Daniel Rudewicz
Interview with Daniel Rudewicz who submitted proxy access proposals at Paragon Technologies and KSW.
James McRitchie
McRitchie: How about giving our readers a little personal background?
Daniel Rudewicz: During the day, I am the managing member at Furlong Financial, LLC. In the evenings, I am a law school student. I have lived all over the US, but right now I live, work, and study in Washington, DC. I am also a CFA charterholder.
McRitchie: What got you interested in corporate governance and proxy access?
Daniel Rudewicz: I have found that good corporate governance, including offering proxy access, can lead to less distortion in valuation methods. There are many methods to valuing a company, but in a DCF valuation or NCAV valuation one of the biggest complaints is that there’s no way to make sure the value of those cash flows (or assets to be turned into cash flows) will ever be returned to shareholders. The argument many investors make is that if a company chooses to retain what it has earned, the situation will lead to less than optimal capital decisions by managements. (One example of a less than optimal capital decision is spending money on what Peter Lynch calls Diworseifications.) The truth is that the company belongs to shareholders and not to the management. I do believe that many (not all) boards know this and try to act in the shareholders’ best interest.
That’s why good corporate governance practices are so vital to letting the company realize its true value. Bad corporate governance practices can lead to entrenchment and waste. As I learned this, I became more and more interested in the role shareholders can have in shaping the company’s corporate governance. I feel that proxy access is just an example of one of the many tools that companies could offer their shareholders.
In regards to proxy access, the most important advantage of companies offering access to the proxy card is that it can lead to lower liquidity risk for large shareholders. Large shareholders are at a disadvantage to smaller shareholders when it comes time to sell. The larger shareholder will have to either wait much longer to exit the position or will be forced to take a huge discount if he or she wishes to sell quickly. This is a problem.
Because of the illiquidity discount that increases with size of their ownership, small shareholders may be discouraged from buying more shares of a certain company. I believe a company should be encouraging their small shareholders to buy more. Proxy access can mitigate the liquidity risk. Being in a position to be able to place your nominee on the company’s proxy card is a very valuable position. A company offering proxy access to shareholders will allow those who own amounts above the threshold to be able to shop their large positions much more effectively, because now those positions are more valuable.
A company with good corporate governance (such as offering proxy access) will offer comfort to shareholders (and potential shareholders) that there are many avenues for shareholders to take if the board begins taking actions contrary to a majority of shareholders’ wishes. This will lead to more confidence in a DCF or NCAV valuation; thus, a higher overall company valuation.
McRitchie: Why did you choose these specific companies for proxy access proposals?
Daniel Rudewicz: Largely for the reasons discussed above. These companies are clearly worth more than the current market values them at. Most of my other positions will appreciate in price and converge on their true worth in a short period or time, often less than the window of time needed for me to even submit a proposal. Once my price is met, I will sell and reallocate the capital to other undervalued opportunities. However, other positions will linger well below their true worth. Like many of the companies I invest in, these companies tend to be the smaller companies with lower liquidity. I feel that having proxy access would reduce the fears a smaller shareholder might have about buying more of the company and then having an illiquid position. I think a company should want its existing shareholders to buy more, and proxy access accomplishes this.
McRitchie: What are the provisions of your proposals?
Daniel Rudewicz: They vary from company to company. I’m relatively new to the 14a-8 shareholder proposal world, so I try to take clues from the leaders in the area. The levels in my earliest proxy access proposals reflect this. However, I don’t understand the reasoning behind making a 3% (or other level) shareholder wait two or more years before gaining access to the proxy. Why wait? If a company is being run into the ground, what’s wrong with giving shareholders a voice on the proxy card earlier? I think one year should be the maximum.
The two proposals I have submitted (as of December 16th) were to Paragon Technologies, Inc. and KSW, Inc. Both were binding bylaw proposals. I submitted the Paragon proposal back in September. The proposal sought to grant proxy access to those shareholders owning 3% for more than two years. Because Paragon is no longer subject to SEC rules, the proposal process was a bit different.
