Friday, July 15, 2011
Just a short post to give the other side to Brian's warning. As this post notes, the debt ceiling was breached for 6 months in 1996, and there was no resulting catastrophe. "In fact, the second half of the ’90s, as we are constantly reminded, produced record growth in jobs and GDP."
Over at The Deal Journal, there is a slightly disturbing post that observes a late rush of deal making activity. Could it be people are rushing to get deals through the door while borrowing costs are still low? By that I mean, are smart deal makers looking at the nonsense going on in DC and figuring out that borrowing costs on August 3 are going to be through the roof, so best to push deals through and lock in financing right now?
OK, this blog is decidedly apolitical. If you want commentary on the state of the presidential contests or the political horse-race, you will quite rigthly go someplace. Afterall, what do I know about any of that stuff? (Uh...nothing.) In any event, I do know this if the debt ceiling isn't raised (grand-bargain, mini- bargain, no bargain, whatever), then we will have pushed ourselves over a cliff of our own making. Borrowing costs for the private sector - strategic buyers, private equity buyers, etc will all go through the roof - and deal making will come to an abrupt and complete end.
In which case, there will be a whole lot less work for deal lawyers and all those new grads who will have just completed the bar exam will find their positions at firms deferred, or worse. It will be a total nightmare.
OK, off my soap-box, but don't say I didn't warn you.
Thursday, July 14, 2011
Wednesday, July 13, 2011
After my recent post on Oklahoma's bid to change its corporate law to require staggered boards of all publicly-traded OK corporations, a well-informed reader confirmed for me why I will always remain a cyncic at heart. The state of state competition for corporate law and incorporations is ... well ... non-existent. You see, Massachusetts has a provision similar to the OK provision on its books. It's been on the books since 1990. How the amendment came about is instructive.
In March of 1990, a British firm, BTR PLC launched a $75/share hostile tender offer for Norton Co., a Worcester, MA based manufacturer of abrasives and plastics. Norton was a publicly-traded MA company that employed over 2,500 employees in central MA. Following the announcement of the hostile offer to acquire Norton, employees and managers staged protests against the offer and made their voices heard to the state lawmakers. The NY Times described the scene:
While BTR's chairman and chief executive, John C. Cahill, met with Mayor Jordan Levy of Worchester and other local officials, about 1,200 Norton employees and supporters demonstrated outside City Hall, where they burned the Union Jack.
Flag burnings and protests.
On March 27, 1990, members of the Worcester delegation to Beacon Hill proposed a bill to amend the MA corporate code. The amendment would require that publicly-traded firms incorporated in MA have staggered boards unless they opt out in their charters. The requirement that Norton have a staggered board would slow down BTR's ability to take control of Norton.
On April 13, 1990, BTR annoucned that 64% of Norton stock had been tendered in the offer and that it expected to be able to take control of the corporation at the next annual meeting scheduled for April 26, 1990.
On April 17, 1990, the MA legislature - both houses - passed the amendment to the corporate code requiring staggered boards. On April 18, 1990, Gov. Dukakis went to Norton's No. 7 Plant in Worcester, MA and signed the "Norton Bill" into law. According to the Worcester Telegram Michael S. Dukakis noted the bill was signed on the 215th anniversary of Paul Revere's famous ride to warn of a coming British invasion. Xenophobic much?
On the same day Norton filed a lawsuit to block the tender offer and proxy contest while it pursued a white knight. More than 100 Congressmen signed a letter to President George H.W. Bush asking him to block BTR's hostile takeover on national security grounds on April 19, 1990.
Anyway, by this point, Norton had the benefit of the "Norton Bill" staggered board, and MA's version of DGCL 203. It could have hung on for a while, but managers went out and found a white knight - Compagnie de Saint-Gobain - to acquire Norton for $90/share. A French company. Sheesh.
At $90/share suddenly, there were no employees protesting - no burning of the tri-colour. There were no desperate legislators passing bills. No reminders of the French and Indian Wars. There was no worrying about national security and foreigners invading central Mass.
