September 6, 2008
Strickland Sings a New Tune
The Democratic Governor of Ohio has an editorial in today's Wall Street Journal entitled "Don't Believe the Doomsayers (sic). Ohio's Economy is Doing Fine". He notes that the press, covering the presidential race, has made the Ohio out to be worse than it is. He then goes on to note various Ohio pro-business programs and Ohio's recently enacted reduction in business taxes. The article seems harmless enough but it covers up a variety of sins. First, the Democrats are running and have been running on a Bush hurt the economy platform. Elect us and we will fix the economy. Strickland himself used the attack when he ran for Governor. There are studies out on how many unemployment points or on how many GDP percentages will cost Republicans the election. Second, Ohio is a swing state and it is in the Democrats interest to portray the state as depressed. Obama has constantly, even two or three days recently, meet with groups of Ohioans to "feel their pain" and announce that McCain cannot ("he is out of touch"). Fourth, it is far from clear that the President of the United States, or even the Governor, has enough control of economic fundamentals to be "blamed" for economic problems. Third, the Governor,now in office, has discovered how corrosive such self-serving portrayals can be -- they can be self-fulfilling -- hurting people in Ohio who should not be hurt. And now the shoe is on the other foot -- the economic problems are on Strickland's watch. I very much doubt Obama will pay Strickland any heed on the matter -- he will continue to announce that Ohio is depressed and it is Bush's fault (and McCain is "a Bush third term" ). Strickland can hardly fault Obama for doing what Strickland himself did to get elected Governor. Messing with the truth to get elected is tawdry business.
By the way, the tax reduction took place under a Republican Governor and a Republican controlled Ohio General Assembly.
September 5, 2008
Freddic Mac's Capped Voting
Freddie Mac has just changed its capped shareholder voting bylaw that disables any shareholder from voting over 20 percent of the outstanding voting stock unless the others shareholders vote to allow it. The voting cap discouraged takeovers and thereby protected management. The cap was one reason that Freddie Mac managers were so comfortable even though they were so bad for so many years. The managers used company money to fund Congressional campaigns, gained Congressional support, and ignored poor returns on excessively risky holdings. Rumors are that the current CEO is soon to depart; his predecessors should return a large chunk of their multi-million dollar salaries.
September 4, 2008
Omnicare of "Questionable Continued Vitality"
The Omnicare case is of "questionable continued vitality" notes a new opinion from the Delaware Chancery Court. In Optima v WCI Steel, the Chancery Court refused to apply Omnicare to block a deal between Severstal and WCI in the face of a higher bid from Optima. The WCI union, interpreting a collective bargaining clause to give them veto power over any acquisition, sided with Severstal. The Court held that the provision, imposed by a bankruptcy court and not the board, was not a deal protection device. It also held that a requirement of a written consent vote by shareholders 24 hours after the merger was signed was not a deal protection device either but simply a ratification timing requirement. The holding that Omnicare does not require a "fiduciary out" clause after the vote to enable the target to accept other offers surprised some, but not I. The right to terminate a merger after a shareholder vote must itself be preserved in the merger agreement (See Section 251(d)) and is and always has been optional. The case is notable because of dicta on the "questionable continued vitality" of Omnicare, a decision that was poorly reasoned on its facts and has caused trouble ever since its promulgation. The Supreme Court, at some point, will have to grapple with setting sensible limits on a board's ability to bind the firm in merger negotiations.
September 3, 2008
Ryan v Lyondell "Clarification"
In denying a motion for an interlocutory appeal of, Vice Chancellor Noble, explained his early July 29th opinion denying summary judgment to the defendants in the case. The company, Lyondell Chemical, had a 102(b)(7) charter amendment in place. The Court held, in its earlier opinion, that the lack of good faith precluded reliance on the charter provision. In this opinion, Chancellor Noble explained his earlier holding saying that the defendants "may have exhibited a conscious disregard for their known fiduciary obligations." This definition of lack of good faith is in accord with the Supreme Court's language in In re Walt Disney Company Derivative Litigation (906 A.2d 27(Del.2006)). We then, in the footnotes, must suffer a tortured discussion of psychological states of mind ("two states of mind may coexist in the same person...."). Most use "conscious disregard" language to characterize recklessness, not bad faith, but no matter the new opinion brings the case back in line with Stone v Ritter and Disney. The case does show, however, the elusiveness of this branch of doctrine -- later the court notes the "slothful indifference" of the directors. This is apparently another version of "conscious disregard" of duties. What of "[not] sufficiently attentive" or "remaining passive", also later in the opinion? So do we have a new category of acts, those in which the board's decision on information presented is to acquiesce, gets special treatment? Boards must "do something" to get summary judgment protection under 102(b)(7) language.
Bartels Book Makes Classic Mistake in Logic
The left is pushing a book by Larry M. Bartels entitled "Unequal Democracy" to argue that Democrats are better for the economy than are Republicans. Bartels, a professor of political science at Princeton, is a formidable critic. He notes, among other things, that annual GDP growth under Democrats exceeded that under Republicans (2.78 percent to 1.64 percent). Alan Blinder in the NYTs uses the data to trumpet that Democrats are better for the economy (Sunday, Aug. 31th). The error: There is no relevant market index to which we can compare the data. Or to put it more succinctly -- what was the rest of the developed world doing at the time -- was the United States better or worse off than the rest of the world? Data from the IMF, for example, shows that US GDP under Bush expanded faster than the GDP of France, Japan and Italy over the same period. The annual rate of the US was 2.2 percent from 2000 to 2008, not great, but better than most other developed countries over the same period. As good economists know, you do not look at stock price of a company alone, you compare stock price of a company to an industry index to evaluate the performance of the CEO.
I recommend that in his next book he compare cities run by Democrats with those run by Republicans.
September 1, 2008
Nocera on Ichan at XO
Joe Nocera of the New York Times went after Carl Ichan's management of XO Communications in Saturday's business section. He sided with an unhappy hedge fund R2 that had invested in XO. Ichan bought control of the company when it was in bankruptcy; he bought majority control of the stock and bought 90 percent of its new debt. He became board chairman and put buddies on the board. The company has continued to struggle and Ichan has flirted with recapitalizing the company to keep it afloat. Entire Nocera: 1) Charge I: Ichan has cronies on the board. Privately- held companies and not run like public companies and do not use independent directors as monitors, they use directors as business resources and for advise. This may make them run more efficiently not less. 2) Charge 2: Ichan is conniving to get control of the XO tax loss. Since the Tax Reform Act of 1986, this game has been over. Tax loss transfers in acquisitions are now capped at modest levels in most ownership changes. 3) Charge 3: He is attempting to dilute existing shareholders without a shareholder vote (because XO is not listed). Ichan is thinking of purchasing XO preferred stock for cash. Since stock prices are very low (less than a dollar) he will dilute existing shareholders. No shareholder vote is required if the stock is authorized in the charter but under Delaware law (and the law of most states) one is advisable if the board is controlled by a dominant shareholder (which is true here). The obvious conflict of interest will empower courts to set the deal aside and courts will look for a vote of disinterested shareholders to aid in that deliberation. The affirmative vote of a majority of the independent directors, in a separate negotiating committee, is also critical to the decision. So a vote will probably be necessary to do the offering. XO shareholders minority are not without powerful remedies in such an offering and Ichan knows it; he must price the deal and structure the deal to get it though court. Nocera is the unwitting agent of a clever minority investor seeking to maximize its bargaining position on an otherwise impudent investment. No an uncommon position for the New York Times business opinion writers.