A Proxy on both your Houses

Cynics have long claimed that corporate democracy was a chimera. But after the shenanigans at American Industrial Properties even the starry-eyed may have to agree

Is there gold in them tha'r malls? Texas property company American Industrial Properties has now been the subject of a three year siege by grimly determined majority shareholders trying to oust the company's management. It has a little way to go before it matches the siege of Troy, but the epic battle has revealed some surprising things about corporate governance.

Above all, even uninvolved investors across the US were surprised by the revelation that an NYSE-listed company's management could lose the vote in two consecutive annual meetings and still keep its power and emoluments, including the right to spend the company's wasting assets fighting off a majority of shareholders.

The vehicle for this perpetual immobility machine is a Texas Real Estate Investment Trust, or REIT. And, as it turns out, the Lone Star State allows REIT management boards to try a replay of the siege of the Alamo, by demanding a two-thirds vote of shareholders to oust them.

That is the principal bastion used by American Industrial Properties' CEO Charles Wolcott and his fellow board member William Bricker against the massed hordes of invading investors.

At the company's annual meeting, held in Irving, Texas on December 13 last at 9 am, New Jersey-based Paul Koether fought his third proxy contest against AIP in two years. And as at the previous two meetings, he had a plurality - or a majority - of votes in favour of sacking the board.

However, Koether failed to get the votes of the two-thirds of outstanding shares he needed to remove the incumbents. And Wolcott and Bricker decided, despite not having a majority in favour of their reelection, to remain in situ. Indeed, Bricker reportedly told shareholders at the meeting, in defence of his position: 'I do have a job. And I do make a living other than screwing around with this.'

Nevertheless, Koether was able to claim a measure of success. 'We stopped the board's poison pill, and stopped a move to Maryland, a state notoriously lenient about such oligarchically self-perpetuating manouevres,' he reports with some satisfaction. He was speaking from the offices of Pure World Inc, the company he is using as his assault vehicle against Wolcott and his cronies. In more ordinary times, Pure World operates in the 'botanicals' business: maybe he should have included a corporate weedkiller in his anti- Wolcott armoury?

To be sure, American Industrial Properties is the kind of business that gives corporate America a bad name. It was a dubious investment right from its launch, back in 1985 when the company was first set up with 19 properties being sold to it by its own sponsor, Texas realtors Trammell Crow, at prices estimated by some to be inflated by $25 mn.

The 2,900 individual investors who paid $15 a share were promised a steady 7.9 per cent income. But in the event, the share price dropped to $2 and the dividend to zero, as the trust's asset value declined from $135 mn to $25 mn.

But while American Industrial Properties may have been a poor bet for investors, it was a dead cert for some others. Investment bankers Goldman Sachs and E F Hutton benefited to the tune of $13 mn in fees for the launch, while Trammell Crow itself took a hefty $1 mn-plus annual management fee.

When AIP was relaunched independently of Trammell Crow, who provided the new manager Charles Wolcott, others saw the possibility of refining some value from the property portfolio, since the stock was trading on the NYSE at such a heavy discount. Several investors moved in after Koether with the idea of taking over the company.

But Wolcott had other ideas, although his behaviour certainly provided ample ammunition for the raiders. Hired at a starting salary of $150,000 a year, he celebrated the ending of dividend payments and the posting of a loss for 1994 with a $30,000 raise and a $50,000 bonus.

Since then he has taken every advantage of Texas REIT law to consolidate his grip on the company. For example, the management board has made a provision to the effect that the CEO - Wolcott, that is - be entitled to payment of a year's salary if he loses control. And one of his most potent weapons is the board's power to limit individual holdings to 9.8 per cent.

Through Pure World, Koether owns the maximum. He accuses Wolcott of mismanagement of the company and of personal enrichment at the expense of shareholders. He thinks that AIP should merge, trading its properties for stock in a larger REIT.

In riposte, Wolcott's proxy letters cite alleged court descriptions of Koether as a 'greenmailer and corporate blackmailer'; and he calls him a raider who has only been a shareholder in the company since 1993. Koether counters that Wolcott himself became a stockholder even more recently than that - and that his holding is still a small one. Indeed, the aggregate holdings of all insiders amount to less than 1 per cent of total equity.

But the battle over AIP has not been restricted to these two men hurling accusations and counter-accusations at each other. On the contrary, it has involved serious canvassing. 'We ran a very expensive and arduous phoning and mailing campaign with our own employees,' says Koether. 'We rounded up as many phone numbers as we could, of every shareholder with more than 1,000 shares. They have now had four letters from us and four from the management. In fact, some people are pleading with us not to send any more letters.'

