Icahn Sues Steel for Fraud

ACF Industries, a Company affiliated with Carl Icahn, is suing Steel Partners for fraud.

According to a Reuters article, ACF - which had invested $15M in 2005 with Steel Partners, filed a lawsuit against Steel for trying to restrict investors' ability to pull their money out and for not giving proper notice of their plans to convert the hedge fund into a publicly-traded holding Company. (See our Jan 12 Blog post)

Bank of America, acting as master trustee for ACF Industries' employee benefits plan, charged that Steel Partners and its manager, Warren Lichtenstein, "pulled off a classic 'bait and switch' by stripping investors of what they had purchased and replacing it with something entirely different."

Activists Could Shake Up Tier Technologies

Published in RealMoney.com

By Damien Park, President & CEO Hedge Fund Solutions
1/12/2009 12:59 PM EST

The past few years have been difficult for the board of directors at Tier Technologies (TIER) . In 2004, the company had a dispute with its audit firm over its internal control procedures for financial reporting, and as a result, it switched to a new independent financial examiner. Less than a year later, Tier disclosed that it was restating the prior three years' financials.

Much has transpired at Tier since then. After being de-listed from Nasdaq, the stock plunged, and the board installed a "poison pill" shareholder rights plan to help ward off any unwanted takeover attempts. During the same period, the SEC launched a formal investigation into the accounting irregularities, and the company spent millions on legal advisers and independent investigators to determine the scope and implications of the questionable accounting methods.

For the board of directors and for the new management team brought in to clean up the mess, these are very difficult times. I know, because eight years ago I was part of a turnaround management team brought into a business after the board had removed the previous CEO for financial shenanigans. We faced many of the same complexities Tier has, and it took us two years to stabilize the business, restructure the entire management team, recruit new directors and restate financials.

Managing a business through this sort of chaos is extremely difficult; every aspect of the business is vulnerable. Customers shift to competitors, shareholders sue for misrepresentation, banks call outstanding debt obligations and restructure loan covenants, suppliers question the long-term viability of the business, and almost every employee begins looking for a more stable place to work. Through all this, the board and management have to stay centered on developing new strategies for growth, recruiting high-performing managers, improving operating efficiencies and cultivating a shareholder base that believes in the rejuvenated business and what it can achieve.

As if all of this weren't enough to contend with, Tier's board is now faced with two activist investors who together own close to 20% of the outstanding stock. The activists demand board representation and insist that shareholders would realize more value if the company were sold today.

Last December, Discovery Equity Partners, a 9.9% shareholder, sent a letter to the company nominating two individuals to the eight-person board. In the letter, Discovery argued that the company's unusually large cash balance of $90 million, or about $4.50 per share, is an inefficient use of capital and reflective of the board's poor judgment.

Discovery claims that, considering that the company has a market capitalization of just above $100 million, Wall Street has ascribed very little value to the fact that Tier's main operating business generates over $11 million in EBITDA before corporate overhead expenses are allocated. Discovery says that for that reason, its board nominees, if elected, "intend to help Tier expeditiously reduce excessive overhead, determine the appropriate amount of capital to return to shareholders, eliminate unnecessary corporate defenses, and proactively evaluate all strategic alternatives to unlock value."

Last week, Parthenon Investors II, another activist investor pressing for Tier to be sold, announced that it will attempt to replace two additional directors by appearing at the annual meeting in person and nominating their candidates for election from the floor. Since Parthenon was given one seat on the board in March 2007, a success this year would increase its representation to three members.

In my circumstance, after cleaning up the beleaguered enterprise, we too faced a hostile battle for control from two activist investors who believed the value of the business was worth more broken up than as a whole. Ultimately, we were no match for the seasoned insurgents who had done this numerous times before. We lost the battle, the company was quickly put up for sale, and I left to begin advising boards of directors on how to proactively manage dissident shareholders.

Winning this proxy battle will not be any easier for Tier. The most important analysis of any proxy campaign is the shareholder vote projection. Understanding who shareholders may vote for will determine whether or not it's worth fighting. In Tier's case, it may be difficult to get a clear read on this.

According to Tier's bylaws, shareholders have cumulative voting rights in director elections. This means that shareholders have the right to pool their votes to elect one or more directors rather than apply their votes to the election of all directors.

For example, Tier has eight directors up for election this year. In statutory voting, a shareholder with 100 shares casts 100 votes for each opening (100 x 8 = 800 votes). Under the cumulative voting method, however, the shareholder may choose to vote all 800 shares for one candidate, 400 votes each to two candidates, or otherwise divide the votes however preferred. As a result, it is quite possible that Discovery can obtain two board seats and Parthenon can obtain two additional board seats by directing their votes to the election of their respective candidates. If successful, the dissidents would control five of the eight board seats.

