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AVI Shareholder Advocacy Trust

I recently congratulated Richard Macary on what seemed like a recent victory for the AVI Shareholder Advocacy Trust at AVI BioPharma (AVI BioPharma's CEO resigns, 3/29/07, The Oregonian). I also asked him what he thought of Glyn Holton's proxy exchange concept. Macary wrote back with the following:

Unfortunately, the Trust's job at AVI is not done. The Board that allowed this poorly performing CEO (Dr. Burger) to remain at his position for years despite public record evidence of his many failures is now in charge of finding his replacement, which doesn't make me feel very comfortable. They made no offer to the Trust to submit potential nominees for the Board of Directors to replace the vacant positions on the Board as part of the current proxy (there are/were two vacant seats). The new Chairman simply directed us to the bylaws and suggested we submit potential candidates for next year’s proxy! Then came their SEC filing regarding the compensation of the new interim CEO and the President whose exit or demotion we were also seeking.

Mike Forrest became the interim CEO after being one of the Board members who failed in their oversight of management. They gave him a $385K salary and 300,000 in stock options struck at a multiyear low with monthly vesting! Then they gave the President a raise, an $110,000 bonus and 150,000 stock options despite his many failures and demonstrable lack of experience to be the President of a biotech company.

The majority of these Board members failed to build shareholder value in their last CEO job. Forrest resigned from his last company only months before joining AVI's board. The Board is made up of a number of former public company CEO’s who seemingly were protecting one of their own for years until the Trust forced them to form a special committee and hire independent legal counsel to investigate our many issues and concerns. Dr. Burger likely resigned before the results of the independent counsel's investigation were compiled and presented, although I can’t be positive about that. This whole situation is a shining example of how shareholders need an organized and financed group such as this Advocacy Trust to take action on their behalf. There is NO WAY this result would have happened without the Trust's significant efforts, the unity of shareholders, the hiring of a law firm and the collective financial contributions of hundreds of shareholders.

I think the proxy exchange is interesting and I think it has great merit for large and mid caps. Probably even for small caps. But for the many small and micro cap companies dominated by individual investors, they have few if any major shareholders to start the process to allow for a contest. Even if there are large shareholders, they might not be motivated to commit the time, money, media exposure, potential litigation, etc. required to succeed in this process. But the Trust gives them someone to back, so long as the Trust has a set of objectives in line with the majority of shareholders and clearly defined under a fiduciary mandate.

Even if the money into a Trust comes largely from a handful of larger investors and 20 to 40 percent comes from smaller individual investors, the end game remains the same and the publicity, mailings, etc. make the other "free riders" aware of the battle and thus more likely to vote their shares come proxy time. I am now looking forward to potentially testing the structure in a proxy contest against a Board that has been completely derelict in their fiduciary duty until the Trust forced them into action, and now instead of doing what is best for shareholders, they are rewarding an interim CEO with an egregious comp package that is even better than the package given to the CEO who just resigned under pressure!