The Stress Test Every Business Needs

13How can you pre-empt activist shareholders?

Shyam Gidumal

I was a shareholder activist.

At the time, that term hadn’t yet been coined; however, the foundation had been set for a fundamental realignment in the way investors, boards, and management teams interacted.

I joined with a group of investors who owned stock in Vista 2000, Inc., a public company that had been a highflier on the NASDAQ. Unfortunately for them, management and the board had not succeeded in implementing the strategy they had promised. When the results fell short of projections, they cooked the books. The stock collapsed after questions were raised about the accuracy of prior financial statements.

I was the turnaround expert of the group. The more we dug, the worse the governance and malfeasance appeared to be. We engaged with the legacy board, which was largely populated by friends of the founder/CEO: a professional baseball team manager, an academic, the CEO’s personal tax accountant, and so on. Eventually, after some tense discussions, we negotiated an arrangement to take control of the board. We filed a Form 8-K to make other investors aware of the reality we had uncovered.

The management team and board had failed on multiple fronts. Not only had the financials been inaccurate, but the company had liquidity issues—the banks had accelerated the loans. The company also had Regulation S toxic preferred securities outstanding and a variety of legal issues that needed to be addressed, including class action ...