Monday, June 3, 2013

Solitron proxy voting guide

I have written about Solitron Devices extensively on this blog.  I write about the company, not because I have a large position in them, but rather because the story is so interesting.  For readers who don't wish to spend their morning trolling the archives I will give a very quick summary below.

Solitron is a Delaware corporation that makes electronic diodes and components for the aviation and defense industries.  The company went through a bankruptcy in the early 1990s and recently settled their remaining outstanding liabilities related to the bankruptcy.  For years the company traded below NCAV, where most of their NCAV consisted of Treasury bonds, and cash.  The company's operations are small, but efficient, and most importantly profitable.

After owning the stock for a while I became fed up, I was off-put by the brash CEO, and the lack of shareholder focus.  I eventually wrote the company a letter asking for a share buyback and the instatement of an annual meeting.  My letter got the ball rolling, other shareholders began to contact Solitron and push company into action.  One small fund sued the company as a means to force them to establish a date for the annual meeting (June 18th, 9am in Miami FL.)  I have felt that my letter, and subsequent posting of it on this blog got the snowball rolling.  I can't take credit for anything subsequent my letter, but I do feel that I got the process moving.

I have a lot more thoughts on this topic in general, and with regards to the shareholder/management relationship problem, but I want to keep this post focused.  I will save those thoughts for some point in the future.

I received my annual report and proxy in the mail recently:


Both are available online through EDGAR as well.

I thought it might be helpful to walk through a few issues in the proxy that are up for a vote, and voice my opinions on them.  It would be much easier to say "Vote Yes on a,b,c.. No on d,e,f.." but instead of spoon feeding my views I'd rather share my opinion on these issues.

Director Election - Up until recently the Board of Solitron could be summed up as follows: a CEO and two empty leisure suits.  Of the three members of the Board, two seemed to be missing in action, they will not be getting my vote.  One of my goals in establishing an annual meeting was so the company would allow shareholders to vote on the Board.  We need fresh faces on the Board, removing Jacob A. Davis, and Joseph Schlig is essential.

The company recently nominated two other new directors for a short term, they are also up for re-election at the annual meeting.  I voted against the two new candidates as well.  I don't wholly trust the current Board's judgement, and since the new nominees were nominated by the current Board by proxy I don't like them either.

Another reason to vote against Joseph Gerrity and Sidney Kopperl is that the company changed their bylaws so that director elections are staggered.  It would take three years for the full Board to be replaced.  The last thing I want are two more potential bad Board members voted in for three years.

I voted for Saraf to remain on the Board, I voted against the other four nominees.

Ratification of Accountants - This is often the easiest item to vote on a proxy.  Most companies keep the same accounting firm year to year and the vote is more of a formality.

Solitron is different, they have a habit of firing their accounting firm yearly and bringing in someone new as a way to save costs.  This is a practice I'd like to see discontinued, and an item that's hopefully raised at the annual meeting.  If no one else raises it, I plan to.  I voted for the ratification, but intend to question the Board as to why they think this is a good practice to save a few thousand dollars, but alienate themselves from the investor community.

Say on Pay vote - Shareholders are allowed a non-binding vote on executive compensation.  The company doesn't have to listen to shareholders, but this is a way for the company's owners to loudly voice their view on what management takes out of the company each year.  Smart companies listen to their shareholders, and if shareholders vote against pay they revise it.

I voted against this item.  The only executive is Shevach Saraf, the CEO, who made $403k last year.  This was up from $380k the year before.  I recognize that in the grand scheme of things $403k isn't an egregious salary for the CEO of a company that does $8m in sales.  On the other hand Soliton has been treading water for almost two decades in terms of profitability.  I don't see why shareholders should regard a CEO who is essentially babysitting a company with a paycheck for $403k.  If the company were growing, or shareholder friendly I would reconsider in the future.

Frequency of pay advisory vote - With the passage of Say on Pay shareholders have the choice on how often they want to voice their view of management compensation.  The choices are 1 year, 2 years, or 3 years.  Naturally management doesn't want the owners meddling in their affairs, Solitron has suggested that every three years is an appropriate time for shareholders to vote.

I disagree with this and firmly believe shareholders should be voting on compensation yearly.

Conclusion

I am interesting in any differing thoughts or views on the proxy that shareholders, or any readers have.

I will be attending the annual meeting in person, the meeting is on June 18th at 9am at the offices of Akerman Senterfitt in Miami Florida.  I have informally talked to a few other shareholders and we are planning on grabbing something to eat after the meeting.  If anyone is planning on being there you're invited to join us and talk about Solitron, micro-cap stocks, value investor, or really anything afterwards.  If anyone has any suggestions on where to eat within walking distance of the SunTrust building in Miami they would be helpful too.

Talk to Nate

Disclosure: Long Solitron

13 comments:

  1. I already voted exactly the same :)

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  2. I'm voting in person at the meeting.

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  3. Taylor,

    I'd double check that, I believe the proxy Yates that only shareholders with shares registered in certificate form can vote in person. You might be able to get a formal letter from your broker and the DTC attesting to your ownership, but I'm not sure.

    Nate

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  4. I got a letter from Scottrade stating that they released themselves to vote and I was their proxy (on the shares I own) or whatever. So I figured I could bring that with me to cast my vote.

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    1. Yes, the legal proxy, I requested one as well and will now be voting in person.

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    2. I think it could "send a message" more forcefully if a lot of people who show up in person vote against the incumbent measures. Even if we don't represent a true majority of total votes cast, the psychological impact of the people who bothered to show up all voting against could be valuable in persuading management to consider our voice.

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  5. Nate, thanks for this post.
    My investors and I own about 2.5% of the company and, unless new persuasive arguments emerge, we are voting the same as you.
    See you at the meeting.

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  6. Voted as you advised

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  7. Nate, very helpful post and will vote similar. Obviously the elephant in the room is what will they do with cash. Also, please ask if they will/have been considering a sale now that the environmental liabilities are taken care of.

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  8. I plan to attend also. It looks like it will be a crowded meeting. According to the proxy statement, beneficial owners need to provide legal proxy from the broker and photo ID to attend the meeting.

    I'm on the fence about the new directors. They appear to be finance guys. I'll have some questions for the board about uses for the cash, including dividend, capex projections, possible acquisitions (yecch!) and stock buyback. I'm also concerned about succession. Although Mr. Saraf is doing a great job running the company, he isn't getting any younger.

    A buyout needs to be carefully structured to maximize the value of the NOL's. Since Mr. Saraf is such a large shareholder, it would be in his interest to see that happens. Maybe that's a reason for the new directors.

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    1. Thanks for this information, I requested a legal proxy from my broker so I shouldn't have any problems. By doing this it forced me to vote in person which is fine.

      Looking forward to meeting you as well as a number of other shareholders.

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  9. you should be proud of your work here to-date, nate.

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    1. as a follow up, I just voted my 600 shares the same way you suggested.

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