Activist Investor Lawndale Increases P&F Industries Stake While Demanding Action

Includes: PFIN, QEPC, SNA, SWK
by: Andrew Shapiro

Lawndale Capital Management files an amended 13D on P&F Industries. (O-PFIN): Letter calls for improved board independence and reduced CEO compensation; Increases position to 9.7%

In a filing with the SEC on September 20, 2010, Mill Valley, CA-based Lawndale Capital Management, LLC and its affiliates (“Lawndale”) filed SEC form 13D/A #2 in P&F Industries (NASDAQ:PFIN) triggered by a September 17, 2010 letter to PFIN’s Board and an increase in Lawndale’s ownership position to 9.7% of PFIN.

(See letter here.)

The Item 4 language of the filing is set forth, below, and the actual P&F 13D filing and letter exhibit by Lawndale Capital Management can be found at SEC EDGAR here.

P&F Industries, Inc., through its two wholly-owned subsidiaries, Continental Tool Group Inc. and Countrywide Hardware, Inc., manufactures and/or imports air-powered tools and builders' hardware. Its products are sold under their own trademarks, as well as under the private labels of major manufacturers and retailers. Further information on P&F can be found at its corporate website.

Lawndale Capital Management, LLC is Mill Valley, CA-based investment advisor that manages activist hedge funds focusing on creating and unlocking shareholder value in small- and micro-cap companies for more than 17 years.

Item 4. Purpose of Transaction

As disclosed in prior filings, the Filers ("Lawndale") have been in contact with P&F Industries ("PFIN") management and members of PFIN’s Board of Directors (the “Board”) regarding certain operational and corporate governance concerns that include, but are not limited to, what Lawndale believes to be excessive compensation paid to PFIN’s Chairman and CEO, Richard Horowitz, for poor performance. This leads to additional serious concerns Lawndale has regarding the Board’s composition and independence.

In February 2010, Lawndale submitted the names and backgrounds of five highly qualified and independent individuals for possible addition to P&F’s Board. Around May 4, 2010, PFIN mailed proxies for its 2010 Annual Meeting containing only its current board members as nominees for election to new 3-year terms. On May 25, 2010, Lawndale sent PFIN’s Board a letter (the “May 2010 Letter”, a copy of which is attached as Exhibit 1 hereto, and incorporated by reference to this filing) informing them of Lawndale's intent to vote its shares, then equal to 7.5% of PFIN, to "Withhold” on the re-election of PFIN’s nominees. The May 2010 Letter to PFIN’s Board set forth Lawndale’s rationale for its concerns and vote, the major points of which were that:

  • Horowitz’ compensation is wholly inappropriate for P&F’s small size and holding company structure
  • The only shareowner to benefit from the Horowitz era has been Horowitz
  • P&F’s board requires increased independence by means of new directors from outside “the club”

Leading independent proxy advisory services Proxy Governance and RiskMetrics both criticized P&F’s corporate governance (and in the case of Proxy Governance, its excessive CEO compensation as well) and recommended Withhold votes for its clients. Voting results from the June 3, 2010, Annual Meeting disclosed roughly 30% of the votes cast for each of the nominees were voted Withhold.

Subsequent to the 2010 Annual Meeting, PFIN has taken some rudimentary steps towards improving its corporate governance, including, on July 29, 2010, expanding its Board to nine directors by adding to its Board one of the five individuals recommended by Lawndale.

On September 17, 2010, Lawndale sent PFIN’s Board a letter (the “September 17th Letter”, a copy of which is attached at Exhibit B hereto, and incorporated by reference to this filing) informing them of Lawndale's increased ownership in PFIN and that Lawndale viewed PFIN’s changes to date as cosmetic. It is the view of Lawndale that a board comprised of qualified directors who are independent, and whose interests are better aligned with shareholders via meaningful purchased equity ownership, would more objectively and aggressively oversee the compensation and corporate acquisition and disposition decisions of PFIN.

In the September 17th Letter, Lawndale requested that PFIN’s Board:

  • Improve its independent composition and reduce its size by removing or replacing conflicted directors, particularly Director Dennis Kalick, one of Mr. Horowitz’ personal tax advisors
  • Consider strategic alternatives, including the sale of the company for a control premium to a synergistic buyer, prior to renewing Mr. Horowitz’ contract
  • Reduce or eliminate the egregious compensation terms such that any new contract with Mr. Horowitz contains lower “guaranteed” base compensation, greatly reduced supplemental profit sharing payments, and no “Golden Parachute” severance terms

Lawndale has offered to source additional director candidates to PFIN’s Board as needed, and requested a meeting or conference call with PFIN’s Board to discuss constructive actions to further improve corporate governance and maximize value for all P&F shareowners.

Lawndale believes the public market value of PFIN is undervalued by not adequately reflecting the value of PFIN’s business segments and other assets, including certain long-held real estate.

While Lawndale acquired the Stock solely for investment purposes, Lawndale has been and may continue to be in contact with PFIN management, members of PFIN’s Board, other significant shareholders and others regarding alternatives that PFIN could employ to maximize shareholder value. Lawndale may from time to time take such actions, as it deems necessary or appropriate to maximize its investment in the Company's shares. Such action(s) may include, but is not limited to, buying or selling the Company's Stock at its discretion, communicating with the Company's shareholders and/or others about actions which may be taken to improve the Company's financial situation or governance policies or practices, as well as such other actions as Lawndale, in its sole discretion, may find appropriate.

Disclosure: At time of writing, funds author manages hold a long position in this issuer and is a 13D filer. The funds or its affiliates may buy or sell securities of this issuer at any time.

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