Even though the proposed bylaw was not adopted at the company’s annual meeting held on Dec 14th, the language of the binding bylaw proposal was eligible to be included on the proxy. Knowing that the binding bylaw language held up, I submitted a similar proposal to KSW, Inc. This proposal seeks to grant proxy access to those shareholders owning 2% for more than one year. Also, KSW does have supermajority provisions attached to amending certain bylaws, so I made sure to structure the proposal so that it is an addition. Thus, it will only require a simple majority.
McRitchie: Good luck with KSW, Inc. Since their meeting isn’t until early May, I hope you will give us another opportunity to help you make the case for proxy access as voting gets closer.
So, there we have it. Two more proposals brings the total up to seventeen by my count. One down, that many of us didn’t even know about, and sixteen more to go. I’m also delighted to note that Rudewicz has joined the USPX. For previously filed proxy access proposals, see 15th Proxy Access Proposal of Season Filed at Nabors.
Was the proposal at Paragon was submitted at the annual meeting? It was not included in the Company’s proxy statement. Below is a copy of the Notice page of the proxy statement:
PARAGON TECHNOLOGIES, INC.
600 Kuebler Road, Easton, Pennsylvania 18040
Telephone (610) 252-3205
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 14, 2011
The Annual Meeting of Stockholders of Paragon Technologies, Inc., a Delaware
corporation (the “Company”), will be held at Pepper Hamilton LLP, 400 Berwyn Park, 899
Cassatt Road, Suite 300, Berwyn, PA 19312 on December 14, 2011, at 11:00 a.m., local
time, for the following purposes:
1. To elect five directors to the Board of Directors;
2. To ratify the appointment of ParenteBeard LLC as the Company’s independent
registered public accounting firm for the fiscal year ending December 31, 2011;
and
3. To transact such other business as may properly come before the meeting or at
any adjournments thereof.
Only stockholders of record as of the close of business on November 3, 2011 will be
entitled to notice of the Annual Meeting and to vote at the Annual Meeting and any
adjournments thereof. A list of stockholders of the Company entitled to vote at the
meeting will be available for inspection by a stockholder at the Annual Meeting and
during normal business hours at the Company’s corporate offices during the ten-day
period immediately prior to the Annual Meeting.
The Board of Directors hopes you will be able to attend the Annual Meeting,
but whether or not you plan to attend, please vote your shares by:
• Marking, signing, dating, and returning the enclosed proxy card as
soon as possible;
• Calling the toll-free number listed on the proxy card; or
• Accessing the Internet as instructed on the proxy card.
Voting by proxy will not prevent you from voting your shares in person in the manner
described in the accompanying Notice of Annual Meeting (also known as the “Proxy
Statement”) if you subsequently choose to attend the Annual Meeting. If you hold your
shares in “street name” through a bank, broker, or custodian, you must obtain a legal
proxy from such custodian in order to vote in person at the Annual Meeting.
November 10, 2011 RONALD J. SEMANICK
Easton, Pennsylvania Secretary
From Daniel: “It was not on the proxy card because Paragon is no longer SEC registered, so it doesn’t have to comply with rule 14a-8. But a shareholder can present a proposal at the annual meeting. (So I could have mailed my own proxy card containing the proposal). I choose not to mail my own proxy b/c the board owned enough of the shares, so it would come down to their votes. I attended the annual meeting. B/c I didn’t have my proxy from the broker, they had me present it in the comment period.”
So, should it really be counted as a proxy proposal this year? Maybe; maybe not. Maybe the count is more realistically 16 or 16.5, since it was submitted to the company and presented at the AGM but was not on the proxy. Still, I was delighted to learn about the upcoming proposal at KSW, Inc. and that Rudewicz has joined USPX. Perhaps he will suggest additional companies to be targeted.