain, some investors eventually received about four times the buyout price. Usually, however, settlements are negotiated before a judge gets the case.
I Fold My Hand
On January 4, Troy issued a press release poor-mouthing its own future prospects and revealing that the merger was imperiled. The Dirk family threatened to call off the merger if minority shareholders continued to assert their appraisal rights. And on January 18, that's exactly what it did.
Although you might think this was good news, the stock went into a bit of a free-fall without the prospect of that $3.06 merger payoff, puny as it was. Personally, I didn't care. I had already sold my shares.
I no longer want to own stock in a company that can summarily reject a buyout bid that is 47% higher than a pending offer from its own executives. Whenever management owns 67%, you are potentially at an extreme disadvantage.
Columnist and New Yorker Andrew Feinberg writes about the choices, challenges and frustrations facing individual investors.