DryShips Inc. (NASDAQ:DRYS) has been the recipient of numerous legal actions and investigations. But until recently, the company hasn't made much mention of them in its press releases, nor have they resulted in damages or anything else that would affect the prospects for the stock in 2017. Nevertheless, investors continue to pursue legal action against the struggling Greek shipping company.
Bad management isn't a crime, but it is possible that DryShips has breached its fiduciary duty to its shareholders via its countless dilutions, reverse stock splits, and related-party transactions. The stock will probably continue to drop due to the ongoing dilution and headline risk from this developing legal mess.
On July 4, 2017, DryShips reported that it and its CEO, George Economou, have been named as defendants in a lawsuit filed in the Marshall Islands - the Caribbean tax haven where the company is incorporated, although it is based in Greece.
This recent lawsuit was filed by an American investor named Michael Sammons. He alleges that DryShips has breached its fiduciary duties to its shareholders, committed fraud, unjust enrichment, and has multiple conflicts of interests - the most notable of which are with George Economou, who is also a defendant in the legal actions.
According to Fairplay, a shipping news organization, Sammons is seeking $2 million in compensation for his DryShips shares along with $413 million in damages from Economou himself. In addition to the monetary damages, the suit seeks to force DryShips to make several important changes to its corporate governance and ability to dilute investors in the future.
Sammons wants the judge to "extinguish" Economou's preferred shares. This is important because each of these shares has the voting power of 100,000 common shares, and this is how Economou is able to dilute common stock without diluting his ownership of the company. On top of this, the investor wants an order that prevents DryShips from issuing shares at more than 25% below their book value (roughly the recorded value of the company's assets) without a majority vote from shareholders who are not part of management. Finally, the suit wants to prevent DryShips from selling additional shares to Kalani Investments at a price of less than $39.11 per share.
What Does This Mean for DryShips Investors?
It appears that Sammons is filing two different types of legal actions. One is a lawsuit against DryShips itself while the other, much larger, suit is a derivative suit on behalf of DryShips - as a corporate entity - against George Economou for the damage that Economou is alleged to have done to DryShips through his mismanagement and related-party transactions with himself and companies he is affiliated with. Sammons states, quote:
“Economou has utterly undermined and destroyed any semblance of a rational or efficient public market for DryShips common shares,” We are not talking about what a brilliant businessman would do, or even an average businessman, or even the worst businessman in history – we are not talking about [what] any sane businessperson [would do]."
Thankfully, for DryShips investors, the possible $2 million in damages is not a serious threat to the company's liquidity. And the $413 million claim is directed against Economou instead of DryShips itself. That being said, if Sammons' claim has merit, it would set a dangerous precedent that may open the door for other similar claims as well as class action suits against DryShips that - if added up - pose a serious existential threat.
The courts will decide the legality of DryShips’ and Economou's actions. But investors hoping for a favorable action in Sammons' suit should remember that no one forced him, or any other investor, to buy shares in DryShips. Information about the company is easily available through the required corporate filings, and investors are perfectly able to do research on DryShips before they buy shares in it.
I do not believe DryShips would still be in operation if it didn't know how to operate within the confines of the law. This recent suit against DryShips is one of many similar suits that have failed, and it probably will not have any material impact on the company - although headline risk will continue to pressure the stock.