The Securities and Exchange Commission is trying to fix "proxy plumbing" to make it easier for shareholders to effect change inside companies. But confronting insiders, who are richer and better-informed than you, will probably remain a lonely, lopsided battle.
Just ask Matthew Crouse of Salt Lake City. Starting in 2002, he sank roughly $190,000 into Cadus Corp., a classic "value" stock. The tiny company was selling for less than the amount of its cash minus debt.
Another reason Mr. Crouse was attracted to Cadus: Its largest shareholder was Carl Icahn, the renowned activist investor who has shaken up such companies as Texaco,Yahoo and Lions Gate Entertainment. On July 1, after 17 years as Cadus's most powerful director, Mr. Icahn ceded his board seat to his son Brett.
Cadus, with a market value of only $19 million, has no employees, no operations, and just $100,000 in annual revenue from biotechnology discoveries that it sold a decade ago. Yet the company is sitting on $24 million in cash, plus more than $28 million in tax benefits that could be used to shelter future earnings.
In order to use those benefits, Cadus needs to acquire or merge with another company that produces profits. Complicating matters, the tax benefits begin to expire this year, with $10 million lapsing by 2012.
In February 2009, Mr. Crouse wrote to Cadus, requesting that the board sell the company and return the cash proceeds to investors. He drafted a resolution to that effect, which he asked the board to include in Cadus' proxy statement when shareholders were next asked to vote.
Yet Cadus didn't hold an annual meeting last year. One large shareholder says that "time and again, we have brought opportunities [for mergers or acquisitions] to the attention of the board." Each time, he says, the suggestion was rebuffed or ignored. "It's been a decade of complete nonaction," he says.
A little over a week ago—17 months after Mr. Crouse's letter—Cadus informed him that it will hold its annual meeting on Oct. 6, that his resolution will be included and that the board will recommend that shareholders reject it.
"My goal is to get it on Icahn's radar screen so that he'll need to deal with us, not just ignore us," Mr. Crouse says. "If you push for shareholder activism in other companies, I'd think you'd want to take care of your own."
It isn't that simple, Mr. Icahn counters. "We've been looking assiduously for three years for opportunities," he told me this week. "But I don't want to make a bad acquisition and lose the cash." He added, "I strongly believe that in today's type of market we will find a company [to buy] fairly soon."
Furthermore, Mr. Icahn says, if Cadus distributed its cash to shareholders, it would have no money for an acquisition, losing the opportunity to use its tax benefits directly. "I don't want to waste $25 million," he says. Of course, Cadus could still be acquired by another firm that could make use of the tax break.
Cadus is less a company than a publicly traded checking account with a tax perk attached. The insiders are the only ones who can write checks. The minority shareholders can always vote with their feet by selling the stock—although they would have little to show for it.
For the proposal to pass, nearly 90% of all the minority shareholders would have to vote for it, since Mr. Icahn controls 40% of the stock.
"This is the type of contest that can be won," says Gary Lutin, chairman of the Shareholder Forum, an investor-advocacy organization. "But [Mr. Crouse] is assuming all the burden and, given his small holdings, the absolute dollar amount of [profit] if he wins may not justify his costs." Even if victory comes to Mr. Crouse, it may not be sweet.
No matter how the SEC reforms the proxy system, management will retain the upper hand; companies have deeper pockets, and insiders have better knowledge, than most outsiders do.
Nonproxy measures—like electronic surveys to determine whether investors support management—may be faster, cheaper ways to improve corporate democracy.
It is tempting to tag along with famous investors, like Mr. Icahn. But if their view of what is right for the company differs from yours, their view will almost certainly prevail.
Finally, several traits are essential to be a successful investor: intelligence, independence, skepticism, patience, discipline. To be a successful activist, however, you need at least one more attribute: stubbornness.
If you are a quitter, the Don Quixote life isn't for you.
Write to Jason Zweig at intelligentinvestor@wsj.com