The challenge for shareholders is to decide who is best qualified to generate the greatest value for them. Discovery says plenty of buyers are ready and waiting to pay a premium for the business and that it intends to examine each of those options as soon as possible. Management, on the other hand, says it examined these very strategic alternatives a while ago and determined that shareholders will be better off realizing the longer-term benefits from what is now a substantially complete restructuring.

In any event, stockholders of record as of Jan. 16 will get their chance to weigh in at the shareholder meeting scheduled for March 11, 2009.

Elsewhere, other proxy fights are heating up. Activist hedge-fund investors were very busy at the end of 2008 despite lackluster returns and across-the-board redemptions within the industry.

In early December, Sandell Asset Management sent a letter to Southern Union (SUG) announcing its intention to run a proxy contest in order to obtain four seats on the 10-person board. Like the dissident shareholders at Tier, Sandell believes the best course of action for Southern Union shareholders is an immediate sale of the company.

Currently, Joseph Stilwell is attempting to gain board representation at Kingsway Financial Services (KFS) in an attempt to influence the board to sell its non-core businesses and use the excess capital to retire debt.

Hedge fund Southeastern Asset Management was recently offered board representation at Sun Microsystems (JAVA) after announcing its desire to work with management to improve value. Elsewhere, Southeastern changed its filing status with the SEC from passive to active for its investment in Texas Industries (TXI) , where another activist investor, Shamrock Capital, has been rapidly increasing its ownership.

Looking forward, activist demands for improving share performance will likely increase in 2009. One company worth keeping an eye on is Dr Pepper Snapple Group (DPS) . Nelson Peltz, one of the more recognizable names in activist investing, recently disclosed a 7% ownership interest in DPS and announced his belief that the company is undervalued because Wall Street views the business as a bottling company and not a branded beverage company that owns a number of great brands, including 7Up, A&W, Canada Dry, Dr Pepper, Nantucket Nectars, Snapple and Yoo-hoo.

Considering Peltz's recent fight record (two wins, with HJ Heinz (HNZ) and Wendy's (WEN) , and no losses), it's highly probable we'll see something more develop here very soon.

At the time of publication, Park had no positions in stocks mentioned.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Tier Technologies to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Steel Partners Will Go Public to Avoid Additional Redemptions

Hedge fund plan splits opinion

By Steve Johnson

Published: January 12 2009 02:00 | Last updated: January 12 2009 02:00

Hedge fund investors are deeply divided on radical plans by Steel Partners, the activist hedge fund group run by Warren Lichtenstein, to convert its flagship fund into a listed industrial holding company, as revealed in the Financial Times on Saturday.

The New York-based group plans to transform its $1.2bn ($792m, €892m) Steel Partners II fund into a holding company spanning energy, aerospace, insurance and banking, likely to be listed on either Nasdaq or the New York stock exchange in the second quarter of 2009.

Steel Partners took the controversial step after facing an unprecedented wave of redemption requests; as of October it had received withdrawal notices for 38 per cent of the fund's assets.

"This is groundbreaking. It is definitely the most creative and radical solution we have come across," said Mike Vogel, partner at Elcot, a London-based family office with a "substantial" investment in the fund.

However, Gary Vaughan-Smith, partner at SilverStreet Capital, a fund of hedge funds that did not invest in Steel Partners, said: "This is good for the manager and bad for investors." Other hedge funds have reacted to large-scale redemption requests by imposing restrictions such as "gates", which limit the amount that can be withdrawn each month, or the creation of "sidepockets", new vehicles into which hard-to-sell assets are placed.

Steel Partners' solution trumps these options by effectively trapping capital within the fund, aside from a share buyback of up to $200m, or 17 per cent of its assets, upon listing.

Investors will only be able to sell shares in the market - possibly at a steep discount to net asset value - preventing capital from leaving the fund.

Steel Partners said in its letter to investors that it would be "impossible, inequitable and unfair [to remaining investors]" to accede to the redemption requests, given the fund has large, often controlling, stakes in its portfolio companies, rendering it "difficult, and in some instances impossible, to sell assets and businesses quickly".

As of September, just four holdings accounted for 50 per cent of the fund's assets, with eight positions accounting for 80 per cent of its assets.

"We believe this is by far and away the best and fairest solution for all investors. This transaction will give all investors the potential to buy/sell units in the public market at any time," said Steel Partners.

Mr Vogel argued: "It does, to us, look a pretty fair balance in terms of remaining investors and those who were looking to redeem; they will be able to go into a vehicle that has much enhanced liquidity. [Steel Partners] has recognised that this is a transformational change in terms of what is going on in the market and concentrated on what works in terms of getting value out."

But with the average single manager hedge fund listed on the London stock exchange, the major centre for such vehicles, currently trading on a discount of 23 per cent to NAV, Mr Vaughan-Smith said: "If the client wants to exit then a proper plan should be put in place to return the client's cash over time, rather than forcing them into structures which make them take an immediate hit."

