Value Investing Forum

Post edited 1:41 am – November 14, 2011 by somrh

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 nell said:

 

@somrh ..very good point ..maybe something for http://www.sec.gov/whistleblower ? ;-)

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I think it's dubious but it might not be illegal. I wonder if there's any regulations regarding various classes of shares. If not, I think there should be.
 

 

To contrast that, consider BRKB classes A and B. There is a difference in voting:

Each share of Class A common stock is currently convertible into 1,500 shares of Class B common stock, but shares of Class B common stock are not convertible into shares of Class A common stock or any other security. Although a share of Class B common stock may sell below one-fifteen-hundredth of the market price for a share of Class A common stock, it is unlikely that a share of Class B common stock will sell significantly above 1/1,500 of the market price for a share of Class A common stock because higher prices than that would cause arbitrage activity to ensue. Also, holders of Class A common stock are entitled to one vote, but holders of Class B common stock are currently entitled to only 1/10,000 of a vote for each Class B share on matters submitted to a vote of our stockholders.

But their dividend policy is sensible:

Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class A common share is entitled to one vote per share.

But technically APOL hasn't done anything bad as of yet (unless there are some regulations that I'm not aware of). And they could easily declare equal dividends to both share classes so the overall effect might be negligible.

I know the sector (for-profit education) is a favorite for short sellers. This one has an interesting twist:

Some interesting tidbits from APOL's 10-K…

There are two share classes: Class A (130,108,000 Shares) and Class B (475,000 Shares). It is the Class A that sell on the NASDAQ stock exchange.

Under item 1A – Risk Factors, the Class A common shares have no voting rights. So the entire company is controlled by the Class B shareholders.

Who are the Class B shareholders?

There is no
established public trading market for our Apollo Group Class B common
stock and all shares of our Apollo Group Class B common stock are
beneficially owned by affiliates.

[...]

Dr. John G. Sperling,
our Executive Chairman of the Board and Founder, controls approximately
51% of our only class of voting securities, the Apollo Group Class B
common stock. Dr. Sperling’s son, Mr. Peter Sperling, the Vice Chairman
of our board of directors, controls the remainder of our Class B common
stock. Dr. Sperling and Mr. Sperling together control the election of
all members of our Board of Directors and substantially all other
actions requiring a vote of our shareholders, except in certain limited
circumstances. Holders of our outstanding Apollo Group Class A common
stock do not have the right to vote for the election of directors or for
substantially any other action requiring a vote of shareholders.

So Class B shares do not trade on the exchange. They are owned entirely be father and son (later on it says there are "four registered holders" for the Class B shares). Father and son get to decide who the "independent" board members will be.

So why would anyone want to own this company? APOL has been relatively profitable. They have relatively low debt, etc. But none of that really matters. What matter is what cash it will eventually pass onto its shareholders (Class A). So what's its dividend policy:

Although we are
permitted to pay dividends on our Apollo Class A and Apollo Class B
common stock, subject to the satisfaction of applicable financial
covenants in our principal credit facility, we have never paid cash
dividends on our common stock. Dividends are payable at the discretion
of the Board of Directors, and the Articles of Incorporation treat the
declaration of dividends on the Apollo Class A and Apollo Class B common
stock in an identical manner as follows: holders of our Apollo Class A
common stock and Apollo Class B common stock are entitled to receive
cash dividends, if and to the extent declared by the Board of Directors,
payable to the holders of either class or both classes of common stock
in equal or unequal per share amounts, at the discretion of the Board of
Directors. We have no current plan to pay dividends in the near term.
The decision of our Board of Directors to pay future dividends will
depend on general business conditions, the effect of a dividend payment
on our financial condition and other factors the Board of Directors may
consider relevant.

So they haven't paid any dividends yet. That's not a big deal; lots of valuable companies are in that boat. But if and when they do pay dividends (see the stuff I put in bold), they can choose whether or not to pay dividends to Class A, Class B or both.

So let's get this straight. Class A shareholders have no voting rights, they don't decide who is on the Board. So there's a huge Principal-Agent problem here. And on top of that, the Board can choose to – and I realize that this is unlikely – pay cash dividends to, say, the Class B shareholders but not to the Class A shareholders.

So what are the Class A shares worth? Will a Class A shareholder ever receive a dime from this investment?