Proposed Transaction Represents Approximately 41% Discount to
Company’s Own Stated Net Asset Value
Rand Shareholders Would Receive 69% Greater Return by Liquidating
Transaction Would Transfer Over $7.8 Million in Wealth from Current
Rand Shareholders to Owners of East Asset Management
Proposed Special Dividend Would Further Dilute Current Shareholders
and Potentially Result in Out-of-Pocket Tax Expenses
THE WOODLANDS, Texas–(BUSINESS WIRE)–User-Friendly Phone Book, LLC (“User-Friendly”), the largest
shareholder of Rand Capital Corporation (“Rand” or the “Company”)
(NASDAQ:RAND) owning 1,455,993 shares or 23.0% of the Company, today
announced that it had filed its definitive proxy and an open letter to
fellow shareholders urging them to vote AGAINST the proposed
transaction with East Asset Management, LLC (“East”) using the
WHITE proxy card at the special meeting of shareholders scheduled to
take place on May 16, 2019 (the “Special Meeting”).
As presented in the letter, the transaction proposed by Rand management
would sell a majority of the Company at a grossly inadequate price
relative to the Company’s net asset value (“NAV”), transferring
control and over $7.8 million in wealth from Rand shareholders to the
owners of East immediately upon closing of the transaction. Further, if
the Board proceeds with the Transaction and declares the proposed
special dividend, it will cost current shareholders even more, both in
terms of dilution and potential out-of-pocket tax expenses.
Bruce Howard, Chief Executive Officer of User-Friendly Phone Book, said,
“Rand Capital’s proposed take-over by East Asset Management is a brazen
attempt to take millions of dollars of value and control away from
Rand’s current shareholders. It’s absurd to sell a majority of the
Company at a 41% discount to its net asset value. In the end, this
transaction only benefits the owners of East Asset Management and the
Company’s management team. For these reasons, I believe Rand
shareholders must vote against the transaction by using the WHITE proxy
card and withholding their vote at the upcoming Special Meeting.”
User-Friendly strongly believes Rand shareholders should not be asked to
give up control of their Company at a significant, 41% discount to its
NAV. It urges fellow shareholders to vote AGAINST all proposals on the
WHITE proxy card and to discard any card they have received from the
The full text of the letter to Rand shareholders is included below:
May 6, 2019
Dear Fellow Rand Capital Corporation Shareholder:
YOUR INVESTMENT IN RAND CAPITAL IS AT RISK!
Please find enclosed our proxy materials and WHITE proxy card
related to Rand Capital Corporation’s (“Rand” or the “Company”) special
meeting of shareholders scheduled to take place on May 16, 2019 (the
“Special Meeting”). We own 1,455,993 of Rand’s shares, or over 23%, and
are Rand’s largest shareholder. We are leading an initiative to stop
Rand from giving away control the Company in the proposed transaction
with East Asset Management, LLC (“East”) for far too little money.
If the Board proceeds with the East transaction and declares the
proposed dividend (the “Special Dividend”), it will COST
YOU MONEY and ownership, as we describe below. The cash
limitation on the Special Dividend could require you to pay your
resulting tax with YOUR OWN money.
The Special Dividend also will further dilute your ownership in Rand.
RAND IS ASKING YOU TO GIVE UP CONTROL OF YOUR COMPANY FOR NO PREMIUM
We are extremely disappointed that Rand’s board of directors (the
“Board”) has chosen to move forward with such a transaction and we urge
you to VOTE AGAINST all of the
proposals to be voted upon at the Special Meeting because we believe the
transaction is bad for shareholders for the following reasons:
INADEQUATE PRICE: East’s
$3.00 per share acquisition price represents an approximately 41%
discount to the Company’s stated net asset value (NAV) of $5.06 per
share as of March 31, 2019. This is in spite of the fact that East will
gain a controlling interest, for which acquirers typically must pay a
GREATER RETURN UPON LIQUIDATION: put
another way, Rand shareholders would receive an approximately 69%
greater return, relative to East’s $3.00 per share acquisition price, if
Rand simply sold off its assets for their NAV of $5.06 per share, as
recent transactions by the Company prove can be done.
SUBSTANTIAL DILUTION: current
shareholders’ investment in Rand will be diluted by approximately 24% as
a result of the East transaction, reducing the NAV per share by $1.24 to
$3.82 per share. At the same time, East will see the NAV of their
investment increase 82 cents per share, or 27%. This significant
transfer of wealth from current shareholders to East has been approved
by Rand management.
