For Investors, Shaking Up Is Hard to Do
By JASON ZWEIG
The Securities and Exchange Commission is
trying to fix "proxy plumbing" to make it easier for shareholders to effect
change inside companies. But confronting insiders, who are richer and
better-informed than you, will probably remain a lonely, lopsided battle.
Just ask Matthew Crouse of Salt Lake City.
Starting in 2002, he sank roughly $190,000 into Cadus Corp., a classic
"value" stock. The tiny company was selling for less than the amount of its
cash minus debt.
Another reason Mr. Crouse was attracted to
Cadus: Its largest shareholder was
Carl Icahn, the renowned activist investor who has shaken up such
companies as Texaco,
Lions Gate Entertainment. On July 1, after 17 years as Cadus's most
powerful director, Mr. Icahn ceded his board seat to his son Brett.
Cadus, with a market value of only $19
million, has no employees, no operations, and just $100,000 in annual
revenue from biotechnology discoveries that it sold a decade ago. Yet the
company is sitting on $24 million in cash, plus more than $28 million in tax
benefits that could be used to shelter future earnings.
In order to use those benefits, Cadus needs
to acquire or merge with another company that produces profits. Complicating
matters, the tax benefits begin to expire this year, with $10 million
lapsing by 2012.
In February 2009, Mr. Crouse wrote to Cadus,
requesting that the board sell the company and return the cash proceeds to
investors. He drafted a resolution to that effect, which he asked the board
to include in Cadus' proxy statement when shareholders were next asked to
Yet Cadus didn't hold an annual meeting last
year. One large shareholder says that "time and again, we have brought
opportunities [for mergers or acquisitions] to the attention of the board."
Each time, he says, the suggestion was rebuffed or ignored. "It's been a
decade of complete nonaction," he says.
A little over a week ago—17 months after Mr.
Crouse's letter—Cadus informed him that it will hold its annual meeting on
Oct. 6, that his resolution will be included and that the board will
recommend that shareholders reject it.
"My goal is to get it on Icahn's radar screen
so that he'll need to deal with us, not just ignore us," Mr. Crouse says.
"If you push for shareholder activism in other companies, I'd think you'd
want to take care of your own."
It isn't that simple, Mr. Icahn counters.
"We've been looking assiduously for three years for opportunities," he told
me this week. "But I don't want to make a bad acquisition and lose the
cash." He added, "I strongly believe that in today's type of market we will
find a company [to buy] fairly soon."
Furthermore, Mr. Icahn says, if Cadus
distributed its cash to shareholders, it would have no money for an
acquisition, losing the opportunity to use its tax benefits directly. "I
don't want to waste $25 million," he says. Of course, Cadus could still be
acquired by another firm that could make use of the tax break.
Cadus is less a company than a publicly
traded checking account with a tax perk attached. The insiders are the only
ones who can write checks. The minority shareholders can always vote with
their feet by selling the stock—although they would have little to show for
For the proposal to pass, nearly 90% of all
the minority shareholders would have to vote for it, since Mr. Icahn
controls 40% of the stock.
"This is the type of contest that can be
won," says Gary Lutin, chairman of the Shareholder Forum, an
investor-advocacy organization. "But [Mr. Crouse] is assuming all the burden
and, given his small holdings, the absolute dollar amount of [profit] if he
wins may not justify his costs." Even if victory comes to Mr. Crouse, it may
not be sweet.
No matter how the SEC reforms the proxy
system, management will retain the upper hand; companies have deeper
pockets, and insiders have better knowledge, than most outsiders do.
Nonproxy measures—like electronic surveys to
determine whether investors support management—may be faster, cheaper ways
to improve corporate democracy.
It is tempting to tag along with famous
investors, like Mr. Icahn. But if their view of what is right for the
company differs from yours, their view will almost certainly prevail.
Finally, several traits are essential to be a
successful investor: intelligence, independence, skepticism, patience,
discipline. To be a successful activist, however, you need at least one more
If you are a quitter, the Don Quixote life
isn't for you.
Write to Jason Zweig at
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