Engaged Capital, an investment firm specializing in small and mid-cap
North American equities and beneficial owner of approximately 5.1
percent of the common stock of AeroVironment, Inc. (“AeroVironment” or
the “Company”) (NASDAQ:AVAV), today sent a letter to the Company’s Board
of Directors (the “Board”), included below and also filed today as an
amendment to its SEC form 13-D.
In its letter, Engaged Capital expresses its disappointment with the
Board’s unwillingness to enter into a constructive process, seriously
consider its highly qualified independent director nominee, and its
failure to provide proper governance and protections for the rights of
its shareholders. Engaged believes that the Company lacks a sense of
urgency to capitalize on the Company’s market position, nor explore
alternatives that could change the trajectory of its public market
valuation. Engaged believes that recent events and information disclosed
in the attached letter reveals a Board that elevates self-interest over
its fiduciary duty to shareholders.
Glenn Welling, Principal and Chief Investment Officer of Engaged
Capital, commented, “AeroVironment’s failure to deliver meaningful
shareholder returns over any relevant time period is a clear indication
of a need for change. We have spent the last few months working
transparently and constructively towards a solution that would finally
elevate the interests of shareholders to the top of the Board’s priority
list. At this point, we feel that we have exhausted every possible
avenue to finding a solution, as the Company’s offers to address our
concerns have no substance. We are resolute in our determination to
ensure the Company is governed for the benefit of its shareholders. All
shareholders should be intently focused on this Board’s lack of progress
in the areas of governance, capital allocation, and long-term strategy.”
Engaged Capital noted that it had also included, as part of its 13-D
filing but not appearing below, three additional letters: a cover letter
to management, dated July 3, 2013 that accompanied its nominating letter
to the Board, a letter, dated August 7, 2013 expressing disappointment
at the lack of communication or action regarding previous communications
to the Board, and a letter, dated August 12, 2013 expressing further
concerns after the meeting with the Nominating and Governance Committee.
The Company’s 13-D filing can be found in its entirety here: http://tinyurl.com/EngagedCapital13D
Full letter text:
August 27, 2013
Members of the Board of Directors
AeroVironment, Inc.
181 W.
Huntington Drive, Suite 202
Monrovia, CA 91016
Dear Members of the Board,
As you know, Engaged Capital is a significant shareholder of
AeroVironment, Inc. (“AVAV” or “the Company”) with ownership of
approximately 5.1% of the Company’s outstanding shares. We have
explained in prior conversations that we consider ourselves private
equity investors in public equities. We make long-term investments in
undervalued companies and seek to work collaboratively and
constructively with the board of directors and management to eliminate
impediments to value creation and to identify and execute on
opportunities to unlock value for the benefit of all shareholders.
The overriding responsibility of the board of directors and management
is to create value for shareholders. Unfortunately, it has become our
considered position that AVAV’s board of directors (the “Board”) and
management team have each failed to fulfill this basic responsibility
and, moreover, have willfully repudiated their fiduciary duty to
shareholders. The Company’s one-, three-, and five-year returns have
been an abysmal (4%), (1%), and (32%), respectively. In fact, since the
close of trading on the day of the Company’s IPO more than six years
ago, the Company’s shares have declined by 5%. Such long-term
underperformance is alarming, especially from a company that is the
dominant participant in a high-return, fast-growing industry. We believe
the Company’s strong competitive position, extensive intellectual
property, and sizable growth opportunities have the potential to create
significant value, and we find it unacceptable that the value ascribed
to these attributes goes unrealized.
From the outset of this process, we have expressed our sincere desire to
work constructively with the current Board to reach a mutually agreeable
solution in the best interest of all shareholders. We have been
completely transparent and constructive in all of our communications
with you to date. We have made it a point to notify management and the
Board of any filings, notices, and press releases, including our
nomination notice, and have provided you ample opportunity to meet us
halfway in finding an actionable solution that gives shareholders a say
in the Company’s governance and strategy.
In contrast, the Board has demonstrated its undying commitment to the
unacceptable status quo and, in doing so, has resorted to defensive,
reactionary tactics to avoid shareholder input and real change at AVAV.