POTENTIAL TAX CONSEQUENCES: there
is no assurance that Rand will declare the Special Dividend (or any cash
dividends going forward), and if it does declare the Special Dividend,
the Special Dividend may not include sufficient cash to provide
shareholders with the ability to fully satisfy the resulting tax
CONFLICTS OF INTEREST: the
Adviser’s fee structure under the proposed Investment Management
Agreement misaligns the interests of the Adviser and the Company’s
QUESTIONABLE VALUATIONS: there
is no credible support that the value of the assets to be contributed by
East (the “Contributed Assets”), which comprise 52.4% of the aggregate
consideration to be received by Rand, have been accurately measured.
Please remember, you are not getting paid anything for your shares
if the transaction is approved, but you will be selling control of the
The acquisition price of $3.00 per share represents an approximately
41% discount to Rand’s NAV of $5.06 per share as of March 31, 2019. In a
transaction where East will be acquiring a controlling interest, we
believe Rand should be commanding a premium
for its shares, not giving them away for a 41% discount!
In the Definitive Proxy Statement filed by Rand on April 18, 2019 (the
“Proxy Statement”), Rand management has taken great pains to argue that
it is receiving income-producing assets at an acceptable price, but
ignores the question on which we are actually voting: control
of Rand AND fair compensation to its shareholders.
If the proposed transaction is approved, East will own approximately 57%
of Rand, with its stake possibly to increase with any dividend that is
declared in the future. As of March 31, 2019, Rand’s NAV per share
increased to $5.06 per share. The $3.00 per share purchase price that
East will be paying for its controlling stake in your company is now an
approximately 41% discount to Rand’s most recently reported NAV per
User-Friendly believes that East is providing extremely inadequate
financial consideration to you and all shareholders in return for
depriving us of the benefit of this increase in Rand’s NAV and stripping
away control for inadequate compensation.
GREATER RETURN UPON LIQUIDATION
Simply liquidating Rand’s portfolio would net shareholders an
approximately 69% larger return than the proposed transaction with East.
As of March 31, 2019, the fair value of Rand’s total assets was $32.5
million with net assets of $32.0 million. By simply undertaking an
orderly and methodical liquidation of Rand’s asset portfolio, Rand
shareholders would receive approximately $5.06 per share, which
represents $2.06 or 69% more than the $3.00 per share offered by the
proposed transaction with East.
Management contends that a liquidation would require selling the
portfolio at an approximate 41% discount to its fair value. However,
this premise is not supported by Rand’s own results reported in its
Quarterly Report on Form 10-Q filed on May 2, 2019. For example, Rand
reports that it received a 6% premium
relative to carrying value from the realization of its investment in
eHealth Global Technologies, Inc!
Even if proceeds from an orderly liquidation of assets only yielded 75%
of their fair value, equating to $3.80 per share, current shareholders
would still receive 80 cents per share or 27% more than the East
We believe empirical evidence supports our view
that Rand could liquidate its portfolio for a premium to fair value, and
not at a 41% discount, as is being proposed in the transaction with
East. We believe the competent execution of an orderly liquidation would
yield well in excess of $3.00 per share to Rand shareholders.
While the Proxy Statement and management’s other public statements claim
that the Company’s asset portfolio has a “liquidation value” of less
than $3.00 per share, this statement is based on Rand’s assets “being
sold immediately or over a relatively short period of time.”1
This fire sale approach is yet another example of management’s poor
judgment in our view.
We do not believe that the proposed transaction adequately
compensates Rand or its shareholders for the significant dilution that
will occur as a result of the proposed transaction with East.
If the proposed transaction is approved, East will own approximately 57%
of the Company’s outstanding shares of common stock. Given that the
8,333,333.33 shares of common stock will be issued at a price below the
Company’s per share NAV, shareholders will
suffer substantial dilution immediately upon consummation of the
proposed transaction, and will receive inadequate compensation for such
dilution in our view.
Immediately upon the consummation of the
proposed transaction, Rand’s NAV per share will drop to $3.82 per share,
a $1.24 per share decline! Because shareholders are
not being cashed out of their investments, shareholders will now hold a
diluted investment that has been significantly impaired.
