Family group systematically looting small public companies

[aws]

I’ll start by laying out some of the facts I have found about a family group that seems to have a business model where they systematically take large stakes (around 30-40% usually) in small, cash-rich companies, takeover the board, and then seem to get away with running the company for their own benefit instead of the shareholders. And then after sharing the outrage I guess I was wondering if there’s anything that can be done to stop them, as they seem to just loot a couple of companies a year with impunity. By the time they initiate their scheme they already have a near controlling stake and the entire board, so it’s unlikely another big shareholder could engage them in a proxy fight, and to the extent that individual shareholders are damaged none probably have deep enough pockets to hire lawyers to fight the pilfering.

 

So I came across a stock that looked very appealing, until I dug into the shady family that controls it. EVOL sold its operating business late last year and ended up with a little over $3 per share in cash. After the sale they were basically just a shell, and the share price traded up near the cash value.  The assumption would be that they would wind up the company after the sale of the operating assets and distribute the cash. The stock had languished around $1 per share for a couple years before the sale announcement, so a $3 per share payout would have been quite welcome.

 

The problem is the company was 40% owned by the Singer family, and they completely control the board with a slate of directors who have been involved with several similar takeovers in the past. They decided to keep the corporation open and pivot to be an investment holding company, paying themselves considerable salaries and directors fees to oversee the shell of the business, and giving the entire proceeds of the sale over to invest (with a 2% management fee and 20% performance fee) to the son of the 40% shareholder. It seems like the exact same playbook they did a few years prior with another company CCUR. They took control with about $6 a share in cash, entered into a similar terrible management agreement and tread water for a couple of years on the asset side. Along the way the minority shareholders got frustrated at never seeing any cash, and the stock price dropped to around $3, and the Singer family took the company private at that price. They justified paying $2.86 per share on the take private because that had been the average share price in the recent past, even though there was more cash than that per share on the balance sheet. There might still be some minority shareholders now that it’s private, but you can bet the controlling shareholders are still using it as their personal piggy bank and the minority shareholders will never see fair value.

 

Within a few months EVOL had given back all of the market value gains from the sale (even though they still had the cash) and traded back below $1. A dutch tender last month at half NAV brought the share price up a bit, but it’s still an unfairly low price that shareholders are taking to avoid getting the entire sum stolen. And a recent 13D filing by a Singer has suggested that the company should be taken private (like they did with CCUR). If that happens you can be sure it will be taken private at an insultingly low price.

 

That’s two examples in the past two years, but there’s likely been dozens of similar plays by the same group. Future targets are likely CBIO, which is fighting a board takeover by Singer, and SEAC who haven’t yet sold their operating business but have the board infested by Singer collaborators.

 

The ringleader of the operation appears to be Gary Singer, a convicted felon who is barred for life from serving on the board of a public company, but since he uses his wife, brother, and son to be the nominal owners he can pretend to not be involved, even though he sits in on all the conference calls and is copied on emails sent by the nominal owners (see this recent letter sent by CBIO for those lurid details: https://www.globenewswire.com/news-release/2022/07/19/2481760/0/en/Catalyst-Biosciences-Sends-Letter-to-Stockholders.html).

 

Clearly the board is breaking their fiduciary duties to shareholders when you look at the big picture with the context of all the other deals the family have been involved with, but it’s probably hard to demonstrate that any individual action is such. So what can someone do to combat this family who seems to loot companies with impunity? Their bread and butter seems to be companies in the $50 million range, of which they own about half anyway, so they probably cause losses in the $10-20 million range to outside shareholders. Likely not enough to interest the class action securities lawyers, and too small of an overall pot for a larger shareholder to solely bear the expense of fighting for. I suppose it should really be up to regulators to control, but if they look at anything they probably look at each deal in isolation and decide there’s nothing egregious enough for them to get involved with. Have the Singers figured out how to repeatedly commit the perfect crime, or is there anything that can be done to fight back?

Edited July 21, 2022 by aws

[Morgan]

From the way you describe it in the beginning, it sounds like they aren't breaking laws, just being quite slimy. I'm not a legal expert at all though. 

 

The second half certainly sounds like it's not legal. Using family members/front people to run the companies. I don't know. Maybe it's legal. As you say it sounds like regulators should be involved. 

 

I hope more people chime in so I can learn more! 

[IceCreamMan]

Sounds like a situation a lawyer might be able to help with.

 

And maybe a sleuth who can dig up other illegal actions the members have taken. Then alert various authorities and put pressure on group.

[Gregmal]

All I can say, and I’ve made money on some of the names mentioned, is that the outfits you might have mentioned have in various points also been linked to stock promotions. 
 

I do agree though that there’s also likely not much legally nefarious being done here as much as simply taking advantage of situations that the public markets have ignored, and then using the mechanisms that the markets allows, IE gaining semi control or voting in a way that capitalized on poor shareholder assertiveness. 
 

I was involved with a few companies where insider control wasn’t in the filings, but through clever management, the passive vote manipulated and through compensations structure, a firm grip on the remaining float gained. Legal sure. But it wasn’t really ethical. However the market often doesn’t reward ethics. 

[aws]

In some cases I understand how companies can drift into being run not for the benefit of shareholders. Especially situations where the board members do not hold material stakes and have no direct incentive to maximize shareholder value. For the Buffett historians, something like the Sanborn Map Company, where they had substantially more assets than the market capitalization, but were doing nothing with them. Companies that are worth more dead than alive and need an activist investor to shake things up and unlock value.

 

But it feels like there's a big difference between an individual company or fund finding itself in this situation, and a cohort of people that purposefully create value destructive situations for their fellow shareholders. They don't seem to buy in at any great discount, they get in at fair value overall, but then siphon the other shareholders' money to themselves to make the profit. CCUR was taken control of at around $5 when they had $6/sh in cash, probably roughly representing what a reasonable liquidation would yield. Their profit came from paying themselves management fees, delaying and frustrating shareholders, and then buying them out at half fair value.

 

Maybe you could forgive a single such transaction, but this is clearly their game plan. Why would one family need to own a dozen 40% stakes in a variety of public shell companies, vs. simply cashing them all out and using the proceeds to further their goals? At what point does it crossover from slimy to criminal?

Edited July 21, 2022 by aws

[Guest]

Sounds like they learned a thing or two from Biglari.