November 21, 2008
Delaware Courts and Distress Deals: A Word to the Wise
Delaware courts are now adjudicating "busted deals," deals from the top of the bubble that were overpriced but not closed until the bubble burst. Buyers looking to escape are, largely, being forced to pay damages (or even close) for attempting to walk. The next spate of deals, that the Delaware courts will face two or even three years from now, will be distress deals. Buyers, holding all the cards, will buy targets at distress prices ("It's either us or bankruptcy!") and target shareholders, when the terms of the deal set in, will complain. Delaware courts will get the cases. This means that buyers in these distress sales should be careful on how they press their advantage. A high-handed buyer (no shareholder vote, maximum deal protections, maximum termination fees) may find that two or three years down the road that their demands look very, very bad in court. A shareholder vote will not kill these deals but lack of a shareholder vote may give shareholder's a litigation hook down the road. Onerous deal protection covenants are not needed if the buyer is the only player but may look very bad in court later when a judge wonders whether the target board was panicked and did not look around enough. A word to the wise....
The Ionia Management Case: ON Its Way to the Supreme Court??
A federal appeals courts is hearing arguments in the prosecution of a Greek shipping company, Ionia Management SA, for dumping waste in the ocean. The facts are not good but the case has, by luck, presented the federal courts with an issue that they desperately need to address -- when are companies criminally liable for the criminal acts of employees. Currently we have only a 1909 ambiguous Supreme Court decision, NYC&H R.R. v US, on the issue. The Court ruled that an old act, the Elkins Act, was constitutional -- the Act provided for criminal prosecutions of corporations. Was the opinion limited to the Elkins Act or did it sanction any and all legislation on the criminal liability of corporations? The demise of Arthur Anderson and the now repealed Thomson memo at the Department of Justice are all evidence of the substantial importance of the issue. My view? It is too easy to prosecute corporations for the illegal acts of employees. Direct participation of senior corporate officials (with required criminal states of knowledge), whose actions can be imputed to the company, ought to be a requirement for company prosecutions. Negligent supervision should not subject a company to criminal penalties unless a legislature expressly so defines the offense in a statute. [corrected]
In the end, I hope the Supreme Court will get and decide the case.
November 20, 2008
Defined Benefit Plans and the Economic Crisis
The front page of the New York Times reports on a request by pension funds for Congress to modify pension funding rules for defined benefit plans. Defined benefit plans are promises by employers to pay employees on retirement a percentage of salary determined by length of service. ERISA requires that a company fund such plans with enough money in escrow to cover the promises as they become due. The stock market crash has hurt the value of securities held in escrow and the plans are now, by value, "underfunded." Companies, with little cash, must now add money to the underfunded escrows. The solution?? Beg Congress to relax the escrow requirements. Presumably when pension payments are due, and the companies cannot pay because the money in escrow is insufficient and the companies are cash poor, Congress will make the payments. In this manner we back into a government run pension system. One has to marvel at the chutzpa of this.
November 19, 2008
Paulson and Congress: High Comedy
Paulson's testimony before Congress was high comedy. Paulson was attempting to tell members of the House Financial Services Committee what they had passed in a rush in the Bailout bill now known as TARP. And Congress members were attempting to tell Paulson what they thought they had passed. Laughter is all that we have left.
Cuban's Insider Trading Defense
I do not spend every waking moment on the definition of insider trading so perhaps I am missing something here. Cuban receives confidential information on corporate business problems from the CEO and the CEO ask him to keep it confidential. Cuban gets the information and trades before the public knows. His defense? He did not agree explicitly to keep the information confidential; short of an agreement he can trade. I did not think this was a valid defense -- he is a tippee with knowledge. His refusal to agree means he knows that, on his refusal, the CEO should not be telling him anything and if the CEO does talk, the CEO's activity is, at minimum, reckless and a breach of the CEO's duty to the company and Cuban knows it. If I have missed a maverick case somewhere then I add that it should not be a valid defense.
Fannie Mae and Freddie Mac
On September 6th, federal regulators seized Fannie Mae and Freddie Mac. The Treasury promised $100 billion for preferred stock. Private investors still required hefty interest rates when asked to loan Fannie and Freddie even short term cash. So Freddie is back at Treasury asking for another $13.5 billion in cash and, quietly, explicit loan guarantees. The loan guarantees would make Fannie and Freddie, in essence, captured government agencies. These GSEs, government sponsored enterprises, when privately owned, did not work and government owned GSEs do not work. How much more tax payer money will it cost us before government learns these lessons???
