When shareholders of First Aviation Services Inc. assemble in Memphis, Tenn., today (June 15) for their annual meeting, a rare thing will take place. A proxy fight.

That's right, we said "rare."

For the first time in more than decade, there has actually been a decrease in the number of proxy fights. Institutional Shareholder Services, the proxy advisory firm,

counts just 10 this year, down from 41 last year.

Some observers think the reason for the decline stems from the widespread anticipation of an early implementation of the SEC's proposed proxy access rules. Of course, the final rules are delayed and may be watered down considerably if not scrapped altogether.

Also, not all dissidents have exactly fared well. For example, ISS points out that last year dissidents spent nearly $6 million in their losing battle with El Paso Corp., garnering 46.9 percent of the total shareholder votes.

Increasing The Odds

This hasn't stopped Wynnefield Group's Nelson Obus, who has launched the fight against First Aviation. And he just might prevail. He recently received the support of the ISS. It recommended that First Aviation shareholders vote for Obus, Wynnefield's nominee, as director and for the implementation of cumulative voting for directors.

Obus, First Aviation's largest outside shareholder—he holds 29.7 percent of the company's outstanding common stock and first invested in the company shortly after its IPO more than six years ago—asserts that over this period, the supplier of products and services to the aviation industry "has failed to develop a profitable business strategy, exhibited unsatisfactory financial performance, has major deficiencies in its corporate governance and that its management and incumbent board have failed to deliver shareholder value."

The investor also charges that First Aviation paid more than $1.4 million in fees over the past four years to the investment bank First Equity, even though the financier only completed one small, $4.6 million acquisition in fiscal 2001. First Equity is wholly owned by First Aviation's chairman and its CEO, which Obus and ISS assert is a conflict of interest.

Indeed, even ISS said: "With poor historical shareholder returns, a continuing conflict of interest due to related party transactions with First Equity Group, and the market valuing the company near its liquidation value, the circumstances warrant support of the dissident nominee. We believe that an alternative voice on the board would increase the odds of maximizing shareholder value."

Not To Be Dismissed?

In response, the company said in a statement: "We believe The Wynnefield Group and Mr. Obus are using the guise of a proxy contest to run a negative campaign against the incumbent board and management, well aware that Wynnefield will not succeed in either electing Mr. Obus to the board or having its cumulative voting proposal approved."

It added: "First Equity, the company's majority stockholder, already has informed The Wynnefield Group that it will be voting for the board's two nominees for election as director and will be voting against the cumulative voting proposal. Consequently, under no circumstances will Mr. Obus be elected to the board or will the cumulative voting proposal be approved."

Who is The Wynnefield Group and Obus? Wynnefield is a value investor, specializing in U.S. small cap situations that have company- or industry-specific catalysts. It was established in 1992 by Obus and Joshua Landes, who held senior research and institutional equity positions at Lazard Freres & Co. during the 1980s, and the initial Wynnefield investors included many of their Lazard colleagues. The fund now runs about $200 million.

And although it is easy to dismiss Obus as well as his target as merely two puny, insignificant players, it would be a mistake. For, behind Obus' seemingly obscure profile is a well-connected, aggressive hedge fund manager who is well-connected to other, similar profile hedge fund managers who are among the most aggressive, activist—and secretive—investors among the smaller capitalization set.

In fact, they form a loosely spun web that from time to time team up to flex their collective muscles as they try to influence governance and strategic policies or wrest control of the company altogether.

For example, Wynnefield had been a director and largest shareholder of Sylvan, the producer and distributor of products for the mushroom industry that last week finally agreed to be taken over by SAC Holding, Inc., a subsidiary of Snyder Associated Companies, Inc., for $12.25 per share in cash.

When a group of Sylvan senior officers, including Chief Executive Officer Dennis Zensen and private investors, offered to buy the entire company early last year for $11 a share, Obus fired off a letter noting that Wynnefield and another hedge fund, Steel Partners II, headed by Warren Lichtenstein, owned a combined 30 percent stake and they did not intend to vote in favor of the transaction. In June, 2003, Zensen withdrew the offer.

In addition, Lichtenstein runs one of the most aggressive, activist hedge fund specializing in small companies. Since he launched his partnership more than 10 years ago, Lichtenstein has initiated more than a dozen proxy fights, landed on 16 boards and taken control of about a half-dozen companies.

In May 2003, he won a bitter proxy fight against top management of Del Global Technologies Corp., a maker of medical-imaging and diagnostics systems.

He is currently chairman and CEO of power-supplier SL Industries, which he gained control of in 2001 after a proxy fight, capping a 10-year campaign.

Lichtenstein also serves as chairman and CEO of consumer and commercial lender WebFinancial.

"We're not afraid to have a proxy fight," he says matter-of-factly.

Lichtenstein and Obus are currently directors as well as the largest and second largest shareholders, respectively, of Layne Christensen, a $200 million market cap company that provides drilling services and related products and services in four principal markets: water resources, mineral exploration, geoconstruction and energy.

Steel Partners II, meanwhile, has from time to time teamed up with Dallas-based hedge fund Newcastle Partners, which teamed up with Steel Partners in the SL Industries proxy fight.

Altogether, Newcastle and Steel have jointly invested in four companies—SL, Aydin Corp., WebFinancial and Tandycrafts.

"Sometimes it's coincidental, sometimes it's situational," Lichtenstein says of his co-investments with other hedge funds. "We think alike. We are deep value investors. If we own 10 percent, [Newcastle's] Mark [Schwarz] owns 10 percent and Wynnefield owns 10 percent, the chance of changing what we want to change is high."

 

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