Not every investment works out, but investors are entitled to a fair chance to participate in the gains if one does. We don’t expect to know every detail of a company’s business. And we’ll take our lumps and move on if things don’t work out.

However, we do demand two things from management for our money--first, that it’s always up front with us about the prospects for our investment, informing us of risks as well as profit potential. That means clear reporting of earnings, along with where strategies and goals are succeeding and where they’re struggling.

Just as important is that management must respect our ownership as shareholders. That means acting in good faith and in our interest.

The first demand has the weight of the law behind it. Executives who lie or mislead in the official documents they file with the Securities and Exchange Commission will go to jail if caught. And with the 2002 Sarbanes-Oxley Act--which was passed to shore up investor confidence in the wake of the 2000-02 bear market and the accompanying accounting scandals--reporting requirements are stricter than ever.

Compliance spending by North American companies for 2006 results is expected to grow another 8.5 percent from 2005, continuing a string of dramatic increases. The requirements have had the double-edged effect of delaying full-year filings, particularly for smaller companies. In fact some, like wireless provider TDS (ASE: TDS), have become chronic late filers to the extent that their credit ratings are now threatened. Reports have also arguably become longer and more complex.

Enforcement is more imperfect still. Some of the worst offenders of the accounting scandals have gone to jail, including several high-profile executives. But many have also skated and are, in fact, as much in the game as ever. Jeff Citron, for example, paid a $22.5 million fine for his activities at an online brokerage he founded, Datek Online, in which he managed to sell his interest in 2002 for $503 million.

Now he’s back running VONAGE (NYSE: VG), the Voice over Internet Protocol company. And despite a disastrous public offering last year--which fleeced both investors and customers who were locked into purchasing shares at well above-market prices--you can be sure he’s feeling no pain, despite the still-exploding marketing costs of that company.

Despite these flaws in our system, we US-based individual investors do have the ability to protect our rights--provided we’re willing to use them. Not every Mr. Smith wins by taking on Washington or City Hall. Not every would-be Carl Icahn is able to shake up a boardroom to force executives to take much-needed action. Not every Wall Street hot shot who takes advantage of his or her station is put behind bars for lying, cheating and stealing. Not every lazy broker is fired for not doing their job. And big money can manipulate the market in the short term, and get away with it at least for a while.

But we do have the tools to shake things up here in America, if enough people are willing to take notice and then action. If a government stops listening to the average citizen, it will be voted out of office. And an unresponsive corporate management can be brought to heel, even if it’s traditionally run a company as a personal or family fiefdom.

A case in point: the failure of the Dolan family to take CABLEVISION (ASE: CVC) private earlier this year. Like other cable companies, Cablevision has been extremely successful bundling broadband, cable entertainment and telephone service, and is enjoying strong growth in revenue and cash flow.

Unfortunately, like many cable companies, most of the benefits have flowed to management, rather than shareholders. Aside from a special dividend paid last year to fend off an outside takeover, for example, Cablevision has no regular distribution. Also, the company’s credit rating has routinely languished, as management has had no compunction about rolling up a mountain of debt to fund its objectives.

The Dolans’ attempt to take control of Cablevision was their second in recent months. Like the $27 per share offer rejected in October 2006, the $30 per share offer was voted down by the Cablevision’s board of directors in January, after it was roundly criticized by outside shareholders as too low. I’m still not a big fan of the company, which will face much tougher competition in coming years from VERIZON’S (NYSE: VZ) high-speed FiOS network in New York. But if the Dolans want to take it private, it’s now obvious they’re going to have to pay a fair price.

THE AQUILA CASE

The Cablevision example is at least one hopeful sign for shareholders of another company whose management seems to have forgotten their best interest: AQUILA (NYSE: ILA).

During the past four years, the electric and gas utility has steadily clawed its way back from what at one point seemed like certain bankruptcy. Step one was unwinding its unregulated energy trading arm, which had collapsed in the wake of the Enron scandal and implosion of that industry. With that largely accomplished two years ago, management then set to work on step two, repairing relations with regulators and cutting the costs of its remaining regulated operations.

