May 23, 2008
Canadian Courts and the Bell Canada Buyout
As mentioned yesterday on this site, a Canadian appeals court permitted Bell Canada debt holders to complain about the effects of a negotiated leveraged buyout on the value of the debt securities. The effect? The deal is in danger and the Bell Canada stock has dropped like a rock. Stock prices were down 12 percent and selling volume was so heavy that computer systems at Canadian exchanges could not keep up with it. The banks financing the buyout have wanted out anyway and the court handed them a convenient excuse to bail on the deal. Don't you love it when courts act in "our best interest."
Seventh Circuit and Mutual Fund Fees
Judge Frank Easterbrook, chief judge of the Seventh Circuit [corrected], has released an opinion that withdraws federal courts from overseeing the fees of mutual fund managers. If fund managers make full disclosure, the judge says courts should not "cap" the fees, the market should. I normally am for market solutions be this one goes to far. Fund managers are fiduciaries to fund investors and trust law, going back several centuries, imposes a reasonableness requirement on the fees of fiduciaries that control the cash of beneficiaries. It is a part of the old widow rule; widows of wealthy men whose funds were placed with fiduciaries could rely on the equity courts to see that they were not cheated. The reasonableness requirement is no more vague that a similar requirement in many, many other contexts -- it relies on custom and practice in the trade. Since the investors in mutual funds are the general population who have a great deal of trouble deciphering fees and performance data, this rule makes good sense. It will apply only in egregious cases and acts as a deterrent in all cases.
May 22, 2008
Say on Pay: A Bust?
The Wall Street Journal todays has a nice piece by Tom McGinty on shareholders resolutions that ratify executive pay. Investors in struggling banks do not seem to want to vote for the resolutions. I am not surprised. I suspect that what shareholders want is different than what the resolutions offer. Shareholders do not mind paying executives when they perform well; they do want to penalize executives once the market has discovered that the firm has been very poorly managed. I suspect a right to trigger "claw-back" provisions are closer to what shareholders really want -- the right to exact vengeance for economic pain. A resolution that would fit closer to what investors would support would set up a shareholder vote, triggered by a 20 percent stock price drop compared to under a relevant index for the year, that would allow shareholders to reclaim otherwise paid salary and benefits for the year.
Canada on Shareholder Primacy: Not
A Canadian Court of Appeals, reversing the trial court, has held that debenture holders in the leveraged buyout of Bell Canada have a right to contest to terms of the deal. Canada has a provision found in Commonwealth corporate codes that prevents "oppression" by a board of directors. We do not have the term in our state codes (with the exception of some provisions on oppression as justifying dissolution--and even these provisions usually protect minority owners). Previously the term has not been used to support suits by debenture holders who are concerned about the value of their securities. The case puts on the front burner a long smoldering questions, to whom does the board of directors owe their allegiance. The easy answer has been -- the firm -- but when firm constituencies are at odds, who wins? The traditional Anglo-American rule, the shareholders. The left has constantly attacked the rule and we now have state constituency statutes that purport to modify it (but in fact do not). In any event, the Canadian Supreme Court will get the case and it will be closely watched. I am one who believes the shareholder primacy principle is an important driver of economic success in our business community and so believe that much is at stake here for Canada.
New Farm Bill an Embarrassment
President Bush has vetoed the new farm bill and his veto is sure to be overridden. Yet most all economists agree that it is a boondoggle. How do we get such bad pieces of legislation? The rest of the country will pay for steep protections for Americans farmers, many of whom are very, very wealthy. The bill gets subsidies to farmers whose income can reach $2.5 million a year. Bush gets no credit from the pundits for his stand and the Democrats that have pushed the bill get no public criticism. How can Democrats, who rail against "breaks for the rich," support this? How our country survives this stuff year after year is a downright amazing testament to our inherent national health.
May 20, 2008
Message to Private Equity: Rescue US Please
Private equity buy-out firms have also had an unfavorable press. According to critics: They buy at dear, distress prices, hurt business constituencies when they restructure operations, flip the business, and suck all the money out of a going business. And, the private equity managers do not pay their own investors will for the risks they take.
Now private equity is on the side-lines, with cash, waiting for buying opportunities have the markets stabilize. And we want and hope they will get back in -- we need the cash in capital starved businesses. Where are the critics?
May 19, 2008
The New Target of the Left: Financial Institutions
The left is constantly looking for targets. For some time the target was hedge funds. Now the financial crisis has produced a new target, financial institutions. Hedge funds did not misbehave as an industry in the sub-prime mortgage crisis, some did but many others made money or stayed out. So the new target, financial institutions. A heard much of it in a New York conference for pete's sake.
Here is most of the argument of the left, as far as I can make it out: The decline of a modern civilization is marked by the growth in size and importance of financial institutions. In the United States banks are growing, making money, and obsorbing wealth. As financial intermediaries, banks take all the gains from, exploit, passive investors who make little on their capital over .... (fill in the blank). Therefore, we are in decline as a civilization if we do not stop the banks. The data is flawed the analysis sketcy but there you have it. Our banks are the today's villians. Comments? Mine are coming. [By the way, comments are posted not when written but when reviewed, usually at the end of each day.]