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December 21, 2007
When is There A Fiduciary Duty to Liquidate? Chrysler?
Nardelli, the new chief of Chrysler, is reported to have been asked "Are we bankrupt?" His answer -- "Technically no, operationally yes. The only thing that keeps us from going into bankruptcy is the $10 billion our investors entrusted us with." In other words, the company may well run on its cash reserves until there are none left and then go into bankruptcy. Chrysler is privately held so I am not worried about investor input. But suppose it was in public hands. When should the CEO voluntarily initiate liquidation of the company (ratified by the shareholders) in the best interest of the shareholders? Or better, when could shareholders sue the CEO for not initiating a vote on liquidation and win? Never, the CEO is protected by the Business Judgment Rule that protects all but grossly negligent management decisions. But wait, the Unocal test establishes a threshold for the business judgment rule in takeover defenses because of inherent conflicts of loyalties and perhaps we need a similar threshold for liquidation decisions, which put management positions on the line. In other words, the inherent conflict in non-liquidation decisions should make them easier to attack in shareholder suits -- they must be "reasonable" give operational losses that survive two years, for example. In other words, the prospect of future operational gains must be real and not fanciful. Would change things quite a bit.
December 21, 2007 in Corporate Governance | Permalink
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Comments
No! It's true that Unocal is motivated in part by the conflicts of interest in inherent in takeover defense decisions, and that one could argue that there's a similar conflict of interest problem in companies that are near insolvency. But your proposal is a horrible idea. We don't need courts looking over the shoulders of management every time a company starts to do poorly. When companies are going down the tubes, decisions have to be made quickly to turn things around. Requiring judicial approval of management decisions will only ensure that ailing companies become failing companies.
In the takeover context, it's fairly easy for a court to figure out when management is acting against the interests of the shareholders. It's relatively simple for a court to say, gee, the takeover offer is for $80/share, and the stock is trading at $40, so there's no real way management can validly oppose this. But how the heck are courts going to exercise similar oversight over managers' attempts to turn around a company? When Nardelli says, hmm, I think Chrysler needs to stop selling Sebrings and Pacificas in order to turn itself around, how is the court going to second guess that judgment? Reviewing operational decisions like that is a lot harder for non-expert courts than reviewing takeover behavior.
Posted by: jhkjhk | Dec 21, 2007 6:23:53 PM