The company pinpointed for sale utilities in several states it deemed “non-core.” It then proceeded to lock in prices for them that largely exceeded expectations, and applied the proceeds to reduce debt. Management also won rate increases at the utilities it designated as core, cut costs and increased efficiency.

As it opened 2007, Aquila appeared on track to follow the same path to recovery as the legendary utility comeback stories of the past, such as General Public Utilities’ 30-to-1 move in the 10 years following the Three Mile Island nuclear incident. Aquila’s credit rating had already been boosted several times and was on the verge of increases from all the major raters. Earnings were improving and the share price began pushing toward $5 per share.

Investment grade credit ratings and common stock dividends were still likely a couple of years off. But things were clearly moving in that direction. In short, Aquila looked like the best bet in the utility sector for an explosive comeback over the next few years.

Then came the bombshell: Aquila management announced a two-part sale of the rest of the company: A $940 million fire sale of assets to BLACK HILLS CORP (NYSE: BKH) to be followed by the sale of the rest of the company to GREAT PLAINS ENERGY (NYSE: GXP).

I’ve known Aquila management for some years. In fact, despite the company’s rather severe ups and downs, I’ve always respected its CEO, Richard Green. The Green family has been involved at the company, formerly UtiliCorp, for generations. They didn’t run away when disaster struck earlier this decade, for reasons that were almost entirely outside its control. Employees have always been major shareholders and, unlike many battered utilities in the last bear market, management didn’t resort to widespread layoffs as a way to balance the books in the near term.

Admittedly, I’m not in management’s closest counsel now. But this move is extremely disappointing as well as surprising. Just as it seemed things were moving in the right direction in a big way--and that a payoff for patient shareholders was in sight--they’ve accepted a buyout offer that’s valued even below where the shares were trading before the announcement.

The deal will take at least a year to win needed regulatory and shareholder approvals. It’s possible during that time I’ll be convinced of the buyout’s merits. In fact, no one ever gets anywhere in investing if they don’t keep an open mind to future developments.

At this point, however, I have several major objections to this deal. First is the fact that it was priced below where Aquila was trading before the deal was announced. That’s the textbook definition of a “takeunder”, and those are never good deals for shareholders.

Second, the deal’s value when it’s completed depends heavily on the stock price of a utility with less than stellar prospects, Great Plains Energy. Great Plains’ utility operation--Kansas City P&L--is healthy. But it also owns and operates Strategic Energy, a major unregulated buyer and seller of energy. The track record of regulated utilities operating such businesses is abysmal, and Strategic’s history is checkered to say the least. The larger it becomes, the greater the danger it poses to Great Plains’ fortunes and the ultimate value of this deal.

Last, there’s the issue of management motivation. Yes, operating a recovering utility is hard work, and Aquila has had as difficult a road to tread as any ute that’s avoided Chapter 11. There are still hurdles to complete recovery, including winning adequate rate increases to pay for needed capital spending in coming years. And a less than fair rate hike would delay full recovery.

It’s also possible that management knows about some risk it hasn’t fully disclosed that could delay or even derail its recovery. But the bottom line is--based on what we do know and what they have reported--the really hard work and most of the uncertainty are behind Aquila. More than ever, getting the ultimate payoff seems a matter of just staying the course and watching the numbers steadily improve.

So why did management elect to accept--or even arrange--a buyout offer that’s below market and short-circuits all the hard work it’s done the past four plus years? Well, for one thing it was following the advice of investment house The Blackstone Group, which apparently stands to collect some hefty fees from such a complicated transaction, even if it fails. More important, however, management is getting paid off, quite well and well ahead of when it would be from staying independent.

