January 20, 2007
Business Roundtable Half-Truths
Castellani's editorial in todays Wall Street Journal, as president of the Business Roundtable (John J. Castellani, Market Risk) is a half truth. He makes a policy argument on board composition that is a good one -- optimal board composition is a debatable proposition. But then he implies that the SEC is thinking of mandating direct access to the ballot (company's proxy) for board candidates. This is false. The SEC is considering the merits of leaving in place a rule that will allow shareholders to vote on voting process; in order words, under the rule shareholders can decide whether or not to give themselves direct access to a ballot. If the rule survives, Castellani can make the same policy arguments on board composition at the time of the shareholder vote in which the shareholders decide whether they should have direct access to the company's proxy. If Castellani is persuasive, the shareholders could refuse to adopt any procedure that gives them direct access. The SEC rule in place now, unless modified, only gives shareholders the option to vote on procedure, an option that the SEC had interpreted its own rule to deny for some time (the Court said the SEC was misinterpreting its own rule). The SEC rule does not, as is implied by Castellani, mandate ballot access. The SEC rule changes was has been a mandate (no shareholder votes on voting procedure in the firm's proxy) to a discretionary option (shareholders can vote of procedure if they wish). Shareholders have more choice, not less. Such arguments as Castellani's, that rely on half-truth, are a disgrace.
Apple And the Accountants
Apple has announced that it must charge a nominal amount for a technology upgrade to its computers in order to avoid an earnings restatement. In other words, we would like to give it away for free but accounting rules would penalize us. Accounting officials have gone nuts: "Accounting rules do not mandate behavior they just characterize events with numbers -- make a choice and we tell you what the numbers must look like." Apple is, of course, correct and the accounting officials are myopic. Accounting, tax and other regulatory rules have operational effects and companies must plan with them in mind. Revenue restatements and revenue deferrals are a messy business and should be avoided. If the small charge is necessary to do so (and here is where the argument should lie - is it necessary??), then it makes sense to do it.
Cablevision Systems' LBO
The LBO offer for Cablevision Systems, a publicly owned company, is a classic illustration of problems created by a two-tier voting stock. The founding family, the Dolans, owns 20 percent of the equity but control, thanks to a two-tier voting stock classification, 70 percent of the voting power. The Dolans have offered by buy the company (an LBO) and declared that they will not vote to sell the company to any other suitor. The Cablevision board has declined the offer, stating that the price is too low. The board is in a pickle. The board's fiduciary duties to the company require that it negotiate for a fair price (otherwise dissenting shareholders can sue to block the deal) but the board is effectively disabled from soliciting other offers that are serious. The Dolans, as shareholders, have no duty to sell. Moreover, come the next board election, the Dolans can replace them. Of course the new directors will have the obligation to negotiate hard as well, but who would want the job?? The law provides answers but common sense sees practical problems. The ultimate solution depends on a judge approving whatever deal is negotiated. Shareholders who buy stock in a company that has a two-tier voting stock classification are, in essence, relying on judges to protect them in deals.
January 19, 2007
Equity Office BuyOut
Two private-equity firm consortiums are competing to purchase Equity Office Properties, a public traded REIT. The winner will pay the highest price in history in a leveraged buyout (LBO), probably in excess of $36 billion.. The price will exceed the price paid for HCA last summer (at $33 billion) RJR Nabisco in the late 80s ($26 billion). Will there be a book and a movie??? Nah. More, larger deals are coming.
Executive Compensation Unraveled
A new study by Amir Barnea and Ilan Guedj, University of Texas, has found that CEOs at companies whose directors sat on numerous other boards were paid 13 percent more that CEOs whose directors did not sit on other boards. The study is an indictment of sorts of outside directors, most of whom often sit on several boards. There are several possible explanations. Some argue this is evidence of the power of "friend of friend" networks that facilitates mutual back-scratching. Others argue that it is evidence of a viral spread of self-serving practices. I would argue that it is not that complex -- a board member with a reputation for supporting CEOs gets other jobs. An outside directors that is friendly to CEOs on one board gets selected by other CEOs for other board positions. The bottom line on the data is the new study of 3,000 companies (I cannot recall the authors) that show companies that lavishly pay CEOs under perform the market.
