George Economou accuses Performance Shipping of ‘governance violations’ as blistering war of words breaks out

It turns out that Greek shipowner George Economou’s disclosure of a major stake in New York-listed Performance Shipping was not exactly an expression of faith in the company’s management.

Only days after revealing the holding of about 1m shares in the aframax owner, Economou’s camp rifled off a scathing letter to the Performance board, accusing the company of violating regulations of both the Marshall Islands, where it is domiciled, and the Nasdaq exchange on which it trades.

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One of the noteworthy aspects of Economou’s broadside is that the Greek owner himself was a target of frequent criticism for allegedly abusing shareholder rights in favour of his own interests during nearly 15 years in the US capital markets at the helm of DryShips. He took DryShips private in 2019.

When a shipowner who repeatedly finished last in analyst Michael Webber’s ranking of some 50 public shipowners on governance standards is questioning your practices, what does that mean for Performance?

Now turning the tables in a letter from New York law firm Cadwalader, Economou’s Sphinx Investments took particular aim at Performance’s decision in January 2022 to convert common shares into non-voting Series B preferred shares, which then transitioned to super-voting Series C shares.

“The apparent plan was to disenfranchise and strip economic value from Common Shareholders in favour of PSI’s controlling shareholder, Mango Shipping Corp.

Mango is an entity “controlled by Aliki Paliou, who is both the chairperson of PSI’s board of directors and the daughter of PSI’s founder … and protect Mango’s control and economic position from dilution due to anticipated near-term capital raises”, Economou’s team alleged.

Performance is one of several mostly Greek owners who have conducted controversial equity raises through US investment bank the Maxim Group. The Maxim raises have increasingly been criticised by investors and industry figures for their highly dilutive nature.

Performance had $199m in stockholders’ equity on 30 June but a market capitalisation of just under $20m on 30 August, largely owing to its dual-class shareholding structure, Economou charged.

Paliou is a daughter of Simeon Palios, the founder of both Diana Shipping and Diana Containerships, the predecessor to Performance since the company changed name and focus in 2019.

The board of Athens-based Performance did not take kindly to Economou’s accusations and issued its own blistering response in a letter written by Israel David, a New York-based lawyer who specialises in securities-related litigation.

Performance described Sphinx’s initial letter of 31 August as “riddled with baseless allegations, errors, and mischaracterisations of events”.

The board was also critical of a follow-up letter from Sphinx on 4 September that explored alleged deficiencies in shareholding filings by Paliou and Performance chief executive Andreas Michalopoulos, Paliou’s husband.

Economou questioned why the married couple should not be considered “a group” for the purposes of US securities disclosure purposes. He also alleged they had made months-late disclosures of shareholding.

Performance described the second letter as “based on errors and unsupported allegations”.

Economou’s demands

So what does Sphinx want out of its protests to the Performance board?

The investor demands the board invalidate the results of the January 2022 shares exchange, which it says was tailored to increase Mango’s voting control but “anathema” to holders of the common shares.

Per its second letter, Sphinx demands an investigation of Paliou’s and Michalopoulos’ “late” filings, an explanation of why they should not be treated as a “group” for filing purposes, and a reason why the company’s number of common shares increased by some 400,000 shares in late August.

“Confirm in particular that this increase was not a result of further insider transactions,” Sphinx insisted.

The board shows little sign of meeting the demands.

“After careful consideration of the letters, the board’s independent directors reject the letters’ insinuations,” the response letter states.

The board’s detailed response indicates Sphinx ignored the potential benefit to the company to convert all Series B preferred shares into Series C shares through a cash buy-in.

“The converting holders would have to pay the company an aggregate of $5,952,427,” the letter states. “Given the company’s financial condition at the time, that would have represented a substantial and welcome influx of cash to the company’s coffers.”

The Performance board further questions the motivation for the Economou attack, noting that there is no evidence Sphinx owned any Performance shares at the time of the exchange.

“Sphinx recently accumulated its holdings in the company’s common shares whilst being fully informed of all aspects of the company’s capital structure and the 2021 Exchange Offer — which concluded more than 19 months ago — in the hope of concocting claims regarding the board’s conduct at that time,” Performance writes.

“Stated differently, Sphinx’s recent buying spree of the company shares is nothing more than a transparent after-the-fact attempt to buy a claim. Unfortunately for Sphinx, it is a claim in a futile search of a viable theory.”

Common history

The dispute between the two Greece-based owners comes despite some interesting commonalities in the companies’ past.

As TradeWinds has reported, Performance’s chief financial officer is Anthony Argyropoulos, an investment banker who led DryShips’ 2004 IPO in New York and in its final years as a public company gave financial presentations on Economou’s behalf.

DryShips was the first Greek owner to use financier Kalani Investments for a spate of highly dilutive equity raises in 2016 and 2017. And while New York-listed Top Ships was the other major user of Kalani deals, a third Kalani client was Diana Containerships, the Performance predecessor.

All three Greek owners were sued in US federal courts for alleged securities fraud in relation to the Kalani dealings.

The transactions created massive destruction of share value through large-scale stock and warrant sales, coupled with repeated reverse stock splits, a progression not unlike some of the later Maxim deals.

Courts cleared Top Ships of fraud allegations, partly on evidence that details of the Kalani transactions were fully disclosed in securities filings. As it happens, public disclosure is one of the defences raised by Performance in its response to Economou’s new complaints.

The shareholder lawsuits against Diana Containerships and DryShips remain pending in US federal court, although available records show little recent activity.