Greenbackd

We cast our proxy votes on-line today in support of Biotechnology Value Fund’s (BVF) proposal to remove the board of Avigen Inc (NASDAQ:AVGN).

We’ve been following AVGN (see archived posts here) because it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and specialist biotechnology investor BVF has been pushing it to liquidate and return its cash to shareholders. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that we think represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV) with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. The stock is up 65% from $0.65 to close at $1.07 yesterday. We estimate AVGN’s net cash value to be $37M or $1.24 per share (BVF estimates $1.20 per share). The net cash estimate does not take into account AVGN’s AV411 assets and program, which could be worth considerably more, perhaps as much as $5M to $20M or between $0.15 or $0.60 per share.

BVF’s task is a difficult one. Why? Let’s turn to the proxy material, which states as follows:

To be approved, the Board Removal Proposal must receive “FOR” votes from the holders of at least two-thirds of all of Avigen’s outstanding shares entitled to vote either in person or by proxy at the Special Meeting. If you do not vote or “ABSTAIN” from voting, it will have the same effect as an “AGAINST” vote. Broker non-votes will have the same effect as “AGAINST” votes.

This is an incredibly high threshold. For BVF to unseat the board, it requires two-thirds of all of AVGN’s outstanding shares entitled to vote. This means that BVF’s enemy is likely not stockholders voting against BVF’s proposal, but stockholders not voting at all, because failing to vote has the same effect as voting against BVF. Let us say that again: failing to vote has the same effect as voting against BVF’s proposals. If 10% of AVGN’s voters fail to vote, BVF requires almost three-quarters of the votes from those actually voting.

If the purpose of voting at stockholder meetings is to give voice to the majority (or, in this case, the supermajority) of the stockholders, surely the process should be designed to reflect that will. At present, it is not. The deck is stacked heavily in favor of the incumbent board. At least two-thirds of all of AVGN’s outstanding shares must be voted for BVF. The real threshold is actually higher than two-thirds, because failure to vote equates to a vote against BVF. If even a small proportion of stockholders neglect to vote, BVF’s threshold is proportionately that much higher. Each obstacle reduces the chance that a stockholder votes along with BVF, and that’s a shame. The corporate voting process should function to reflect the will of each stockholder and it does not presently do that.

The special meeting is to be held next Friday, March 27, 2009. If you hold stock in AVGN, you must cast your vote before that date. If you wish to support BVF, you must vote GOLD card.

[Full Disclosure:  We have a holding in AVGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]