In August 2000, Rosemore, a holding company controlled by Crown chief executive Henry Rosenberg and his family, offered $9.50 per share for the company, which was below Apex Oil Co.'s $10.50-per- share offer at the time. Apex initiated a proxy fight to contest the merger with Rosemore because Apex felt the Rosemore deal was unfair (see ISS's analysis of Aug. 17, 2000). At the Aug. 24 meeting, shareholders voted down the merger between Rosemore and the company. The company failed to receive the required two-thirds vote. Since then, the company has been in the process of evaluating a broad range of strategic alternatives for the company including a possible merger with Apex or Rosemore. According to a recent press release, the company is concurrently conducting discussions with both parties. According to Jim Sanders, corporate counsel of Apex, through the company's independent committee, the company and Apex have entered into a confidentiality agreement and have agreed to due diligence.
Analysis
This proposal seeks election of eight directors for one-year terms. Stanley Hoffberger, Barry Miller, Frank Rosenberg, and John Wheeler, Jr., are new director nominees. According to the proxy statement, in a letter dated Jan. 27, 2000, Golnoy Barge provided notice that Golnoy would nominate Paul Novelly, the chairman and CEO of Golnoy Barge and the chairman and CEO of Apex. However, according to Mr. Sanders, Mr. Novelly may or may not be nominated depending on the outcome of the discussions between Apex and the company. Due to the ambiguous nature of Mr. Novelly's nomination, ISS is not treating Mr. Novelly as a new director nominee for purposes of this analysis.
The present board currently consists of one insider, one affiliated outsider, and six independent outsiders. At the upcoming annual meeting, four independent outsiders will step down and three insiders and one affiliated outsider will take their place. The new board will then comprise four insiders, one affiliated outsider, and three independent outsiders. Jack Africk was designated as an affiliated outsider last year due to consulting arrangements with the company. Mr. Africk no longer receives consulting fees from the company and is duly designated an independent outsider. The three insiders being nominated include: Frank Rosenberg, the company's senior vice president of marketing and the son of Henry Rosenberg, Jr., the company's chairman and CEO; Mr. Miller, Rosemore Holdings, Inc.'s, senior vice president, treasurer, and CFO; and Mr. Wheeler, executive vice president and CFO of the company.
The Audit Committee comprises two independent outsiders. The Executive Compensation and Bonus Committee comprises one independent outsider. The Nominating Committee comprises one insider and one independent outsider.
Messrs. Hoffberger and Miller, new nominees, own no company stock. Henry Rosenberg, Jr., is an insider on the Nominating Committee.
Conclusion
The complexion of the board will be drastically altered from a board consisting of a majority of independent outsiders to a board composed of a majority of insiders. When ISS asked Mr. Wheeler and Tom Owsley, the company's senior vice president and general counsel, what the company's motive was for replacing the independent outsiders with insiders, they simply stated that "the four independent outside directors were comfortable" in standing down. Furthermore, Messrs. Owsley and Wheeler also stated that the company is like a family-owned business, and it is not inordinate to have a number of insiders on the board.
ISS believes that adding more insiders on the board will severely reduce board independence and cause potential conflicts of interest. In addition to the company's dual-class capital structure, a board controlled by a majority of insiders may also be a sign of entrenchment. Furthermore, in February 2000, the company adopted a poison pill which precludes any party from acquiring substantial blocks of the company's stock, whether by a tender offer or open market purchases, unless the board approves the acquisition. In response to Apex's request to exempt the $10.50 tender offer from the pill or redeem the rights issued under the pill so that Apex could make such a tender offer, the company explicitly indicated that it was prohibited from amending or modifying the pill under the merger agreement between Rosemore and the company.
As a moot point, the company's independent committee failed to put the management-led buyout to a simple majority vote of non-Rosemore shareholders (especially when Rosemore owns approximately 47 percent of the total voting stock).
