Can Tim Michels Divest His Stock?

Republican gubernatorial candidate Tim Michels announced on Thursday that he had resigned his executive positions with the Michels Corporation, his family’s Brownsville-based international construction firm.

Later that day, seemingly as an afterthought, Michels added that if elected governor he would also divest himself of his share of the company’s stock to avoid a conflict of interest and pesky ethical issues preventing elected officials from personally benefitting from their public duties. (The firm bills about $2 million a week in contracts with the state, and as of 2019 was the nation’s 27th largest US contractor, with sales of $3 billion.) He offered no details on how the sale might be structured, or what percentage of shares he owned.

In the movies, newly elected Governor Michels, with the camera rolling, would simply get on the phone and issue an order to sell off his holdings. In the real world, this is not so simply done in a closely held corporation where none of the stock is publicly traded, and the buyers are limited to relatives or the corporation itself.

This is precisely the case with the Michels Corporation, founded in 1959 by Dale and Ruth Michels, the parents of four sons, including the candidate. Dale died in 1998, at which time Ruth took over, running the firm with her sons and personally signing thousands of paychecks weekly. She died in 2020, at which time ownership was presumably transferred to her children Tim, Kevin, Steve and Pat (the current CEO), and as would be typical, related trusts.

In 1953 a Wisconsin governor hurriedly sold his stock back to his family’s closely held company. For Governor Walter J. Kohler, Jr. it did not go well. For his uncle Herbert V. Kohler, Sr., the company president, it helped to solidify the majority ownership of his descendants that continues to this day.

Facing Strike, Governor Kohler Sells His Shares

Walter J. Kohler, Jr. (1904–1976) was the grandson of John Michael Kohler, who founded the Kohler Company in 1873. Within a year of his son’s birth, Walter J. Kohler, Sr. (1875-1940) became president of the firm, which he continued to own and run even while serving as Wisconsin’s governor from 1929-31, seeing no conflict between his private business and public service. The junior Kohler joined the firm in 1925, becoming a stockholder in 1931, and serving in executive and board capacities. Around 1947 he was told he had no future in the firm, by that time controlled by his uncle Herbert V. Kohler, Sr. (1891-1968), the youngest child of J. M. Kohler, who delivered the bad news to his nephew. Walter, Jr. quit the firm to become President and part-owner of the Vollrath Company, a Sheboygan manufacturing firm founded by members of his mother’s family.

But he held on to his Kohler stock, representing 21,415 of its total 200,000 shares. At the time, the firm had only 26 stockholders, mostly family members by birth.

In 1951 Kohler, Jr. was elected governor for the first of three two-year terms. He continued as president of Vollrath, just as his father had run Kohler while governor. In early February 1953 the governor decided to sell his stock in Kohler for two reasons, as court documents later revealed:

• It would provide the cash for him to exercise his options to buy all Vollrath stock he did not yet own.
• “He believed that a strike was imminent, and as Governor of the State of Wisconsin, he did not want to be in a position of having to act to preserve the peace while owning stock in Kohler Co.” He might have to call out the National Guard for his personal benefit. Such a situation would be constitutionally suspect and politically untenable.

Thus, for both business and political reasons, time was of the essence. Although he had hoped for $125 a share, on February 20th, 1953, Kohler accepted the firm’s offer of $115 per share, netting him $2,462,725 ($26,518,475 in 2022 dollars).

But in 1958, when he studied the company’s more recent financial statements, he concluded the company had withheld material information from him in 1953.

Walter, Jr. then sued his uncle Herbert, Sr. and the Kohler Co. in Federal Court, asking that his original asking price be paid. In his complaint he accused the company and his uncle of “misrepresentation, half truths, and omissions” of vital financial information. This “induced” him to sell his stock for $10 per share beneath its “actual” or “fair market” value.

In 1962 a federal appeals court ruled in favor of the Kohler Company’s valuation, noting the hurriedness of the negotiations, and the lack of comparable businesses. (Walter Kohler used a formula based on the value of shares of American Standard and Crane, which were publicly traded companies.)

The court ruled:

Whether plaintiff initiated the discussions because he wanted to exercise his option with Vollrath or to avoid an embarrassing situation developing because of the Kohler company’s labor difficulties and his position as Governor of the State of Wisconsin is immaterial except as it bears upon the conclusion that plaintiff was intent on selling his stock in as short a time as possible.

Something for Michels to Think About

If Tim Michels hopes to become governor next January, he better start working on his stock sale now, as the Kohler case shows. As the appeals court noted in the Kohler case, and has been seen in many instances since then, it is inherently difficult to value closely held businesses, particularly when they are ongoing concerns that rely on key family members for their operation, as seems to be the case with the Michels Corporation.

Until Thursday, the firm was led and managed by Michels and two of his brothers — Kevin, and Pat, the CEO. Will his departure lessen the value of the company? That is a fair question, since construction firms rely heavily on insurance and bonding, and issuers of such policies generally require seasoned managers at the helm. The departure of a senior executive with decades of experience might cause them to lower their ratings and to raise their premiums. The increased premium costs would cut into the firm’s margins. thus reducing the value of Tim Michels could command for his stock. This hypothetical is but one of many challenges faced by those who try to put a value on closely held companies, particularly those in specialized industries like construction

The dividends have helped Tim Michels and his wife to pledge $15 million for cancer research and many smaller but significant donations to right-to-life and religious groups ranging from the Wisconsin School Sisters of St. Francis ($150,000 in 2020) to the embattled Hillsong Church NYC, ($30,000). It appears Michels can afford these donations without the recourse of selling his stock, so it is presumed he has sufficient means to get by without his executive salary at the family firm.

But he will still have to agree with the buyers — presumably his brothers and family trusts — on the value of his stock. It will not be easy to find comparable data, as most large contracting firms like Michels are privately owned, and do not trade on the public market. While Michels now says he will sell his company stock when elected governor, he might have second thoughts about living up to his campaign promise should he win the race.

Is Michels a “Self-Made Businessman”?

His family business presents another issue for the Republican candidate. Last week the Tim Michels campaign unleashed a $1 million media buy to introduce the candidate, a former Army Major with 12 years of service, described in his advertisements as a “self-made businessman.”

On Tuesday, April 26th, the self-made businessman was joined by his siblings at a meeting of Envision Greater Fond du Lac, where their late mother Ruth received the group’s Lifetime Achievement Award.

According to the Michels Corporation website account of the event and its posthumous honoree:

We are heartened to know the late Ruth Michels, our leader and matriarch, continues to have a profound impact on the community she loved. … Ruth was one of Michels’ guiding forces from the day it was established until her passing in 2020. … In the early years, when Michels had a handful of employees, Ruth traveled throughout Wisconsin, scoping out prospective jobs and relocating trucks and equipment. As the company grew, Ruth continued to support the business while focusing on raising her sons. She re-entered a leadership role at Michels in 1998, when Dale passed away. Serving as the Chairwoman of the Board, Ruth and her sons guided Michels growth.

In short, Michels inherited a very successful company from his parents.