May 4, 2006
New Jersey Case on Special Litigation Committees
A County Chancery Court Judge in New Jersey rejected the findings of a special litigation subcommittee of the board of directors. Steel Partners II v Aronson. A private equity fund had sued the board for blocking a takeover by adopting a poison pill and by buying votes. The Court held a three-day mini trial on the special committee's findings on the litigation and threw them out. The Court also questioned the special committee's approval of the CEO's compensation package, which was three times the net earnings of the company over a five year period.
This is the first such case that has rejected the findings on the merits that I have seen. It represents courts' new unwillingness to accept band-aid procedural ratifications to serious agency problems.
Trading Fees on the Exchanges
The WSJ today, in an article by Aaron Lucchetti "Nasdaq, NYSE Wrestle it Out Over Trading Fees," has begun to report on the juxtaposition of our exchanges going public with the traditional heavy SEC micro-management of the trading markets. It is an excellent article on matters that most traders could care less about. But, as Lucchetti has reported, a great deal is at stake.
The exchanges are wrangling over the rules for reporting internalized trades from brokerage houses and collecting the appropriate fees. The fees are an important element of Nasdaq's revenue. Why the wrangle? What should be a market based competition is a lobbying problem. The NYSE wants the SEC to prohibit the Nasdaq from collecting the fees. The NYSE cannot not collect such fees. The Nasdaq has petitioned to be and soon will be an exchange itself. Will it now also be prohibited from collecting the fees? Will a joint venture between the Nasdaq and the old NASD be approved by the SEC to allow the Nasdaq to continue to do what it did before it was an exchange? Good grief.
The SEC should have nothing to do with this. The exchanges should compete for the fees for reporting the internalized trades. But the SEC, long comfortable regulating the smallest details of the exchanges' last trade reporting systems when all the exchanges were not-for-profit member organizations, will, no doubt, try to structure the reporting system containing the new for-profit exchanges. The SEC, as we have seen with Regulation NMS, is heading in the wrong direction of more regulation, not less. The SEC is acting more and more like a state public utilities commission but without the economic justification. National markets are not natural monopolies.
KKR's New Public, Private Equity Fund
KKR (Kohlberg, Kravis Roberts & Company) yesterday floated on the Amsterdam stock market a new publicly traded company, KKR Private Equity Investors, that will invest in the private equity markets. The new company sold $5 billion shares for $25. We watched it close the day down a bit on the Euronext, the pan-European stock exchange. What is wrong with this picture?? KK&R, a high-profile American company, is using a European stock exchange to avoid the heavy disclosure rules of American exchanges and federal securities legislation and rules. The new companies will enjoy the tax benefits of of the United Kingdom and other countries in Europe that apply to public companies that are primarily investment trusts. KKR's new venture is yet another indication that the United States has legal rules that discourage domestic investment.
May 3, 2006
Ballot Initiatives: Using The Wedge Issue
Those who put ballot initiative procedures into state constitutions thought that they were a counterpoint to political parties. When politicians ignored the wishes of the people, the people, using ballot initiatives, could enact their views into law.
But politicians are a resourceful group and they have figured out how to use ballot initiatives to advance their political party’s fortunes. They have discovered the “wedge” ballot proposal.
Here is how it works. A political party needs to energize its political base for an election so its core voters will show up at the polls. If they show up they will vote for the party’s candidates. To whip up excitement among these loyal but undependable voters the party puts a carefully selected initiative on the ballot. The initiative is on a hot button issue that the party’s core voters care very deeply about. The core voters will show up just to vote on the initiative and stay long enough in the voting booth to also vote for the party’s candidates for office.
Republicans used initiatives on gay marriage in the 2004 President race to turn out conservative voters. Some pundits claimed that the Ohio initiative on gay marriage gave President Bush the extra 60,000 votes he needed to claim the Electoral College votes of Ohio, the pivotal state in the election. In this year’s Congressional elections, the gay marriage initiative is on another six state ballots. Republicans are also using initiatives on tax and spending limits to turn out their base conservative constituency in several other states.
The Democrats, although late to the tactic, have responded with ballot initiatives of their own. In the 2004 Senatorial race in Colorado, the Democrats took back a seat held by the Republicans with the help of a ballot initiative promoting renewable energy sources. In six states this year, Democrats have successfully placed initiatives on the ballot that raise the minimum-wage. In Missouri this year, a Democrat for the Senate is hoping for help from a ballot initiative permitting private funding of embryonic stem-cell research.
Academic research has found that ballot initiatives are effective in midterm elections. The authors of the studies have found that ballot initiatives can increase voter turnout by as much as eight percentage points. The studies of presidential campaign are mixed however; some find no effect on voter turnout in some states while others find a small effect.
But, as I noted above, politicians are a resourceful group, and they are already developing counter measures. The most obvious counter-measure is to match ballot initiative with ballot initiative. Both parties struggle to get offsetting ballot initiatives on the same ballot.
The more subtle counter-measure is to moot an opponent’s ballot initiative with legislation. In Michigan and Arkansas, for example, Republicans in the state legislature passed minimum wage increases to keep the Democrat’s initiative on minimum wages off the ballot. Around elections then we can expect to see state legislatures flip-flop on legislation. A state legislature controlled by one party that has blocked legislation promoted by the other will, on the eve of the election, pass the other party’s bills.
This counter-measure, of course, will further encourage a minority party to have several ballot initiatives in advance of any election.
Whether all these is good or bad is hard to say. One thing is for certain, however, political parties will be a very vigorous proponent of ballot initiatives in all future elections.
April 30, 2006
The Pfizer Annual Shareholders Meeting: Calling a Loss a Victory
Gretchen Morgenson of the New York Times has been using her column to encourage Pfizer shareholders to "withhold" their votes for two members of Pfizer's board of directors who were up for re-election. (See, e.g., today's "Can't Take it Anymore?") The board members were on the corporation's compensation committee and have approved a very lucrative pay packages for the company's CEO for five years even though the company's stock price has plummeted during that period. Significantly, Pfizer has adopted a "resignation" bylaw; if over 50 percent of the shareholders withhold votes for a nominee, the nominee, if elected, must submit a letter of resignation to the full board of directors. Morgenson was supporting the efforts of two well known proxy advisory firms and by a well known non-profit promoter of shareholders rights, Investors for Director Accountability. The result? A measly 21 percent of the votes cast were withheld. Morgenson declared victory. Incredible. Reminds me of the advice Nixon received when he inquired about how to get out of Vietnam: "Declare victory and leave." The meager results of such a high profile campaign demonstrate once again that shareholder voting in directors elections the management slate of directors is 99.99 percent likely to win. Shareholders who do not vote leave votes in the hands of their brokers, who vote for management, and large institutional shareholders, such as mutual funds, with the exception of public pension funds, also vote with management to stay in the CEO's good graces for consulting, advisory, underwriting and other sizable fees. This was a huge setback in a very high profile case with consolidated, visible, powerful advocates. If dissident shareholders cannot win here they cannot win anywhere unless the CEO is has been indicted. Morgenson, by calling such a result a victory, does a disservice to more serious efforts to modify the shareholder voting system in the United States for public traded companies. Call it a what it is -- a big, disastrous, embarrassing loss -- and figure out, first, whether we should worry (there is a respectable argument that we should not), and, second, if so, how to fix the voting system.