Things got a little steamy at the Cerbco Inc. annual meeting last week. And it wasn't just the weather. Ever since brothers George and Robert Erikson announced that they would sell their controlling interest in Cerbco for $6 million, or $24.24 a share, there have been some very unhappy shareholders.
The shareholders are angry for a simple reason. While the Eriksons may get $24.24 for their shares in a private sale to another company, the shares of other stockholders have been trading in the over-the-counter market for $2 to $3 a share.
And the shareholders say that's not fair.
The dispute at Cerbco has been simmering since March. But it finally boiled over last Friday when shareholders of the small Northern Virginia firm got a chance to tell the Eriksons face to face how they felt about the proposed deal.
Some of the sharpest comments came from Bonnie Wachtel, vice president of Wachtel & Co., a Washington brokerage firm that invests in small companies.
Wachtel was blunt. "If I see what is going on here, the Eriksons essentially are just trying to get whatever they can get away with," she said.
Wachtel said she knew the Erikson brothers had obtained legal opinions telling them they could make the sale, but that didn't make it right.
In the past, she reminded the brothers, she and members of her family-owned firm had often supported, endorsed and lauded the Eriksons for their work at Cerbco.
But now, she added, "I feel what you are doing is wrong and is below the standards that people have come to expect from you."
Wachtel's firm owns 18,000 Cerbco common shares and their clients own another 20,000 shares.
Robert Erikson, obviously prepared for a hostile session, tackled the stock-sale issue head-on.
"We are certainly not embarrassed about the contemplated private transaction and proudly affirm we do not believe the sale of most of our stock to a different owner works to any improper, illegal detriment to other stockholders."
He said he noted that there was a "Where's mine?" overtone to the comments of irate shareholders, who were charging the Eriksons with acting improperly. He added:
"Fine. I think they're wrong. But, of course, they think they're right. They certainly have every right if they like to bring George and me to court to test their theories.
"We believe the law is clear about a premium for control shares in private transactions. But I certainly hold no qualms for a court test if they so choose."
That court test may be coming.
One key stockholder already has begun an effort to derail the sale of the Eriksons' stock or, at least, to persuade the Eriksons to give shareholders a slice of the pie.
Here, briefly, is the background of this dispute, which began when the Eriksons said they would sell their shares to a company call Insituform of North America, which has its headquarters in Memphis.
The so-called "insituform" process is one that permits old sewer pipes to be relined and renovated without excavation. The process is used by a number of Insituform companies in the United States and around the world. The local firm, called Insituform East, has its headquarters in Landover.
Voting control in Insituform East is owned by Cerbco, which is a holding company with interests in three subsidiaries. One is a copying machine firm. Then there is the old Cerberonics defense contractor, which is in the process of being sold. And finally, there is Insituform East.
The key element here is that, if and when the Eriksons sell their controlling block in Cerbo, they also will be selling control of Insituform East to Insituform of North America.
Analysts who follow the Insituform industry have said the sale makes good business sense, aside from the way it is being done.
At the time the deal was announced, a spokesman for Insituform of North America said the $24.24 price was based on the fact that Eriksons were selling control of Cerbco, which made their shares worth more than other Cerbco shares.
The spokesman added that Insituform of North America had "no plans" to make offers to any other shareholders.
And that's why the stockholders are hollering "foul."
The legal attack on Cerbco is being mounted by Merle Thorpe Jr., an attorney associated with Hogan & Hartson of Washington. Thorpe heads an organization called the Foundation for Middle East Peace, which owns 5,000 shares of Cerbco. Thorpe himself owns 17,300 shares, for a total of 22,300.
In early May, attorney Joseph M. Hassett of Hogan & Hartson, representing Thorpe, wrote to the board of directors of Cerbco, demanding that the corporation challenge the Eriksons' arrangement by bringing suit against them.
Hassett said his view was that Cerbco's control of Insituform East was, in essence, a corporate asset that had value and that the Eriksons had to share that value with other shareholders.
Two months after he wrote to Cerbco, in mid-July, Hassett received a reply.
It came from attorney George G. Yearsich of Morgan, Lewis & Bockius, a Washington law firm. Yearsich said that on July 17, the board of directors of Cerbco had appointed a special committee to look into the issues raised by Thorpe.
Yearsich noted that Cerbco also had hired his firm to advise the special committee on what to do.
One of the lawyers at Morgan, Lewis & Bockius who is likely to be consulted on the Cerbco case is A.A. Sommer Jr., a former commissioner at the Securities and Exchange Commission.
Cerbco's special committee will consist of only two members because there are only four members of the board to start with. And two of the four are the Eriksons.
The other two, up until last week, were Robert E. Long and George E. Davies. But Davies did not run for reelection and was replaced by Thomas J. Schaefer, president of Columbia First Bank of Washington.
Thus, the special committee will consist of Long and Schaefer, who is also a member of the Insituform East board of directors.
In fact, so are the Eriksons, who are also paid executives of Insituform East, which shows the closeness between the two companies and the officers.
Just what the special Cerbco committee will recommend is uncertain. They could tell Thorpe and other shareholders to get lost. As Robert Erikson said, the brothers are ready and willing to go to court. In this case, the court is probably in Delaware where the company is registered.
One issue that may arise concerns the role played by Long and Davies when the Eriksons made their deal. At the meeting, Thorpe and others tried to question Long about what he did, as an independent director, to represent the interests of shareholders.
Long defended his actions but the exchanges were imprecise and seemed to leave the shareholders unsatisfied.
As the meeting demonstrated, even if the Eriksons are right on the law, they will seem to be wrong on the ethics in the minds of some shareholders.
Robert Erikson argued that he had put in 18 years at Cerbco, held his stock for 15 years, and had been prohibited from the in-and-out opportunistic trading that other shareholders were allowed.
"Only upon patient holding and eventual sale under specific circumstances is my family able to receive any substantial long-term investment reward for the company's progress over the years," he said.
That apparently didn't make much of an impression on some of his listeners.
Stockholder Linda Heller Kamm of Washington said after the meeting, "I just don't feel the minority shareholders were adequately protected by the company."
And stockholder Barbara Rothkopf of Washington said she had been "upset" that shareholders had not been given the same opportunity as the Eriksons. Moreover, she wasn't comfortable with what she had heard. "I'm going away not feeling good," she said.