Business Law Prof Blog

SEC Acts on Shareholder Nomination Rights

The SEC voted 3-1 to refuse shareholders the right to use 14a-8 resolutions to ask companies to amend their bylaws in order to enable large shareholders to place director nominees on the firm's proxy.  The vote ends a shameful period of equivocation on the issue with the wrong resolution.

Citigroup Accepts $7.5 M from Abu Dhabi Sovereign-Wealth Fund

In the wake of massive losses stemming from the sub prime mortgage meltdown, several of the United States’ leading financial institutions are in need of fresh capital. This need reflects a new reality for many of these institutions who are used to financing themselves. One such institution is Citigroup, who recently accepted a $7.5 billion dollar capital infusion from an investment arm of the oil-rich Abu-Dhabi government. In return, Citigroup conveyed a 4.9% stake in the company in the form of convertible stock.   The investment authority, known as ADIA, will become one of Citigroup's largest shareholders, surpassing the stake held by a Saudi Prince, Alwalweed bin Talal. 

The investment in needed and welcome.  I do not, however, find comfort in the rumored agreement of ADIA to refrain from exercising any control through its stock block.  ADIA, with pure investment intentions, ought to monitor its investment just like any good large block shareholder should and exercise control if necessary to protects its return.  Other shareholders would be better off if ADIA would do so.  Sterilizing ADIA stock is not a good idea and serves to insulate management from accountability and oversight.  The agreement is an aftermath of the Dubai Ports World controversy. 

The more important problem is how this country to view sovereign-wealth fund investments in general.  When such funds invest with normal expectations of an investment return there is no problem. Indeed, we benefit with having their funds.  When a crisis manifests, however, the sovereign-wealth funds could become an foreign policy arm of their governments, lose their investment return objectives, and use their positions for other goals.  The ADIA agreement is not a solution because ADIA could just dump the stock to drive down the price; ADIA does not have to vote the stock to affect Citigroup's health.  This issue puts into play CFIUS (Committee on Foreign Investment in the United States) once again and Congress's new amendments to CFIUS.  A sovereign-wealth fund is an extension of a foreign government and any attempt by the fund to "control" a United States company with "critical" value to the United States merits mandatory review. Until the new regulations come out, we have only vague notions of what control may mean and what "critical" may mean.  Investments by UAE governments will be much less troublesome under the review than investment by the huge Chinese national fund (which mostly invests inside China at the moment).  China has demonstrated that it is much more likely to invest the money of its funds for political reasons than for pure investment returns.  This is a problem that is going to get increasing more important with time and we should start now to formulate our national response.

Some Hedge Funds Short SubPrime Debt

While many financial institutions and hedge funds are absorbing huge losses from the subprime crisis, others are reaping the rewards. One such man is John Paulson, a hedge fund manager controlling $7 billion in hedge fund money. While the majority of investors were content to ride the housing frenzy, Paulson believed the bubble was set to burst and keyed his investments in mortgage credit. In return, his Credit Opportunities funds rose an average of 340%, and he earned $1.14 billion in performance based fees during the first nine months of 2007. Other hedge fund managers had similar vision, and also invested against the housing boom. Philip Falcone of Harbinger Capital Partners collected $1.3 billion in performance fees over the same period.  One fund, Lahde Capital, made 1,000 percent, after fees.  He is returning money to investors rather than continue to invest it.