Anyway, all of this just reinforces what has seemed evident to me for a long time. Most states don't pay much attention to the substance of their own corporate law. They can't be bothered. However, when managers at important locally-incorporated firms have interests at stake, legislators respond quickly and sometimes without much thought to the bigger policy questions about races this way or that. Such is the state of state competition.
Tuesday, July 12, 2011
The ongoing collapse of the Murdoch enterprise is almost as fascinating to watch as that unforced error going on in DC right now. It's also found its way into an ongoing challenge to News Corp's acquisition of Shine from earlier in the Spring. Plaintiffs have now amended their complaint (here) ( News Corp-Shine-Amended Complaint - helpfully red-lined for your reading pleasure) to include additional claims against the board for violations of fiduciary duty related to its running of News Corp while closing its eyes to what appears to have been a pattern of law breaking in its news gathering operations. From the amended complaint:
The most recently revealed manifestation of the Board’s utter capitulation to the control and domination of Murdoch is their complete failure to oversee the news gathering practices carried out under the watch of Murdoch’s close friends, confidantes, and staunch supporters, Rebekah Brooks and Andy Coulson, both of whom served as the chief editors of News Of The World, News Corp’s premier UK newspaper. ... The Board failed in its duty to investigate this egregious conduct in the face of red flags, for to do so would have required Defendants to be objective, critical, and non-biased, which they are incapable of being, given Murdoch’s control over all of the Board’s affairs.
Recent revelations have demonstrated that, over the past decade, both junior and very senior employees at the British tabloid the News of the World and its sister newspaper the Sun were engaged in a massive scheme to intercept voicemail and other forms of electronic communication in order to obtain stories for the papers.
News Corp’s Board should have learned that reporters from News of the World were using illegal means to gather news during Brooks’ tenure as chief editor of News of the World from 2000 to 2003. Given Murdoch’s close personal and professional relationship with Brooks, described more fully below, and the fact that Brooks herself was fully aware of and even involved in this conduct, it is inconceivable that he and his fellow Board members would not have been aware of the manner in which Brooks ran News of the World and, later, the Sun.
News Corp’s Board received (or should have received) its next red flag when, in 2005, Prince William’s staff notified authorities that William’s phone had been hacked. The Prince’s aides noticed that voicemails to which they had never listened were showing up as “saved” messages in William’s inbox. At the same time, News of the World was running a series of articles that reported startlingly intimate details of the Prince’s life. Indeed, one News of the World article quoted verbatim a hacked voicemail in which William imitated Prince Harry’s girlfriend. ...
The magnitude of the problem must have been apparent to the Board as far back as 2009. The Guardian reported on July 8, 2009 that “27 different journalists from the News of the World and four from the Sun” made more than 1,000 requests to private investigators to secure wiretaps, phone records, or otherwise illegally obtain personal and confidential information. According to The Guardian, “These purchases were not secret within the News of the World office: they were openly paid for by the accounts department with invoices that itemised [sic] illegal acts” (emphasis added). Moreover, evidence seized in connection with the 2006 Goodman investigation reveals that “several thousand public figures” were targets of News International’s illegal newsgathering practices, including, during a single month in 2006: then-deputy prime minister John Prescott; Tessa Jowell, a government official then responsible for regulating the media; Gwyneth Paltrow; George Michael; and Jade Goody.
Goodness. And it goes on ...
Of course, the chancery court has made it clear on numerous occassions that boards may not sanction violations of the law and still comport with their duty of loyalty to the corporation. If it's true that the board knew - or closed its eyes to the fact that - there was wide-spread illegal activity going on at News Corp's operations - or that indeed illegal activity was at the center of News Corp's ability to get scoops and therefore make profits, then this case has just taken a turn for the very worse for News Corp's directors.
I guess, the directors could go for broke and make an argument hinted at in Massey: "You shareholders knew just as much as we did that we were breaking the law and you invested anyway - so you get nothing!" Remember in that case, Vice Chancellor Strine was not all that sympathetic to arguments that shareholders were victims of a board that sanctioned egregious violations of the law. Here, I suppose the shareholders will argue that the pattern of law breaking is as much a shock to them as it was to everyone else.
In any event, this case has just moved from being an interesting entire fairness claim destined to end up on the heap to a fascinating soap opera where plaintiffs have a shot.