To make matters worse, Rand has stated that management, the Board and
East intend to receive their portion of the Special Dividend in
additional shares of common stock. Rand attempts to characterize this
noncommittal intention as a charitable gesture on management’s and
East’s part, stating that it is a “strong indication of our confidence
in the future of Rand and has the effect of increasing the amount of
cash available to all other shareholders.”2 However,
we see it as an additional means by which East will dilute current
shareholders and increase its ownership at shareholders’ expense.
Further, because the Company has structured the Special Dividend to
occur after the consummation of the proposed transaction, East
will be entitled to 57% of the Special Dividend, as well as its
proportional share of any future dividends. Therefore,
if East elects to receive payment of the Special Dividend in additional
stock, East’s ownership will increase further and if they take it in
cash, it will reduce East’s actual cash contribution in the transaction
to a meager $9 million!
POTENTIAL TAX CONSEQUENCES
The distribution of the Special Dividend, if declared, will be
taxable to shareholders and you may have to pay more tax out of your
pocket than the cash you receive in the dividend.
In connection with Rand’s plan to elect to be taxed as a Regulated
Investment Company (“RIC”), Rand currently intends to declare a Special
Dividend equal to approximately $22.0 million. While there is
significant uncertainty as to whether the Special Dividend will be
declared, if it is declared, the Special Dividend is taxable to Rand
shareholders as a dividend, whether you elect to receive your portion in
cash or stock. The 20% cap on cash that Rand agreed to makes this even
worse for you.
As an illustrative example, a Rand shareholder who receives $100 worth
of the Special Dividend, whether in cash or stock, could be obligated to
pay approximately $33 in federal and state taxes on the Special Dividend.34
However, the cap limits the amount of cash you could receive in the
Special Dividend to only $20, leaving you $13 short, meaning that you
would have to go into your own pocket to pay the tax!
The assets being contributed by East (the “Contributed Assets”)
comprise 52.4% of the aggregate consideration to be received in the
proposed transaction. Rand provides no assurances that the value of
these assets have been accurately assessed, while East has strong
incentives to over-value the Contributed Assets.
The substantial majority of the Contributed Assets are debt instruments (e.g.
promissory notes, term loans, term notes, etc.) with interest rates
ranging from 12% to 12.5%, which we believe are
indicative of high levels of risk. There is no information in
the Proxy Statement to suggest Rand management attempted to maximize the
value of the assets to be received, or to negotiate more favorable
values attributable to the Contributed Assets. This lack of negotiation
is reflected in the fact that each high-risk debt instrument is valued
at face value, meaning Rand obtained no risk discount.
We believe the absence of a detailed
explanation as to the process by which the Contributed Assets were
valued and the lack of an independent appraisal in light of East’s
incentive to over-value the Contributed Assets is an abrogation of
management’s responsibilities to Rand shareholders.
CONFLICTS OF INTEREST
The Investment Management Agreement raises conflict of interests
concerns and the Adviser has no experience advising Business Development
We believe that the proposed Investment Management Agreement to be
entered into by the Company with the Adviser presents real conflicts of
interest that misalign the Adviser’s and the Company’s interests. The
Proxy Statement itself warns Rand shareholders of these conflicts:
“After the Closing, the Incentive Fee payable
to the Adviser may create an incentive for the Adviser to make
investments on [Rand’s] behalf that are risky or more speculative than
would be the case in the absence of such a compensation arrangement.”
“Unlike the Base Management Fee, the Income Based Fee is payable only if
the hurdle rate is achieved. Because the portfolio earns investment
income on gross assets while the hurdle rate is based on net assets, and
because the use of leverage increases gross assets without any
corresponding increase in net asset, the
Adviser may be incentivized to incur leverage to grow the portfolio,
which will tend to enhance returns where [Rand’s] portfolio has positive
returns and increase the chances that such hurdle rate is achieved.”
5 [emphasis ours]
In addition, the Income Based Fee and the Capital Gains Fee payable to
East will further dilute current shareholders’ ability to
participate in any upside return Rand may earn, as
East would be entitled to 20% of any pre-incentive fee net investment
income and 20% of any net realized capital gains. The
benefits of any appreciating portfolio assets will accrue to the
Adviser, a separate entity that could sell itself, siphoning
away any accrued value from Rand shareholders.
