I've posted about Solitron Devices (SODI) many times on this blog. They're an undervalued electronics manufacturer located in Florida. The company is a perennial net-net that froze investor dollars in place for years at a time. The undervaluation is due to two factors, a complicated bankruptcy in the 1990s with associated environmental liabilities and corporate governance issues.
I took action and wrote the company a letter urging them to resolve the undervaluation, and in response the company repurchased some shares and announced the intent to hold an annual meeting this year. It wasn't as easy as writing a letter, my letter woke up the sleepy shareholder base. Once the company realized people actually cared about them, and were watching their every move they started to take action.
It seemed things were moving in a good direction, the company was resolved to hold an annual meeting, and with environmental liabilities finally settled maybe cash would be returned. Then out of no where a small hedge fund (Furlong Fund) in DC filed a lawsuit against the company. You can read the actual suit here on Jeff's blog.
The lawsuit appears strange to my non-lawyer eyes. It's really a mix of a few items. First, the fund is suing to compel Solitron to hold their annual meeting in April. Second, the fund is trying to force Solitron to pay their legal fees, and finally they bundled a proxy with this whole thing.
To the first argument the fund states that Solitron hasn't picked a date for their annual meeting yet and they want the Delaware court to force them to hold a meeting in April. The company responded that this wouldn't give them enough time to release their annual report before the annual meeting and they'd prefer to hold it in June. I am personally in favor of June because I plan on spending a few extra days in Florida around the annual meeting swimming and sitting at the beach. While the water is acceptable in April I prefer June. Further I would prefer to attend an annual meeting where the company could discuss their full year results.
I believe the reason the fund wants the meeting in April is so they can speed along their proxy agenda. They are pushing the company to change bylaws and push through their slate of directors.
The third item is concerning as a shareholder, and a little strange. If this fund wanted to maximize their investment in Solitron they wouldn't sue the company and then ask for the legal fees. Any legal costs Solitron pays diminishes what they could ultimately receive from the company. Solitron could play the scorched earth strategy and spend all of their excess cash on lawyers defending themselves.
The fund's position is small, they own 18,000 shares worth $67500. If they spend $45k in legal fees a 100% return on investment becomes a ~25% return for fund shareholders. If Solitron doesn't pay the fund's legal fees it's hard to imagine them earning a good return at all. I am wary of an investment thesis which includes suing a target company and the company paying legal expenses for things to work out.
As for the proxy I would encourage all shareholders to read the filing here with the descriptions of directors. If this fund got their way they would effectively control the company after buying 18,000 shares and filing a suit. If the fund is serious about Solitron I don't know why they don't put their money where their mouth is. For filing a suit I'd expect at least a 5-10% position if not more. Either this fund isn't serious, or they don't have much money, I'm not sure which it is.
I'm worried this fund is using Solitron as something to build their resumes. The problem is as a shareholder they're using my money to build their resume, not something I take lightly. I've talked with some of the major holders of Solitron and can say they aren't exactly warm to the proposals either.
There have been indications that Solitron was moving in the right direction on their own without costly lawsuits and some simple prodding from shareholders. Holding a company accountable doesn't require an appearance in a Delaware court. Many CEO's are reasonable people, Saraf included, and with some prompting and discussion do the right thing.
Talk to Nate
Disclosure: Long Solitron