Biglari Holdings: Small Shareholders Speak Out, Have Their Voices Heard

Less than two months ago on Seeking Alpha I published a copy of a letter I sent to Sardar Biglari, the CEO of Biglari Holdings (BH), voicing discontent at his plan to force small shareholders (those holding fewer than 15 shares) to sell their stock back to the company. You can read that letter here.

Biglari planned to do a 1-for-15 reverse split of the company's stock (which was already trading for about $450 per share) and pay out cash for any partial shares of the post-split stock. This would have forced any small shareholder (with less than ~$7,000 invested) to sell their stock, as they would have less than one full share after the split, and done so without the need for a shareholder vote.

As the founder of a small registered investment advisory (RIA) firm who manages investment portfolios for about three dozen individual investors (many of whom currently own less than $7,000 worth of BH stock), I was outraged and felt the need to voice my discontent directly to management, even though I had never done such a thing before and did not expect anything to come of it.

Well, let this be a lesson to individual investors everywhere. You should not avoid voicing your anger if you feel like you have really been done wrong. Yesterday the company announced that the 1-for-15 reverse split was on hold. Instead of splitting the class A shares, forcing the small holders out, and issuing non-voting class B shares at a lower price for them to buy instead, Biglari Hodlings has decided to instead distribute the class B shares to all shareholders. The company will monitor how both classes of stock trade before deciding on whether to implement the reverse split or not (read the SEC filing here).

This seems like a much more fair way of proceeding. Creating the cheaper class B shares does give some smaller investors and short-term traders an incentive to buy the less expensive shares, which could help the company succeed in making the class A stock a truly long-term investment with minimal volatility. However, this decision no longer forces the existing long-term holders of the class A to sell their stock, pay taxes, and give up their rights. We can contnue to hold the stock and participate in the long term value creation that is hopefully going to materialze under Biglari's leadership for many years to come.

Of course, we are not out of the woods yet, as the company said it may reevaluate the reverse split after observing the trading patterns of both classes of stock. Still, for now we are not being forced to sell our stock by the very same management team that has stated again and again that it is looking for long term investors who are interested in investing with a company that has a unique capital allocation strategy. And as long as we are fairly afforded that option, that is what we will do. Thank you, Mr. Biglari, on behalf of small investors everywhere, for your change of heart. We hope this is not simply putting off the inevitable, but rather a genuine understanding that we want to continue to be long-term holders of the class A common stock and deserve that opportunity.

Disclosure: I am long BH.