Shareholder That Nominated Directors Claims LSC Communications Seeks to Expedite Bankruptcy

It appears that the practice of a major shareholder — dissatisfied with the financial performance and share price of its investment — issuing a public letter directed at the publicly-held company's board of directors, seeking change, has become commonplace. Such is the case with New York-based Sententia Capital Management Group, which with its affiliates owns 869,687 shares (2.6%) of LSC Communications outstanding common stock.

Sententia had already issued a letter on Feb. 21, 2020, serving notice that it had nominated a slate of six directors to replace existing board of directors members at Chicago-based LSC Communications (stock symbol: LKSD), to be voted on at the LSC 2020 Annual Shareholder Meeting.

According to Sententia, the LSC board of directors has responded to their action by adopting a Shareholder Rights Plan (aka Poison Pill) to thwart any hostile takeovers, postponed its 2020 shareholder meeting, and is heading LSC toward a bankruptcy filing (presumably a Chapter 11 reorganization plan) to preserve the positions of existing management (click here to view LSC's Q4 2019 financial results and the waiver and forbearance agreements with its lenders).

So, in turn, Sententia issued a public followup letter on March 9, 2020, threatening to file a preliminary proxy card with the SEC, calling for a special meeting of LSC stockholders to remove and replace members of LSC's board — including LSC Chairman Thomas "Tom" Quinlan — with its own slate of board candidates.

Sententia Founder Michael R. Zapata

"The LSC board lacks relevant turnaround, restructuring, and mergers and acquisitions experience that is required to best serve shareholders rights," the value-based investing capital management firm, which is led by Founder Michael R. Zapata, noted in a press release that accompanied its letter to LSC's board of directors.

"Sententia believes LSC’s board is responsible for the current state of LSC Communications and the board may seek to expedite bankruptcy filings to preserve management’s positions. Sententia is calling on the board to engage with Sententia immediately for the benefit of all shareholders."

The full letter said:

LSC Communications, Inc.

Thomas “Tom” Quinlan
Judith Hamilton
M. Shân Atkins
Margaret Breya
Francis Jules
Thomas O’Toole
Douglas Stotlar
Shivan Subramaniam

To the Board of Directors of LSC Communications, Inc.:

I am writing to you on behalf of Sententia Capital Management, which together with its affiliates beneficially owns 869,687 shares of common stock of LSC Communications, Inc representing approximately 2.6% of the shares outstanding.

As you are aware, on February 21, 2020, we delivered to the company a letter serving as notice of our nomination of six candidates (the “nominees”) for election to LKSD’s Board of Directors at its 2020 Annual Meeting of Stockholders. Although we submitted the nomination letter privately in an attempt to work constructively with the board, the company unilaterally decided to publicly announce our nomination in a press release issued on February 23, 2020.

Since the company’s public announcement of our nomination, other LKSD stockholders have contacted us to express their concerns with LKSD’s leadership and to indicate their support for change to the composition of the board. Yet, based on the company’s recent actions, including its adoption of a stockholder rights plan (aka “poison pill”) and its announcement that the company would postpone the 2020 Annual Meeting, the board appears intent on frustrating the will of stockholders by entrenching the existing board and management rather than genuinely engaging with stockholders on the actions needed to cease the destruction of stockholder value at LKSD.

We are further concerned that the board and management’s next step at the expense of stockholders will be to accelerate a bankruptcy filing.

We Call on the Board to Cease its Destruction of Stockholder Value

We strongly urge the board to put the best interests of LKSD stockholders first and fulfill its fiduciary duties by (i) immediately eliminating the stockholder rights plan, (ii) committing to holding the 2020 Annual Meeting in May 2020, in line with the typical timeframe for companies with December 31 fiscal year-ends and (iii) ceasing actions that could expedite a bankruptcy filing.

If the board decides otherwise and continues down the pathway of entrenchment of the board and management and destruction of stockholder value, we will be prepared to take all actions necessary to enforce our rights as stockholders to the fullest extent permissible under the company’s organizational documents and the law, including by seeking to call a special meeting of the company’s stockholders.

The Board Lacks Relevant Experience to Protect Stockholder Value at LKSD

Given the board’s oversight and the continued degradation of the company, we believe each director would be culpable should they insist on entrenchment in the face of potential bankruptcy.

The board does not have the relevant restructuring, turnaround or M&A expertise. This lack of expertise makes the board and management wholly dependent on external advisors. We believe this inexperience was also the root cause of management’s inability to execute its restructuring plan while pursuing a merger with Quad.

Rather than taking proactive and appropriate restructuring steps during and immediately following the failed merger, the company delayed these actions. Today, rather than a focus on executing, the board continues to waste money and resources on distracting activities such as their shareholder rights protection plan and delaying the annual meeting.

LKSD appears to be approaching a complete destruction of shareholder value. We believe it’s inappropriate and imprudent to allow the current board, who has overseen a ~99.5% decline in LKSD’s stock price since October 2016, to remain in control of the Company during this crucial time. The have proven themselves incapable of delivering.

Our Nominees Are Committed to Working On Behalf of LKSD Stockholders

Sententia and its nominees have the industry, turnaround, restructuring and M&A experience needed to protect stockholder value at LKSD and are committed to working with debt holders on behalf of stockholders, and not at the expense of stockholders. We urge the board to act in the best interest of stockholders and provide our nominees with an opportunity to serve.

If the Board Does Not Change Course, We Will Seek to Call a Special Meeting of LKSD Stockholders to Remove and Replace Members of the Existing Board

If the Board will not take the actions specified above and genuinely engage with us, we will commence taking steps to call a special meeting of LKSD stockholders to remove and replace members of the existing Board, including Chairman Thomas Quinlan. Given the board’s recent entrenchment actions and what we have heard from other stockholders since our nomination, we expect our fellow LKSD stockholders will strongly support calling a special meeting to change the composition of the board.

We hope that the board will decide to work constructively with us to address the concerns of stockholders and implement the changes needed at LKSD for the benefit of all stockholders.

Respectfully,
Michael R. Zapata
Founder, Sententia Capital Management, LLC