Supposedly, the externalization of Rand’s management to the Adviser is
beneficial to Rand and its shareholders due to the wealth of “expertise”
the Adviser possesses. However, the Adviser has
no experience acting as an investment advisor to a Business Development
If Rand’s current management is incapable of leveraging its own
expertise for Rand’s benefit, the decision to include two of the
existing Rand executives on the Investment Committee (40% of the total
five-person Investment Committee) is a confounding one. We
do not believe instituting a completely new investment advisory process,
which alters the investment philosophy of the Company, simultaneously
inserting an inexperienced Adviser to oversee it all, while removing
most of the liability of the Adviser, is a prudent course of action for
As outlined above, our opinion is clear that the proposed transaction
gives away control of the Company without getting paid adequately,
shareholders are not being compensated adequately and the East
transaction is not in the best interests of shareholders and should not
be approved at the Special Meeting. We are disappointed that Rand’s
management and Board have chosen to move forward with such an inadequate
transaction. It appears to us that the Board abrogated its duty to
Rand’s shareholders by agreeing to a deal that is favorable to East at
the expense of the current shareholders.
DON’T GIVE UP CONTROL OF RAND FOR NO CONSIDERATION PLEASE VOTE “AGAINST”
ALL PROPOSALS ON THE ENCLOSED WHITE PROXY CARD TODAY.
ANY CARD YOU RECEIVE FROM RAND.
EVEN IF YOU HAVE ALREADY VOTED ON THE PROXY CARD SENT TO YOU BY RAND,
YOU CAN STILL CHANGE YOUR VOTE USING THE ENCLOSED WHITE
PROXY CARD. ONLY YOUR LATEST DATED PROXY CARD WILL COUNT.
WE NEED YOU TO VOTE “AGAINST” EACH
PROPOSAL TO BE VOTED UPON AT THE SPECIAL MEETING TO PROTECT YOUR
In order to cast your vote “AGAINST”
all proposals, you can simply complete the enclosed WHITE card
and return it as instructed.
We appreciate your support, and if you need assistance or have any
questions, please call our proxy solicitor, MacKenzie Partners, Inc.,
toll-free at (800) 322-2885 or (212) 929-5500 or by email to [email protected].
Chief Executive Officer
Phone Book, LLC
CERTAIN INFORMATION CONCERNING THE PARTICIPANT
User-Friendly Phone Book, LLC (“User-Friendly”) is the sole participant
in this solicitation. User-Friendly has filed a definitive proxy
statement with the Securities and Exchange Commission (“SEC”) consisting
of a proxy statement and accompanying WHITE proxy card to be used to
solicit proxies to vote against the proposed transaction with East Asset
Management, LLC at the Special Meeting of Stockholders of Rand Capital
Corporation (the “Company”) scheduled to be held on May 16, 2019.
USER-FRIENDLY STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO
READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME
AVAILABLE BECAUSE THEY CONTAIN IMPORTANT INFORMATION. SUCH PROXY
MATERIALS ARE AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV.
IN ADDITION, USER-FRIENDLY WILL PROVIDE COPIES OF THE PROXY STATEMENT
WITHOUT CHARGE UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO
USER-FRIENDLY’S PROXY SOLICITOR, MACKENZIE PARTNERS, INC., TOLL-FREE AT
(800) 322-2885 or (212) 929-5500.
As of the date hereof, User-Friendly owns 1,455,993 shares of common
stock of the Company, representing approximately 23.0% of the issued and
outstanding shares of the Company.
About User-Friendly Phone Book
Operating since 1999, User Friendly Media boasts a portfolio of print,
digital and mobile marketing solutions for small business. The company’s
product suite includes 35 print directories, User Friendly Apps, a
mobile app builder, User Friendly Mobile ads, a platform for serving
locally-targeted mobile ad impressions and GoLocal247.com, one of the
fastest growing local business directory websites in the country.
|1||Page 3 of Appendix F of Proxy Statement.|
See Additional Definitive Proxy Soliciting Materials filed by Rand
on April 18, 2019.
Based on assumed tax rates of 23.8% Federal Tax and 8.82% New York
This assumes an individual New York State resident in the highest
applicable tax bracket, whose shares were held for more than one
year and as a capital asset, and the Special Dividend was qualified
|5||Page 27 of Proxy Statement.|
|6||Page 25 of Proxy Statement.|
Paul Schulman / David Whissel
Gagnier / Jeffrey Mathews