Many of AIP's stockholders are, as one would expect of people who were sold such a pup in the first place, not particularly sophisticated investors. But in view of the company's record, it still seems surprising that more of them have not joined Koether's crusade. He has his own idea of why this may be: 'People don't want to be told that they made a mistake and that what they hold is garbage,' he suggests.

But some of those shareholders may also detect that this proxy fight is unlikely to end up with an outcome that is genuinely in their interests. While the majority shareholders once saw the battle as a means of releasing value in the company's portfolio, the struggle now has all the makings of a grudge fight fuelled by personalities.

Koether's filings admitted a cost of $125,000 for proxy solicitation for last December's meeting alone. That may not be much by comparison with plenty of other high-profile proxy battles involving leading US companies. But given the stakes here it's a disproportionately high sum.

Koether has accused Wolcott of enriching the legal community of Texas with his defence - at the expense of the trust's shareholders. Wolcott declines to reveal what it has cost the company but there is no shortage of tangible evidence of AIP's litigious propensities. It is involved in a suit against Fidelity; and it was embroiled in expensive litigation following the declaration of default on a loan from its main creditor Manufacturers Life Insurance Company.

On January 9 this year AIP also initiated proceedings against Koether's company Pure World, alleging violations of federal and state securities law for serious misrepresentations and omissions made in SEC filings.

Rick Grubaugh of Beacon Hill, the New York firm which has been helping Pure World to solicit proxies, readily admits that it has never been in a situation like this before. 'The company (AIP) is certainly spending freely to protect its jobs,' he says. 'And it certainly hasn't asked the shareholders if it's what they want. In fact, the management clearly thinks that the shareholders don't know what's good for them.'

In contrast to Koether's expansive and rhetorical style, Wolcott speaks in steady and controlled tones, labelling his opponents as 'a few investors who have established reputations in raiding REITs.' He says, 'Koether in particular has a 25 year history of using similar tactics against companies that have had problems and that are in transition,' as he puts it.

Wolcott accuses his critics of failing to distinguish between a corporation and a trust. 'We have conducted our elections in accordance with the law and anyone who disagrees could go to the courts, and none of them have. We believe that it is regrettable that Mr Koether, who is not a long-term shareholder, has pursued this. We find it wasteful and distracting.'

That all sounds predictable enough but in January Wolcott surprised observers by rejecting an offer from another company which would have maintained him in office.

Rick Osborne of Portland-based Black Bear Realty proposed to buy 30 per cent of the outstanding shares at $3, a 60 per cent premium. Wolcott and Bricker, a.k.a. the board, would have had to authorise an increase in the 9.8 per cent shareholding limit, but in exchange they would have been given employment agreements 'typical of similar agreements in the REIT industry,' including stock options.

A spurned and disappointed Osborne told Investor Relations that he had hoped that as a 30 per cent shareholder he would have been able to guide Wolcott and Bricker's energies into working for the business. He was now considering his options, he said, but he seemed ready to rejoin the siege. 'They've never sat down to do a deal. It's all been in writing between us,' he said. 'It's unthinkable in corporate America that a management can be outvoted by the shareholders and still hang on.'

Wolcott explains this latest rejection calmly. 'Our agenda is to represent the interests of our shareholders - {that's}our fiduciary duty,' he says. But which shareholders, exactly, given that the majority voted against him? 'We have 10,000 shareholders,' he counters.

Was he assuming a rule of one vote per shareholder? 'No. As far as we are concerned the laws which govern this trust must be abided by. For example, to allow an increase over the 9.8 per cent limit for a shareholding would have increased the risk of endangering our position with the IRS.' And, as his opponents are quick to point out, it would enhance the chances of achieving a two-thirds majority if Black Bear's Rick Osborne, an erstwhile supporter of Koether, were to redefect.

Koether warned darkly that Wolcott had made a mistake by filing a suit against him. 'We did not go to court before because we did not want to enrich the lawyers,' he says. 'But our legal moves will not just be defensive - we can now file for discovery. Soon we will know what Wolcott has for lunch, and how much the shareholders are paying for it,' he threatens.

Since then Koether has indeed returned to court, in early February, to bring a suit in Dallas seeking to appoint a receiver for AIP. Pure World says that the aim is to break the deadlock; and it has asked the court to strike the bye-laws requiring the two-thirds majority of shareholders- which it says were anyway unlawfully enacted.

Whatever the outcome of this latest manoeuvre, the one thing Koether will not do is give up, regardless of the cost and the benefits. 'We have no intention of leaving the field of battle. We are aggressive investors and we can't allow our reputation to be tarnished by a defeat. Remember, the crusades took a hundred years.'

The shareholders may also recall that the crusades had a high casualty rate among non-combatants. The hopeful few who put their retirement cheques into AIP at $15 a share ten years ago may think they have little reason to cheer either side.

A proxy on both their houses could well be the majority sentiment.

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