NEW YORK (HedgeWorld.com)–Hedge fund manager Greenlight Capital Inc. is attempting to persuade the shareholders of Mercer International Inc., a European pulp and paper manufacturing company with a U.S. office in Seattle, to vote for its nominees at Mercer’s upcoming annual meeting.
Greenlight filed a preliminary proxy statement with the Securities and Exchange Commission on June 20, nominating Guy Adams and Saul Diamond, both executives of private equity concerns, for the Mercer board of trustees. Two members of the seven-member board are scheduled for election at the July 15 meeting.
Mercer “has excellent assets, but suffers significant deficiencies in corporate governance,” according to Greenlight’s proxy filing. The hedge fund firm is known for short selling companies it sees as having managerial or accounting problems .
There is a need for new trustees because the Mercer board is in disarray and has not been properly supervising top managers, Greenlight argues. The board has not met once in the past three years and has been a revolving door, it claims. Among the red flags Greenlight points to is that a former chief financial officer and trustee of Mercer is under criminal investigation in Germany.
Greenlight alleges that the management has engaged in transactions that are not in the best interests of shareholders, such as the purchase of Landqart AG, a Swiss mill business, and that Chief Executive Jimmy Lee has conflicts of interest, such as being a director at a subsidiary of MFC Bancorp, which is involved in the Landqart deal.
The company has performed poorly because Mercer’s board “blatantly ignored basic corporate governance principles designed to protect shareholders,” the hedge fund states. Mercer’s five-year total return for the period ending Dec. 31, 2002, was negative 37%. Mercer stock is trading at its lowest historical price range.
Mercer executives have hit back with their own version of how the company is doing. Mr. Lee said in a statement, “Mercer’s goal has always been to build long-term shareholder value.” The corporation has taken significant steps to become an efficient, low-cost producer and to expand the business, he said.
He said that the Greenlight nominees do not appear to have experience in operating public companies or paper and pulp businesses or European firms. Mr. Lee is backing Per Gundersby, an executive from the European pulp and paper industry, for the board. In the meantime, Mercer has put on hold a previously announced private offering of US$65 million in convertible notes.
The two sides have known each other for several years. The hedge fund has been an investor in Mercer since August 1997 and owns 14.9% of Mercer’s outstanding shares. It is the company’s largest shareholder. In addition, Greenlight manager David Einhorn and his two nominees own Mercer shares separately from the hedge fund.
“We want truly independent board members who will protect shareholders, not rubber stamp management dealings,” said Greenlight Chief Operating Officer Daniel Roitman, in a statement. “We believe Mercer shareholders would benefit from independent board oversight that has been lacking.”
He added: “As Mercer’s largest shareholder, we’re forced to take a leadership role in representing the interests of all shareholders. Mercer has valuable assets and the ability to deliver solid earnings. Mr. Diamond and Mr. Adams are talented professionals who will work to create a bright future for Mercer and its shareholders, and stop the excessive losses shareholders have experienced.”
Mr. Lee, for his part, expressed disappointment at “the apparent opportunistic action of one shareholder to try to take control over a part of the board at such a critical point in our development and growth.”