Update: Hey, when it rains, it pours... It turns out that US-based News Corp doesn't even have to pay taxes! A negative effective tax rate. Excellent. From Reuters:
Over the past four years Murdoch's U.S.-based News Corp. has made money on income taxes. Having earned $10.4 billion in profits, News Corp. would have been expected to pay $3.6 billion at the 35 percent corporate tax rate. Instead, it actually collected $4.8 billion in income tax refunds, all or nearly all from the U.S. government.
he relevant figure is the cash paid tax rate. This is the net amount of corporate income taxes actually paid after refunds. For those four years, it was minus 46 percent, disclosure statements show.
Even on an accounting basis, which measures taxes incurred but often not actually paid for years, News Corp. had a tax rate of under 20 percent, little more than half the 35 percent statutory rate, company disclosures examined by Reuters show. News Corp. had no comment.
Oh yeah, and now News Corp's proposed acquisition of BSkyB is teetering on the edge.
Monday, July 11, 2011
Sorry for the paucity of posts...it's the summer and I'm working under editor deadlines. That said, I thought I'd point out an article in today's WSJ about a pending change in the Oklahoma corporate law. Oklahoma is amending its corporate law to require publicly-traded OK firms have classified boards. At first glance, that's a little bit surprising. The new law freezes in place a core component of the pill/staggered board defense. The recent trend in corporate governance has been to de-stagger boards not stagger them. The WSJ article reports ISS data noting that in 2005 53% of the S&P 500 had staggered boards, while only 31% of them presently have them.
What this amendment points out is the real nature of the current competition amongst the states for incorporations. And that is there isn't any. This isn't the early 20th century anymore. As Rob Daines pointed out in a paper (Incorporation Choices of IPO Firms) a few years ago, at IPO firms will incorporate in their home state or in Delaware. That's not much competition. For the most part, all the states have adopted basically the same corporate statute. What sets Delaware apart from most states is the massive legal infrastructure that has grown up around the corporate law in that state. Clearly, Delaware is interested in preserving that massive advantage in the incorporation business and will be aggressive in defending its position - though it's real competition is the Feds and not any state.
To be fair to Delaware, they have so many firms incorporated there - and few with any real contacts to the state - that they can more or less disspationately decide cases and the content of the law without regard to particular corporations. If GE has an opinion on a provision of the Delaware corporate law, unless it's also an opinion widely held by other firms, it's not likely to generate a lot of traction. This is not necessarily so in other states - towit Oklahoma.
Turns out one of the biggest publicly-traded firms incorporated in Oklahoma is Chesapeake Energy Corp. Chesapeake has been a target of corporate governance types and those who are outraged over CEO pay for some time now. How about this Motley Fool report from their most recent shareholder meeting:
[Shareholders] showed disdain for what they considered to be excessive compensation approved by the company's board for its Chairman and CEO Aubrey McClendon. As a result, with the well-known proxy advisor International Shareholder Services urging that he be removed from the board, McClendon garnered about 78% of the votes, compared to the 96% he captured when he last ran in 2008. Separately, about 58% of the shareholders cast a nonbinding vote for Chesapeake's pay plan.
Of course, Chesapeake already has a staggered board. But, if the voices of corporate governance types get too loud, it might face the prospect of having to destagger its board and that would be ... inconvenient. Now, the Oklahoma state legislature is in the process of taking away this threat. By adopting an amendment to the corporate law that will require firms like Chesapeake to maintain staggered boards, it will make it impossible for shareholders to push an amendment to remove the structure.
And that's the problem with the current state of competition amongst the states for incorporations. When states think about their corporate codes, more often than not, they are amending them in response to particular lobbying efforts by management - for example Michigan covered itself in glory last year when it adopted a defensive provision in its statute to help out a Michigan insurer. These aren't efforts to compete on policy, rather they are more like special interest legislation. Why else would the Oklahoma legislature take up this issue of staggered boards? I mean, is requiring staggered boards in your publicly-traded firms really front-and-center on anyone's agenda these days?
If that's the state of competition for incorporations, I'm happy staying in Delaware.