Posted by Davy on January 8th, 2009 in Reader Questions, Stock Research
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Despite closing my ACAS position nearly two months ago (see my reasons here), I still get more traffic and questions on ACAS than on any other stock. A reader thoughtfully sent in a petiton regarding ACAS’ plan to issue shares below NAV. I’ve stopped following the stock and don’t know much about the details of this plan but I decided to post the email for readers’ consideration.

Subject: ACAS Stockholder Proposal – “To Limit ACAS’s Authorization to sell shares of common stock”

As someone who follows American Capital (ACAS), you know that ACAS has submitted a preliminary Proxy asking for authority to sell shares below NAV (which is forbidden under the Code that controls RIC/BDC’s).

Strategically, ACAS needs this authority in a limited amount to purchase the remaining shares of one of its portfolio companies, ECAS. Unfortunately, the way the proxy is structured now, they are asking for unlimited authority to sell shares below NAV, not just limited to what is needed for ECAS.

Also, ACAS delayed the payment of $300M of 2008 earnings until as late as Sept 2009. Considering the current outstanding shares and the added shares for the ECAS purchase, that distribution would be approximately $1.30/shr. If ACAS has the unlimited authority to sell shares below NAV, who knows what it could be.

Finally, with the possibility of very large dilution hanging over the stock, I think the unlimited ability to sell sub-NAV shares will impede the stock’s recovery to NAV/shr levels and further erode confidence.

I have proposed that they limit the total number of sub-NAV shares to 20% of the current float (approx 40M shrs) and that they declare the record-date for the $300M distribution after ECAS but before any further shares are offered.

Attached is the proposal that I submitted to ACAS, which was submitted to ACAS via certified mail along with the other requirements of SEC Rules on Shareholder Resolutions (Rule 14a-8). It is my hope that ACAS will imbed the terms in their proxy. If not, then it is my hope that my proposal makes it onto the proxy itself.

Thank you for your time and consideration. I can be contacted [please contact me, Davy -- dvb AT enlightened-american.com for the author's contact information].

Sincerely,

Angelo Guarino, Stockholder ACAS

——— Proposal Below ——–

PROPOSAL

TO LIMIT THE COMPANY’S AUTHORIZATION TO SELL SHARES OF COMMON STOCK
BELOW THE NET ASSET VALUE PER SHARE

The Board of Directors has requested the authority to sell shares of the company’s common stock below net asset value per share (the “SUB-NAV PROPOSAL”). In the SUB-NAV PROPOSAL, the company lists the acquisition of the remaining shares of European Capital Limited (“European Capital” or “ECAS”) and “historically unusual attractive strategic investment opportunities,” as significant factors in asking for this significant authority.

The restriction on the company’s ability to sell common stock below NAV is a key stockholder protection against dilution. Unfortunately, except for a one year time limit, the SUB-NAV PROPOSAL imposes NO restrictions on the company’s authority to sell shares below NAV; neither on the total number of shares, nor for the specific use or purpose of those shares. There in nothing in the SUB-NAV PROPOSAL preventing the company from doubling or tripling the current share count by selling shares below NAV.

Furthermore, the company has postponed the declaration and distribution of approximately $300 million dollars of FY2008 taxable income (the “$300M DISTRIBUTION”) until as late as June 15, 2009 and September 30, 2009 respectively. If the company sells or issues shares under the SUB-NAV PROPOSAL, prior to the record date for the $300M DISTRIBUTION (beyond those required for the ECAS acquisition), it will have a severely negative impact on ACAS’s current stockholders’ and ECAS stockholders’ payment.

Finally, the unrestricted ability to sell shares of common stock below NAV increases the uncertainly inherent in ACAS’s NAV/share and will likely impede the company’s ability to rebuild confidence in ACAS’s stock value and hamper the stock’s return to NAV levels.

By applying a reasonable limit on the total number of shares that can be sold under the SUB-NAV PROPOSAL and by specifying that, except for the shares required for the ECAS acquisition, that the record date for the $300M DISTRIBUTION precedes the sale/issue of any other shares below NAV, the company can:

1) sell the shares it needs to complete the ECAS acquisition,
2) sell additional shares to take advantage of a limited number of attractive investment opportunities, while
3) protecting current shareholders by removing the uncertainty inherent in an unlimited ability to issue sub-NAV shares.

Based on the November 10, 2008 ECAS implementation agreement, the ECAS acquisition requires approximately 11.6M shares of ACAS. ACAS’s current float is approximately 206M shares. If the SUB-NAV PROPOSAL was limited to 20% of the 206M share float, or 41.2M shares, it would provide the company the shares needed for ECAS as well as many as 30 million additional shares for other investments opportunities.

CONCISE PROPOSAL STATEMENT

THE COMPANY’S AUTHORIZATION TO SELL SHARES OF COMMON STOCK BELOW THE NET ASSET VALUE PER SHARE SHALL BE LIMITED TO:
1) 41.2 MILLION SHARES, AND
2) EXCLUDING THE SHARES REQUIRED FOR THE ECAS ACQUISITION, THE RECORD DATE FOR THE $300M DISTRIBUTION SHALL PRECEDE THE SALE OR ISSUE OF ANY SHARES UNDER THIS AUTHORITY.