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Compliance Versus Capitulation
Thursday, May 10, 2018

Over the past 24 hours, I’ve been hearing from anti-gun groups about their having forced Sturm Ruger & Company (NYSE: RGR) into changing the way they do business. Yes, I get a bunch of the anti-gun groups’ material because it’s good to know what the other side of any issue is thinking -although in this case it’s more what they’re “feeling”.

Because if they were “thinking” they’d realize someone who’s had a bit of experience with public companies would quickly blow the whistle on the fact that what they’re trying to pass of as a change of the way a company does business is the equivalent of a fly thinking he’s steering a cow by buzzing around its head.

It’s not called “steering” it’s called “pestering”. And that, ultimately, is what a shareholder proposal passed at their last annual meeting accomplished. The problems associated with being a public company include a myriad of reporting requirements, but the definition of compliance occasionally means having to address things that are of no real consequence.

During the NRA Annual Meetings last week, I had a conversation with an executive who was considering the idea of “going public”. In his mind, being a public company meant immediate access to wads of capital at the simple cost of some additional paperwork. Having taken companies public, I didn’t hesitate to tell him that there were some very sticky strings on corporate capital that came from shareholders. One of the sticking points is the fact that every shareholder has this crazy thing called “rights”. And those rights include the ability to speak to the company about virtually anything- knowing the company is obligated to respond. 

Holders of common stock have the right to share in virtually every element of a company. The obvious rights entitle them to proportionate shares of the company’s profitability, income and assets- but it also includes a degree of control and influence over how the company’s managed. That’s one of the “rights” you most frequently associate with shareholder meetings. That’s where everyone (theoretically) has the opportunity to speak about what they’d like to see the company do.

Otherwise, the “rights” of common shareholders are subordinate to two superior classes: bondholders and owners of preferred shares. 

So why in the world would you care? 

Because the so-called win a group of dissident shareholders claimed over Ruger was nothing more than a group of people gaming the rules. 

At Ruger’s recent shareholders meeting, a shareholder’s proposal - which was essentially a call for gun control- was passed, despite the urging of the Board of Directors that it be defeated. With its passage, Ruger was required to comply.

So what’s the “big change” at Ruger? To comply with the shareholder proposal, the management is required to prepare a report.

Ruger’s issued a response to the action because, well, because some people might think Ruger’s being forced to change their philosophy or operating practices or…something.

Not really. Here’s what the response I got says:

“Please understand that Ruger was obligated by applicable law to include a shareholder’s activist resolution with its proxy materials for a shareholder vote.   With its passage, the proposal requires Ruger to prepare a report.  That’s it.  A report.  What the proposal does not do . . . and cannot do . . . is force us to change our business, which is lawful and constitutionally protected.  What it does not do . . . and cannot do . . . is force us to adopt misguided principles created by groups who do not own guns, know nothing about our business, and frankly would rather see us out of business.”

Ruger’s CEO Chris Killoy also commented on the whole deal, saying “we are Americans who work together to produce rugged, reliable, innovative and affordable firearms for responsible citizens. We’re staunch supporters of the Second Amendment, not because we make firearms, but because we cherish the rights conferred by it. We understand the importance of those rights, and, as importantly, recognize that allowing our constitutionally protected freedoms to be eroded for the sake or political expediency is the wrong approach for our Company, for our industry, for our customers, and for our country….we are arms makers for responsible citizens and…we have no intention of changing that.”

There aren’t many companies that wouldn’t like to be in Ruger’s position today, no debt, a good product mix, loyal customers, solid business results and a considerable amount of cash in the bank. But only the execs at public companies understand the hassles that come along with being a public company. One of those is activist investors. Their agendas go beyond expectations of a return on their investment. 

Fortunately you can comply without being forced to capitulate.

-- Jim Shepherd


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