I first wrote about ALJ Regional Holdings (ALJJ) more than a decade ago, and now that I’m back in the stock it seems only fitting that I write about it once again. When I first got involved it was trading on the pink sheets and Jess Ravich owned 22.1% of the company. After some years in the daylight on the Nasdaq it is back where it started, on the pink sheets, but now Ravich owns 58.9% (more counting a convertible note) and he is looking to increase that percentage further.
To make that happen the company is planning a merger in which shareholders will be cashed out at $1.97/share. With the stock currently trading at $1.84/share that is a juicy looking spread of 7.1%. Accredited investors have the option to rollover their stake and get unregistered shares in a private company, but given the current course of the company I doubt many investors would be comfortable with such a structure.
In the proxy statement it is not explicitly written that accredited investors have a choice, if you read it you would think that they have to accept the unregistered shares. But I don’t think that this can be true, because it is impossible for the company to verify who qualifies without cooperation of said shareholders. Issuing non-registered shares to non-accredited investors is presumably a risk they don’t want to take. In section 5(b) of the merger agreement we find:
Cash Consideration. Notwithstanding anything to the contrary in this Agreement, in no event shall NewCo be required to issue any shares of NewCo Common Stock to any person that does not provide duly completed and executed Investor Suitability Documentation (as defined below) establishing to the satisfaction of NewCo that shares of NewCo Common Stock may be issued to such person in connection with the Merger and the other transactions pursuant to an exemption from the registration requirements of the Securities Act and other applicable securities laws. To the extent that NewCo is unable, in its sole discretion, to conclude that NewCo Common Stock may be issued to such stockholder in compliance with the Securities Act and other applicable securities laws, including making a determination that such stockholder is an Accredited Investor, NewCo shall be entitled to pay, in lieu of the Stock Consideration otherwise payable pursuant to Section 5(a)(i), an amount in cash equal to the Cash Consideration.
And in section 5(f) about securities law compliance we read the following (emphasis mine):
Securities Law Compliance. No later than ten (10) business days following the Effective Time, NewCo shall use commercially reasonable efforts (including engaging a third-party service) to distribute to each ALJ shareholder who is eligible to receive Stock Consideration (except for those shareholders who has less than one hundred (100) shares of ALJ Common Stock) the documentation, in form and substance reasonably acceptable to NewCo, necessary to determine whether or not such person is an Accredited Investor (collectively, the “Investor Suitability Documentation”). NewCo shall use its commercially reasonable efforts to cause each ALJ shareholder to promptly deliver such Investor Suitability Documentation. For the avoidance of doubt, if a shareholder has not completed and returned Investor Suitability Documentation to NewCo or its agent or representative, NewCo shall have the right under Section 5 to determine that such shareholder is not an Accredited Investor.
So it sounds that in theory the company has the right to choose what consideration to offer in the merger, but that in practice it will be up to the investor because you will get cash if you don’t provide the proper documentation to prove that you are an accredited investor. But perhaps this is causing some merger arbitrage funds to stay away from this deal.
To approve the merger ALJ Regional Holdings needs >50% of votes in favor of the merger, but despite the fact that Ravich owns 58.9% of the shares he cannot unilaterally approve the transaction. There is no majority of the minority requirement, but he is bound by a voting agreement that limits his votes to 40% of the outstanding shares. His remaining shares are voted proportionally with minority shareholders. So the company needs some minority shareholders to vote in favor of the deal, but not that many. If 7% of shares from minority vote yes (~17% of minorities) Ravich will vote 17% of his stake above 40% in favor as well which would add a bit more than 3% of votes. Combine all the votes and you pass the 50% mark.
I don’t think that shareholders will love this deal and approve it with an overwhelming majority. The deal is done at a meager premium to the market price before announcement, it is done at a small discount compared to the price of the tender offer the company did at the end of 2022, and most importantly, it appears to be significantly below fair value. I also doubt that accredited investors will be trilled by the opportunity to swap their shares to unregistered stock in a new private company. But 17% of minority investors voting in favor is not a particular high hurdle, and I suspect that they will reach that number. The low to non-existent premium also reduces the risk for those who want to play the merger arbitrage game. If for some reason the deal doesn’t go through, the downside is presumably not too big either.
It should be noted that the merger is not an iron clad deal, the company can basically decide to abandon the transaction at any point in time if it chooses to do so. Given that the transaction is a sweet deal for Ravich I think it will happen, but there is less certainty than in a normal merger. There are appraisal rights available for shareholders, so perhaps if a large number will go for that route it will throw a wrench in the merger plans. Perhaps going for appraisal is a superior plan to trying to eek out a few percent in the merger arbitrage, although I’m not quite sure if that is even possible for new holders. The record date for the special shareholder meeting is March 31, 2023, and I believe you need to vote against the merger in order to perfect your appraisal rights? Not sure though, since I have never participated in one before.
Disclosure
Author is long ALJJ
Are you sure there is no de facto majority of minority condition? It appears that the 18.9% above 40% would be voted in the same way as the majority of independent shareholders vote, so it is the latter that would really count. I also think that it isn’t clear how the Glazer Trust would vote, since they might not be willing to hold non-traded shares nor to cash out at this price (as they haven’t tendered in December).
I think the proxy statement is pretty clear that only a simple majority is required, and you are right about the 18.9% above the 40% threshold. But that still has a bit of a multiplier effect. Every minority shareholder that votes in favor of the deal effectively votes a bit of those 18.9% shares in favor as well.
And yeah, don’t know how the Glazer Trust would vote. You would imagine that Ravich would have checked what they would think of this transaction, but who knows?