Given the company's history of rejecting Apex's higher $10.50-per-share offer in August 2000, the independent committee's failure to adequately pursue all alternative acquisition proposals and expressions of interest as determined by ISS at the time, and the suspicious timing of the adoption of a poison pill at the time when Apex was in discussions with the company about a possible business combination between the two companies, ISS believes that the nominating committee's intentions to nominate a slate of predominantly inside directors are not in shareholders' best interests.
We recommend that shareholders WITHHOLD votes from the entire board.
Mr. Novelly, chairman and CEO of Apex and Golnoy Barge, has submitted this shareholder proposal calling for the prompt sale, merger, or other disposition of the company or its assets as a whole for the purpose of maximizing shareholder value. Mr. Novelly submitted this resolution on Nov. 24, 1999. Also, according to Jim Sander, Apex's corporate counsel, this resolution may be rescinded or modified before the annual meeting, depending on the outcome of the merger discussions between Apex and the company.
The proponent states that the company incurred net losses averaging $12,085,000 per year and revenues have decreased by 38 percent from 1990 to 1998. Furthermore, the proponent argues that industry statistics show that in virtually every financial category, Crown performs below its industry and sector peers and below the S&P 500 Index.
The proponent also states that his company, Apex, had expressed an interest in merging with Crown but believes that the board has not responded to the Apex proposal in any meaningful way (at the time this resolution was submitted). As a final concern, the proponent believes that the company may decide to make only cosmetic changes, sell only a portion of its operations, or do nothing.
The board argues that approval of this proposal would prevent the company from realizing shareholder value through the sale of selected assets in separate transactions, or through a refinancing of the company's debt. The company states that it is continuing its efforts to reach an agreement with the proponent, Mr. Novelly, and his affiliate, Apex, on their proposal to acquire control of the company. The company wants to be free to pursue shareholder value through any other available alternative including the sale of selected assets or a debt refinancing or both if an agreement between Apex and the company is not reached.
Shareholder value maximization proposals that suggest exploring alternatives, including a sale or merger, should be considered on a case-by-case basis. While under normal circumstances the decision to buy, sell, or engage in a merger is best left in the hands of management and the board, we recognize that certain situations may justify the adoption of such proposals, such as a prolonged period of poor or sluggish performance with no turnaround in sight. Support of such proposals is further justified in cases where the board and management have become entrenched. Adoption of poison pills, golden parachutes, and other antitakeover provisions in the face of an attractive offer may be signs of entrenchment.
On the plus side, hiring an investment banker to seek alternatives to enhance share value often results in a higher stock price, as investors expect the company to seek competing merger offers soon. The end result may be an offer price that represents a market premium to most or all shareholders. On the downside, a period of poor stock performance is often the worst time for a company to be "put into play" because "bottom feeders" are likely to approach a company with offers that represent a premium to only a few short-term investors and speculators seeking a quick profit, to the detriment of long-term shareholders who purchased their shares at a higher price. This scenario is only beneficial to long-term shareholders when the company's prospects are dim for reasons such as the permanent decline of an industry or company-specific factors, such as poor management, ineffective strategy, or unwise acquisitions, and share price cannot reasonably expected to rebound.
In this case, the company's performance over the past five years has been significantly below both the American Stock Exchange Market Value Index and the Value Line Integrated Petroleum Index. Important questions to ask are whether or not the company's poor performance is indicative of management's direction of the company in the future and whether or not the company's management and board have become entrenched.
In our opinion, there is no compelling evidence to suggest that the company is in a prolonged period of poor or sluggish performance with no turnaround in sight. In fact, management has considered alternative ways to increase shareholder value. However, the company rejected a higher bid of $10.50 per share for the company by Apex and instead was asking shareholders to support the lower management-led buyout offer of $9.50 per share. ISS believes that the board and management may have become entrenched as explained in Item 1. The potential sale of the whole company, either to Apex or another higher bidder, would be the appropriate course of action and in shareholders' best interests.
We recommend a vote FOR Item 2.
This is a routine item to allow shareholders to raise other issues and discuss them at the meeting. Only issues that may be legally discussed at meetings may be raised under this authority. As we cannot know the content of these issues, we do not recommend that shareholders approve this request.
We recommend a vote AGAINST Item 3.
