Taxpayer investment in eastern Kentucky aluminum mill decried as 'cronyism'

LOUISVILLE, Ky. (WDRB) – Braidy Industries Inc.'s disclosure this week that its CEO borrowed about $15 million from the company earlier this year should “raise some eyebrows,” according to a longtime expert in corporate governance.

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told WDRB that corporations generally avoid lending money to their executives – and federal law makes the practice illegal for publicly traded firms.

“The issue is, the company shouldn’t become an executive’s source of financing,” Elson said in a phone interview Thursday.

Earlier this week, Braidy Industries disclosed that the company’s chairman and CEO Craig Bouchard borrowed “approximately” $15 million from the company in March -- the same month in which the company raised $75 million through a private sale of stock.

Bouchard has since repaid $12 million, including interest, and expects to fully repay the loan by the end of the year, according to the filing.

While a private business, a significant portion of Braidy Industries’ initial capital came from Kentucky taxpayers when Gov. Matt Bevin’s administration invested $15 million in public money in the company last year.

Braidy Industries plans to build a state-of-the-art aluminum mill in Ashland, Ky., and to create 600 high-paying factory jobs when the mill opens in 2020.

Related: Braidy Industries: Non-binding 'commitments' back CEO's claim that mill is 'sold out' for years ahead

The $15 million loan to Bouchard was “to facilitate the consummation” of Braidy Industries’ acquisition of Veloxint, a company formed around emerging metals technology developed at the Massachusetts Institute of Technology, Braidy Industries says in the financial disclosure.

Braidy Industries acquired Veloxint in March, the same month as the $75 million stock sale and the loan to Bouchard.

The filing doesn’t explain why it was necessary for Bouchard to borrow from Braidy Industries if the money was needed for a corporate purpose, and Braidy Industries declined to elaborate.

“I cannot provide the details of private business transactions,” Jaunique Sealey, the company's vice president of business development, said in an email to WDRB News on Friday.

Sealey mostly reiterated information from Braidy Industries’ financial disclosure, including that the loan was “100% related to the successful closing of the Veloxint acquisition;” approved by the Braidy Industries board of directors; and on “full recourse” terms, meaning the company can pursue all of Bouchard’s assets if he fails to repay it.

The loan was also “fully disclosed and agreed to by each of the other investors participating in the concurrent capital-raising effort being conducted at the Braidy Industries parent company level,” Sealey said, referring to the $75 million stock sale.

Elson, the corporate governance expert at the University of Delaware, said that it’s “usually not considered a good idea” for executives to borrow from the companies they run – unless it’s a family business with no unrelated shareholders.

“The danger is when you are dealing with other people’s money,” he said, referring to companies that have a multitude of investors.

In Braidy Industries’ case, the commonwealth of Kentucky’s $15 million appears to have contributed the majority of the company’s capital during its first year, before the second stock offering in which the company raised $75 million from private sources.

Bouchard himself bought more than $18 million in Braidy Industries stock in the $75 million sale, Sealey said.

The company is now looking to raise another $400 million through stock sales over the next six weeks so that it can have sufficient capital to borrow for the construction of the mill, estimated to cost $1.68 billion.

Charlie Moyer, dean emeritus of the College of Business at the University of Louisville, said that while he hasn’t reviewed Braidy Industries’ filing in detail and isn’t involved in the deal, the disclosure of the loan raises questions.

“On the face of it, this appears to be a very complex and unusual transaction and as such, it merits further scrutiny,” he said.

But Dale Boden, president of B-F Capital, a Louisville private investment firm that often deals with early-stage companies, said there could be a number of benign explanations for Bouchard’s borrowing from the company, depending on the precise terms of the acquisition.

He said potential investors in Braidy Industries, which he praised as a potentially transformative project for Kentucky, may want to know more about the circumstances of the loan.

“Those are certainly legitimate questions that would be on your due diligence list, if you were going to consider investing in the company,” he said.

Reach reporter Chris Otts at 502-585-0822, cotts@wdrb.com, on Twitter or on Facebook. Copyright 2018 WDRB News. All rights reserved.

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Chris Otts reports for WDRB.com about business and economic topics, higher education and local / state government. He joined WDRB News in 2013 after seven years with The Courier-Journal. Got a tip? Chris is at 502-585-0822 and cotts@wdrb.com.