The recently announced Board changes were made entirely in reaction to
our nomination notice and involvement at the Company and eschew the
interests of shareholders in favor of the Board’s misguided
self-interests. Frankly, we are surprised and disappointed that the
Company chose to take these actions publicly while we were in the midst
of trying to privately reach a mutually agreeable outcome that would
avoid a potential election contest. After the series of events that have
transpired over the last few weeks, the Board has proven it is not
interested in finding a productive solution to the Company’s
longstanding issues and remains close-minded to the introduction of
fresh perspectives through independent representation in the boardroom.
The Board Has Been Unwilling to Communicate Meaningfully with the
Shareholders it Claims to Represent
In a phone call with Tim Conver on June 30, 2013, and in a subsequent
letter to the Board, dated July 3, 2013, we provided notice of our
nomination of one candidate for election to the Company’s Board at the
2013 annual meeting of shareholders (the “2013 Annual Meeting”). We made
a conscious decision to nominate only one candidate, rather than two or
three, in order to avoid distraction and confrontation. However, after
the passage of over one month, we had not received any direct
communication from the Company’s Nominating and Corporate Governance
Committee (the “Committee”). Inaction on the part of the Committee made
it necessary for us to send a letter questioning why, after over a
month’s time, the Committee had made no attempt to engage in a dialogue.
Not until receipt of our August 7, 2013 letter did the Committee respond
by offering to meet with our candidate. On August 11, 2013, the
Committee and the CEO (who himself is not a member of the
Committee) finally met with our candidate. Notably absent, however, was
the Committee’s chairman.
The Board is Long-Tenured, Entrenched, and Out of Touch With
Shareholders
During the August 11, 2013 meeting, we were shocked to hear Committee
member Joseph Alibrandi state that our criticism of AVAV’s failure to
create any shareholder value since its IPO was unwarranted, as he
considered it too short a time period to properly evaluate the Company’s
performance. Mr. Alibrandi felt that it was necessary to also consider
AVAV’s long history as a private company to appropriately measure the
Company’s value creation. It is not surprising that the Board has
displayed no sense of urgency to create value for shareholders, since
the Board believes it is appropriate to measure performance over
multi-decade periods during which the Company had no public
shareholders. This type of thinking is emblematic of an entrenched Board
without a mandatory retirement age or term limits that is entirely out
of touch with reality and shareholders’ best interests.
We were again stunned during a phone call on August 16, 2013 between Mr.
Welling and Messrs. Alibrandi and Conver, when Mr. Alibrandi responded
to the fact that AVAV had not created any shareholder value over either
a one-, three-, or five-year period by stating that this information was
not meaningful as it could be said about most public companies. This is
simply incorrect, as over the last one-, three-, and five-year periods,
AVAV has underperformed the S&P 600 Aerospace & Defense Index by 44%,
79%, and 53%, respectively, and underperformed its stated peer group by
39%, 59%, and 91%,1 respectively. Rather, AVAV’s stock
performance over the past six and a half years reflects a recurring
pattern of unfulfilled market expectations. Clearly, Mr. Alibrandi and
his fellow directors are out of touch with this harsh reality. In our
opinion, this attitude reflects a clear and alarming disregard of the
Board’s fiduciary duty.
The Board Is Irrationally Insulating Itself from Outside Perspectives
on Value Creation
With our nomination of a highly qualified, independent director
candidate, we sought to (i) energize the Board with a deeper
understanding of how professional investors determine value, (ii)
provide a fresh and experienced perspective on capital allocation, and
(iii) enhance the clarity and transparency of the Company’s public
disclosures to shareholders. During the August 16, 2013 call, Messrs.
Alibrandi and Conver informed us of the Board’s decision not to nominate
our candidate as part of the Company’s slate at the 2013 Annual Meeting.
Messrs. Alibrandi and Conver communicated to Mr. Welling that they felt
this was not the “right time” to add these skill sets to the Board and
that they would be a distraction from the Board’s pursuit of the
Company’s current plan. The Board’s view that disciplined capital
allocation and transparent investor communications are qualities only
relevant to public companies at certain points in time further reflects
the Board’s neglect of its fiduciary responsibilities. Given the current
Board’s poor track record in the areas of capital allocation,
transparency/disclosure, and value creation, the current Board is
woefully unqualified to summarily reject the addition of relevant skill
sets and well-informed shareholder perspectives in the boardroom.