Again, I might be convinced otherwise during the next few months and I’ll be anxiously watching to see what kind of information management presents to bolster its case. At this point, however, I recommend investors follow the lead of private capital that has been accumulating substantial shares in recent months, such as Pirate Capital. That means not accepting any offer or any deal for the time being.

Basically, if enough shareholders decide this isn’t a good deal for us--I’ve owned shares for a number of years--we’ll be able to block it. Meanwhile, the ball is in Aquila management’s court. And they’re going to have put up more than they have to convince me.

DIVERGING INTERESTS

It’s worth pointing out that the interests of private capital and individual investors are not always conjoined. These are two different investor classes and we often have differing interests.

In the case of Aquila, we both share the interest in winning a better deal from any takeover, or else forcing the company to remain independent and continue its recovery. In other cases, however, private capital has a real interest in running down the price of companies or assets, so they can secure the cash flows at the best possible price.

Private capital isn’t always run by the brightest bulbs. But it does tend to be far more strategic in its objectives than are individuals. All too often, individuals are panicked into selling by a falling share price, even if the underlying company is extremely solid. In contrast, private capital licks its chops in such situations because it sees the long term, and has faith in its numbers to gauge the worth of what it’s buying.

Canadian income trusts are a pretty good example today. A year ago, this market was in the grips of a mania. Valuations were soaring and investment houses were scrambling to package together assets of every variety to launch as trusts, even if they had little real economic merit. In that market, private capital was definitely on the selling side, unloading anything it could attach a high yield to in order to attract investor dollars.

Then came a year of sliding oil and gas prices, which has continued into 2007. That was followed by the Halloween announcement from the Canadian Finance Ministry that the country would begin taxing trusts as corporations in 2011.

The result has been a selloff of Canadian trusts across the board as many panic-stricken individuals have left the field. Private capital, meanwhile, is getting ready to play. And with trusts selling at fractions of the price-to-book value ratios of equivalent corporations, it’s not hard to see what’s sparking their interest.

We’ve already seen some buyouts in the group, including Harbinger Capital’s takeover of CALPINE POWER INCOME FUND (TSX: CF.UN, OTC:CLWIF). The truly interesting thing about that deal is that the buyout price of CD13 per share was well above the highest price the trust had ever previously traded.

With an unprecedented amount of private capital floating around the world, there are going to be many more deals involving trusts, very likely even if the Canadian government does moderate its taxation plans. The question is are the deals going to be in the best interest of individual shareholders, or merely a way to enrich private capital, which will then hold until there’s another opportunity to flip the assets at a big profit.

Trust managements have considerable weapons at their disposal to thwart hostile takeovers. Calpine was able to induce Harbinger to raise its bid, even though it had just lost a court decision that made it more vulnerable to a buyout.

In a depressed market, however, any offer that looks good relative to current prices is going to be tough for trusts’ shareholders or management to ignore. That’s especially true given the overhanging uncertainty on trust taxation, which isn’t likely to be fully resolved until the next election in Canada later this year. The Conservative Party appears to have the votes in parliament to pass its proposal. But the Liberal Party is now proposing a much lower tax that could prove a potent campaign issue.

With trust valuations this low, the worst case of 2011 taxation is clearly priced in. Any change--such as adoption of the Liberals’ approach--would be a huge positive that will send prices soaring, while there’s little potential downside from the status quo of the Conservatives’ proposal. Moreover, growing businesses will become more valuable in the years leading up to 2011, even if they do convert to corporations. And many trusts will continue paying big dividends well beyond 2011, whether they’re exempt from the government’s tax proposal or just operate businesses that generate massive cash flows.

The bottom line: There’s no reason for investors to sell good trusts now. Nor is there any rush to accept even what might appear to be generous takeover offers from private capital.

That, however, is going to be hard to keep in mind in coming months, as offers do emerge for trusts. To be sure, some of the deals will be worth taking, particularly those for weaker entities. But it’s going to be critical for individual investors to separate their primary interest--earning superior long-term total returns--from those of private capital, which are basically to buy good assets as cheaply as possible.