One industry consultant feared the move, if replicated, could make it harder for the hedge fund industry to raise assets in future.

However some industry figures doubted the holding company concept would become commonplace, arguing that more short-term "trading" funds could fall foul of tax and regulatory issues in many jurisdictions.

After posting compound annual gross returns of 22 per cent a year from inception in 1990 to 2007, Steel Partners II fell 39 per cent last year, according to figures seen by the FT.

NY City Bar to discuss activist shareholders

Counseling The Board of Directors in the Age of Activist Shareholders

Program Outline:

At this program, a panel of experts will discuss various issues and legal considerations that should be considered when counseling the Board of Directors of a public corporation, with particular attention given to how a Board should respond to demands for changes made by an activist shareholder. Panel discussions will provide an overview of the goals of activist investing and the tools employed by activists to accomplish them, as well as the latest strategies and defensive mechanisms used by public corporations to facilitate their interactions with activist investors. The program will also consider the duties and responsibilities of the Board when confronted with an activist investor and provide suggestions on how independent directors can do their job most effectively. Finally, an overview will be provided of the 2008/2009 proxy season.

Program Chair:

Jared Landaw

Senior Managing Director and General Counsel, Barington Capital Group, L.P.

Keynote Speakers:

Roel Campos

Former Commisioner of the SEC, Cooley Godward Kronish LLP

Martin Lipton

Wachtell, Lipton, Rosen & Katz

Faculty:

William D. Anderson, Jr.

Managing Director, Goldman, Sachs & Co.

Stephen L. Brown

Director, Corporate Governance

TIAA-CREF

Professor Charles M. Elson

Edgar S. Woolard, Jr., Chair & Director

John L. Weinberg Center for Corporate Governance

University of Delaware

Bruce H. Goldfarb

President & CEO, Okapi Partners

Phillip Goldstein

Principal and Co-Founder, Bulldog Investors

Keith E. Gottfried

Blank Rome LLP

David A. Katz

Wachtell, Lipton, Rosen & Katz

Roy J. Katzovicz

Chief Legal Officer, Pershing Square Capital Management

Michael J. Maimone

Greenberg Traurig LLP

Brian L. Schorr

Chief Legal Officer, Trian Fund Management LP

Steven A. Seiden

President, Seiden Krieger Associates

Daniel S. Sternberg

Cleary Gottlieb Steen & Hamilton LLP

Leo E. Strine, Jr

Vice Chancellor, Delaware Court of Chancery

Raymond S. Troubh

Director of Various Public Companies

Marc Weingarten

Schulte Roth & Zabel LLP

Christopher L. Young, JD, CFA

Director of M&A Research, RiskMetrics Group

When and Where:

On Tuesday, February 3, 2009 / 8:30a.m. to 12:45 p.m.

New York City Bar

42 West 44th Street, New York, NY 10036

Additional Information:

Call 212.382.6663

Register online

Ron Burkle On A Buying Spree

Last week Ron Burkle, through his investment vehicle Yucaipa Companies, disclosed an 8.3% "active" ownership stake in Barnes & Noble, Inc. (BKS) and announced his belief that the shares are undervalued. His average cost is $14.68/share. We estimate 20% of BKS shares are held by activist investors; 25% is held by the Chairman/Founder.

Today Burkle announced he's spent about $100M to acquire a 7.0% stake in Whole Foods Market Inc. (WFMI) since November 24th at an average cost of $10.04/share.

Position: None

Activist Pressing Ahead At SUG Despite Redemptions

Activist investor Sandell Asset Management is forging ahead with their proxy contest to replace four directors at Southern Union Corp. (SUG) despite redemptions that have reduced their ownership stake in the Company.

On January 2nd Sandell distributed 1.3% of their ownership in SUG to their investors (who now control those votes). Sandell now owns 8.6% of the stock at an average cost of $29.07/share. SUG closed yesterday at $13.47.

On December 5th Sandell sent a letter to SUG announcing their intention to run a proxy contest in order to obtain four seats on the ten member board. Sandell believes the best course of action for SUG shareholders is an immediate sale of the Company.

Position: None

SRZ Issues a Client Alert on Selectica Activating their Poison Pill

Marc Weingarten (pictured here) and Nicholas Tomasetti from Schulte Roth & Zabel authored a Client Alert regarding Selectica's (SLTC) implementation of their posion pill.

In the Alert, the authors stated, "This represents a rare instance of a poison pill being triggered. Selectica's amended triggering threshold of 4.99% is extraordinarily low, with the norm generally being at a 15% or 20% level, and was adopted only after an activist investor surfaced. Whether the court accepts Selectica's purported justification for the low threshold of protecting NOLs will be a significant development, as other companies would be encouraged to find a basis to lower their pill thresholds as well."

Click here to view SRZ's full publication.