Merrill Lynch and the HCA Deal
How can this be good? Merrill Lynch has disclosed breathtaking fourth quarter earnings. A chunk of those earnings came from the HCA buyout. Merrill got fees from advising HCA pre-buyout, took an $1.5 billion equity stake in the buy-out group, earned $75 million in fees advising the buyout group, and now is underwriting $22 billion in bank loans and junk bonds (with a 7% underwriters fee on the public offerings). Conflicts of interest are everywhere. Reminds me of the dealings of Andrew Carnegie in 1870s (held positions in railroads, iron & steel companies, bridge companies, all dealing with each other, and sold bonds in each to boot).
The Option ARM Litigation
A Maryland bank, Chevy Chase Bank, must rescind loans made to borrowers who took out "option adjustable-rate mortgages." The federal district court in the Eastern District of Wisconsin held that the option ARMs violated the Federal Truth in Lending Act. At issue is whether anyone can understand the loan contract. It is yet another example of over-lawyering on contracts and disclosure statements. The documents are long, technical, understood by a very few, and, probably, once one gets a seminar on the language, technically correct. The defendants answer? The judge did not understand the loan contract. Choice.
Judge Spats: The Role of Blogs
Judges on the same bench routinely disagree and sometimes those disagreements turn personal. The judges own stage in their public image (read legitimacy) --- judges are measured, thoughtful, and respectful-- usually restrains judges from taking their personal conflict public. We hear about personal conflicts, if at all, through leaks from friends or clerks long after the fact. Sharp exchanges on the bench in oral arguments are 1) a surprise, 2) judged harshly, and 3) assumed to be "purely professional" (the judges disagreements are reflections of personal animosity). Disagreement in private, in conferences and correspondence about cases, are, historically, confidential. But judges are human. Within the last month there have been two illustrations of courts going public with personal spats. The D.C. Circuit Court had a public spat over the acceptance of a amicus brief from retired judges (a split panel held that retired judges could not feature the use of the title "judge" in court proceedings). I have mentioned it in an earlier blog. Judges from the DC Circuit are still writing letters to the editor on the issue (a recent defense by a spurned brief writer noted that they used their titles as Judge on in the "bio" materials and in the body of the brief and that other judges had submitted similar briefs that had been accepted.)
The Michigan Supreme Court now has been featured in the New York Times in a public spat over a disciplinary action against lawyer who was also an unsuccessful candidate for governor, Geoffrey Fieger. (Adam Liptak, Unfettered Debate Takes Unflattering Turn in Michigan Supreme Court.") [See also "It's Getting Ugly on the Michigan Bench," from CNN.com]. The defendant was charged with, get this, making negative comments about sitting judges. The successfully candidate for governor had picked four judges on the bench and several of the judges had made negative public comments about the loser/defendant during the political contest. The Michigan Supreme Court judges had a very rough conference on the case and one of the judges went public, on her blog, with the comments of one of her colleagues (he called her, among other things, "a child engaging in a tantrum"). Rosie O'Donnell and Donald Trump move over..
The court, characteristically, met to pass a new rule, on a 4 to 3 vote, prohibiting any member of the court from revealing the contents of inside judicial communications on pending cases. The aggrieved judge called the rule a "gag order" and, characteristically, labeled it as unconstitutional. She has started a blog, for pete's sake. Next up -- a rule against judges having blogs.
Fieger has sued the Michigan court in federal court. Law professors and other judges have, characteristically, clucked their tongues, bemoaned the lack of decorum and supported the need for confidentially.
I, on the other hand, welcome and laugh and enjoy the public spectacle. Increasing publicity about courts is and will be inevitable. Judges had better get used to it. Moreover, it is healthy. Illusions about courts will be more difficult to sustain, judges will suffer public disgrace for poor behavior and be induced to behave better and we will all be better off for it.