The Nomination of New Director Candidates is a Reactionary,
Thinly-Veiled Attempt to Appear Willing to Embrace Change Which Actually
Serves to Preserve the Status Quo
While in the midst of what we thought were good-faith negotiations, and
before rejecting our alternative proposals, the Board preemptively filed
preliminary proxy materials and announced the appointment of two new
directors, Charles Thomas Burbage and Edward R. Muller. We believe both
have problematic ties to management and the Board. Mr. Muller worked
under Mr. Alibrandi at Whittaker Corp., as did Mr. Conver; we believe
Mr. Burbage and Mr. Conver are long-time friends. These appointments
were surreptitiously designed to give the appearance of greater
Board independence; instead, these actions only serve to further
entrench and insulate the Board. In addition, the Company’s third
nominee this year, Charles R. Holland, by the Board’s own admission, is
not independent given the sizable consulting fees he receives from the
Company. It is abundantly clear that the Board and management seek to
enjoy the benefits of a public company structure (liquidity for
founders/management and access to the capital markets) while at the same
time aggressively retaining the governance model of a private company.
We are shocked that the Board would employ such a tactic and assume
shareholders would be so naïve as to not recognize the true motive
behind these actions.
The Board has Rejected Engaged’s Proposed Solutions and Offered Only
Hollow Reforms and Self-Serving Counterproposals
Once the Board communicated its reservations regarding Mr. Welling’s
candidacy this year, Engaged offered multiple solutions to both avoid a
contested situation and bring positive change to the Company, all of
which were rejected.
-
In exchange for a standstill agreement, Engaged proposed that the
Company provide us the right to have our candidate nominated as part
of the Company’s slate at the 2014 annual meeting of shareholders. The
idea being that we would work closely with management and the Board
over the next year to address our concerns and hopefully avoid the
need to exercise this option. On the August 16, 2013 call, Mr.
Alibrandi called this proposal “ludicrous.”
-
Alternatively, Engaged proposed that the Company declassify the Board
starting this year, electing directors to one-year terms, consistent
with corporate governance best practices. Mr. Conver communicated that
the Board’s rejection of this proposal was due to its importance as an
M&A defense mechanism. Engaged views a tender offer for the Company as
extremely unlikely; further, to succeed, such a tender would require
support from a majority of shareholders.
-
Paradoxically, Mr. Conver then suggested that the Company would
declassify the Board beginning in 2014 if Engaged was willing to
withdraw its nomination. This is an unacceptable solution as the
intent is clearly to guarantee the tenure of the Company’s Class I
director nominees for three years, none of whom we view as independent.
-
The Board offered Engaged the option to review the Company’s plans
under cover of an NDA. However, the long-term nature of the requisite
information would result in an NDA of significant and uncertain
length. Therefore, this “solution” would only serve to isolate us from
communicating with other shareholders, prevent us from accumulating
additional shares, constrain our ability to issue public statements,
and expose us to unnecessary regulatory risk. Such restrictive terms
are only acceptable in return for board representation.
-
The Company, through its advisors, offered to create a capital
allocation committee. While Engaged would applaud the formation of
such a committee, this in and of itself would not sufficiently address
our concerns.
We are resolute in our determination to ensure the Company is governed
for the benefit of its shareholders. Our interactions have left us with
serious doubt as to whether a single board seat is sufficient to
influence critical decisions and unbind the decades-long ties that exist
amongst the existing and proposed directors. As our fiduciaries, we
consider the extent to which shareholder value creation opportunities
have been ignored to be objectionable. We intend to exercise our rights
on behalf of all shareholders and are committed to take any and all
actions necessary in order to unlock shareholder value.
Sincerely,
Glenn W. Welling
About Engaged Capital:
Engaged Capital, LLC, (“Engaged Capital”) was established in 2012 by a
group of professionals with significant experience in activist investing
in North America and was seeded by Grosvenor Capital Management, L.P.,
one of the oldest and largest global alternative investment managers.
Engaged Capital is a limited liability company owned by its principals
and formed to create long-term shareholder value by bringing an owner’s
perspective to the managements and boards of under-valued public
companies. Engaged Capital manages both a long-only and long/short North
American equity fund. Engaged Capital’s efforts and resources are
dedicated to a single investment style, “Constructive Activism” with a
focus on delivering superior, long-term, risk-adjusted returns for
investors. Engaged Capital is based in Newport Beach, California.
1 Average total return of peer companies listed in AVAV’s
2013 preliminary proxy statement through August 26, 2013 calculated
using FactSet.
Copyright Business Wire 2013