March 30, 2007
Attacks on Private Equity Funds
Unions, long suspicious of private equity fund buyouts (leverage buyouts or LBOs), have a sympathetic ear in Congress. Barney Frank, chair of the House Financial Services Committee, is rustling about attempting to find ways of regulating LBOs. His basic complaint is that the LBOs do not help and often hurt rank and file employees (in particular unionized employees). He seems to want to limit buy-out funds access to debt to finance the deals. He will have trouble. Buyout funds are taking advantage of a broader market phenomenon -- debt is cheap because it is subsidized and control by the government. The federal government favors debt in the tax code and the fed keeps debt at below free market rates. Buyout funds are using subsidized debt (interest rates are too low). Too many across the financial markets (both main street and wall street) are invested in low interest rates to change this. Disabling one actor, private equity funds, from using debt, will merely embolden and empower others (who are probably less efficient but just as willing).
Take-Two Proxy Fight
The success of the dissident shareholders in the annual meeting of Take-Two Interactive Software, Inc., is stunning (five new directors and the firing of the CEO) and may be a harbinger of a new day for corporate governance. Institutional investors held large stakes in the company, got together when problems surfaced, and in a no-nonsense show of steady strength, put a turnaround artist in control of the company. The ousted CEO tried to sell the company and delay the annual meeting but in the end, he lost. The meeting will have long run effects -- it will encourage institutional investors to be active and, most important perhaps, it will encourage outside directors (two of whom survived by aligning themselves with the dissidents) to switch sides when it is obvious that there are internal problems.
Several recent new items suggest that lawyers are being held accountable for their roles in the recent financial scandals. Several of Enron's house counsel have been indicted and Jenkins & Gilchrist has dissolved, due to the involvement of attorneys in an acquired Chicago law firm in the marketing of tax evasion schemes. Modern financial scams, due to filing requirements imposed by both state and federal authorities, necessarily involve the participation of lawyers and often involve lawyers in the planning. High profile prosecution of lawyers who have misbehaved should help to sober up the practice and give some cover to lawyers who want to resist pressure from clients.