Advocat (AVCA) and Todd Robinson, who is waging a proxy contest for three seats on Advocat's board, each tried to garner public support Friday. The company suggested that Robinson's goal is to push through a related-party transaction.
Advocat Inc. urges its shareholders to vote their shares of stock at the Company's annual meeting and not to allow Mr. Todd P. Robinson and Mr. Essel W. Bailey, Jr. to disrupt the meeting. The preliminary proxy notes that Mr. Robinson, Mr. Bailey and the third individual do not own any stock in Advocat as of the record date.
William R. Council, III, Advocat's CEO, commented, "We believe that Mr. Robinson and Mr. Bailey are trying to take control of the Advocat board of directors for their personal gain and if elected will not represent the interests of the Company's current shareholders." The Company was initially approached by Mr. Robinson in November 2005. Mr. Robinson indicated that he represented a group of entities and investors that own nursing homes located generally in the southeast United States who were interested in selling those homes to Advocat in exchange for shares of common stock.
Management and the board believe that Mr. Robinson and Mr. Bailey are attempting to disrupt the upcoming shareholders meeting for the sole reason of attempting to force a related party transaction.
Robinson responded in an SEC filing:
In early 2006, I signed a confidentiality agreement provided to me by William Council, the Company’s CEO, on the premise that Advocat would be sharing non-public information to determine how the transaction might be structured and valued. In anticipation of receiving this information, I was advised not to purchase shares of Advocat stock due to the insider trading rules. Ultimately, no such proprietary information was given to me, but I never acquired Company stock on the hopes that our transaction would proceed as discussed.
Recently, I acquired 100 shares of the Company’s common stock. Mr. Bailey and Mr. Cash do not own any Advocat stock at this time. If we were elected to the Board, I can assure you that we would collectively acquire a worthwhile stake in the Company, either via a cash or asset investment, to prove our commitment to its success and to further align our financial interests with those of other shareholders.
I was amazed when I read the Company’s proxy statement this year which disclosed that, when you back out the Chairman’s stock ownership and the stock options the Board members awarded to themselves, the four remaining Board members (including the CEO) collectively own only 22,900 shares of Company stock, which is less than 0.4% of all of the outstanding shares. The two existing Board members whose terms are expiring at this year’s annual meeting own only 1000 and 0 shares, respectively.
In a press release dated May 3, 2007, Advocat’s CEO indicated that a principal reason that a transaction was not pursued by the Company was due to the low stock price at the time of negotiations, and if stock were paid in exchange for the assets acquired, the transaction would be too “expensive.” This doesn’t accurately reflect the proposals which were discussed. The proposed transaction was to be valued based on the relative cash flows of all assets (both Advocat’s existing assets and the assets to be acquired), subject to certain adjustments. By looking at cash flow multiples, we would be able to determine the value of everyone’s business relative to one another. The percentage of equity ownership of the participating parties would be determined by these relative values, and the trading price for Advocat’s stock would be a non-factor. Recently, it has come to my attention that I am not alone in my frustration with the Company’s management team and their apparent inaction to move the Company forward. Over the past couple of weeks, I have been contacted by several large shareholders who have expressed a similar frustration.
In a telephone call earlier Friday, Todd Robinson pointed out the obvious -- if he was a director, it would be more difficult for him to push through a related party transaction, not easier. Under Delaware law, such a transaction would have to be approved by a majority of disinterested directors. Friday's back-and-forth doesn't change my opinion. The company should have undertaken a formal bid solicitation and auction process last year. A new board would help push that effort forward, and maximize shareholder value.
DISCLOSURE: I have no position in AVCA. Not a recommendation to buy or sell any security. For informational and educational purposes only.