November 18, 2008
Henry Paulson in the New York Times
Hank Paulson wrote his final official defense today in the editorial pages of the New York Times. It takes up one-third of the page and says -- well -- nothing that is not trite or trivial. His point - Treasury, in administering the TARP program, needs to be flexible to deal with an evolving economic crisis. He gives no attention to the counter-point that unpredictable government action adds to the instability in the financial markets as players cannot price what the government will do. Or to the counter-point that people will play the government (rent-seeking behavior). [Note that insurance companies are buying small banks, something they would never do normally, to argue for government bailout money.]
When Do Managers Get Real?
A good litigator knows that things to clients look very, very different when they are in trial. During a dispute but before trial clients (and their lawyers) can spin and rationalize, moralize and condemn, but once they get in front of a judge things get very, very --- well -- real. Once through the process, educated clients get real in anticipation of being before a judge; inexperience clients still need to test the fire at least once.
How do we get managers of failing companies to get real? To tell the truth? To Make the Hard Decisions? Managers in the news in charge of struggling companies spin and rationalize until -- bankruptcy is staring them in the face. Moreover, most managers are "good time Charlie's" -- they have never been through a bankruptcy or been associated closely with a management failure. Jim Cramer has them on his show; they spin: and he throws darts at their pictures when their stock tanks.
Bankruptcy forces managers to get real. If we short circuit bankruptcy with government bailouts or some other form of legislated relief we short circuit the equivalent of trial for disputes -- managers will never get real.
November 17, 2008
Gov. Strickland and the DHL Fiasco
The last card had dropped in the DHL saga in Wilmington Ohio and Gov. Strickland is finally facing up to reality -- too late and after thoroughly sullying the state's reputation in its effort to attract new businesses.
Here is a short history. In 2003 DHL, a company owned by Deutsch Post, purchased the ground fleet and the Wilmington airport owned by Airborne Express. Legal challenges by competitors, FedEx and UPS prohibited DHL from purchasing the air freight part of Airborne Express. By law a foreign owned company cannot buy a domestic air freight operation, so the air freight operation of Airborne, ABX Air, had to be spun off to Airborne Express shareholders. DHL could not fly it's own domestic packages. This proved to be a major competitive disadvantage for a new freight service trying to break into a market with three established competitors. The three major competitors of DHL in its domestic business were the US Postal Service, FedEx and UPS, each of which was fully integrated and could fly their own packages. Instead of helping DHL integrate, democrats, including Sen. Brown, pushed the ban. DHL could not turn a profit on its domestic operations, it lost $1.5 billion last year. Seeking to reduce costs it signed a contract with UPS in 2008 to do its domestic freight operations; DHL would continue to truck and sort. The contract moved the center of DHL sorting to Kentucky and eliminated the use of ABX Air planes and pilots in its operations. The job loss in Wilmington was severe, 7,000 jobs would go. Democrats tried to blame McCain for the losses, his aid helped broker the 2003 deal (the charge was a joke).
Governor Strickland screamed bloody murder on the 2008 announcement and threatened DHL with a state and federal anti-trust lawsuits. The state even hired a private attorney to sue. The lawsuits were a joke. How could you force a company to lose money??? The Governor did two very harmful things: 1) He misled Wilmington people into believing that they had a chance to save the old way of doing business. This delayed the inevitable necessary damage control in the area. 2) He sent a message to all businesses that Ohio was a "roach motel" state-- once in you cannot get out or change much for that matter.
DHL finally threw in the towel, announcing the end of all domestic air freight service. It would only deliver international packages and UPS would provide the last leg of its international air freight service. The antitrust claims are still in the air but do not meet the red face test now. We now have only three domestic air freight services and Wilmington is no longer a significant player in the market. Wilmington is attempting to cope but a reputation for treating international air freight businesses so badly cannot help it efforts.
The National City Scandal
In the spring, government regulators reached a "memorandum of understanding" with the management of National City Bank, a top ten national bank based in Cleveland since 1845. The shareholders were not told. the stock was trading in the thirties. In September, National City Bank was the only one of the top 25 largest banks that did not receive bailout money. Shareholder did not know until rumors surfaced. A competitor, PNC Financial Services received $7.7 billion and used the cash to offer to buy National City. The price on October 24th was $2.23 a share, down severely from Friday's closing price of $2.75. Why the discount? National City's risky loans had dropped 200 percent in value in three days showing and additional $7 billion in losses. Shareholders did not know. The PBC price was $5.6 billion and we now know that it will be offset by a $5 billion tax deduction available to PNC from a Treasury "notice." PNC is buying a top ten bank with $100 billion in deposits for next to nothing. Shareholder now know. They have lost big. This is a scandal. There was totally opaque disclosure and the government regulators knew it. Prosecutors will be very, very busy with all the new financial disclosure cases; I hope they can make room for this one.