Tuesday, April 29, 2008
The New York Times today has two pieces relevant to the question of market reform. First, an Op-Ed piece, "Muzzling the Watchdog," by three former SEC Chairs, Arthur Levitt, William Donaldson, and David Ruder, warns against a regulatory approach that would turn the SEC, in its words, "from a market referee into an industry coach -- a regulator that is heavy on forgiveness and light on punishment." It calls for a thorough study of the causes of the current market crisis. Perhaps predictably, the piece concludes by saying that the problem with the SEC today is lack of adequate funding to allow the agency to perform its job as law enforcement agency and investors' advocate.
Andrew Ross Sorkin's column, Junk Bonds, Mortgages and Milken, is a response to recent assertions that Michael Milken, and specifically the creation of junk bonds, is to blame for the recent credit crisis. While I agree that blaming Milken is classic passing-the-buck, what caught my attention are the following two sentences:
Toward the end of every bubble, people misuse the financial tools at their disposal, and then a witch hunt begins for the villain. Then, of course, the regulators jump in and try to fix things — and often go a bit overboard. (emphasis added)
Huh? In fact, the response to this crisis, to date, has been quite the opposite. Treasury Secretary Paulson's Blueprint, as the former SEC Chairs point out, is more deregulatory than otherwise, and even if anyone in this current administration thought beefing up the SEC's budget was a good idea, it's hard to see where the money would come from. Moreover, despite the inspirational words from the former SEC Chairs, the current SEC seems, to this outside observer, to lack the energy and the will to be a true Investors' Advocate.
Two large Circuit City shareholders have called upon the company to allow Blockbuster to conduct due diligence. To date Circuit City has refused, saying that it did not believe that Blockbuster had the finances for the deal. HBK Investments, a hedge fund that is a large investor in both companies, says that Circuit City should conduct an auction for its sale. WSJ, Circuit City Gets Pressure From Big Investor for a Deal.
Mars' acquisition of Wrigley for $23 billion cash($80 per share, or a 28% premium)will create a huge privately owned company with many of the iconic brands in the candy and gum business (along with pet food and Uncle Ben's rice). While the deal surprised Wall St., Mars reportedly had its eye on Wrigley for some time. Wrigley has been a public company since 1923; the Wrigley family controls two-thirds of the supervoting shares, although Bill Jr. is the only family member active in the business. Warren Buffett's Berkskhire Hathaway is providing $4.4 billion in loans to finance the deal. The Wall St. Journal has a complete history of both companies. WSJ, Mars's Takeover of Wrigley Creates Global Powerhouse; NYTimes, Mars Offers $23 Billion Cash for Wrigley.
Monday, April 28, 2008
The SEC settled insider trading claims against Edward O. Boshell, an outside disinterested director of a Dallas-based business development company (BDC), and Donald J. Pochopien, a shareholder of a Chicago-based law firm. The SEC alleged that Boshell and Pochopien engaged in unlawful insider trading in the securities of Laserscope in advance of a public announcement on June 5, 2006 that Laserscope would be acquired by American Medical Systems Holding, Inc. (American Medical). The SEC alleges that Boshell was made aware of the acquisition during a routine board meeting of the Dallas-based BDC approximately a month before the public announcement. The Commission alleges that Pochopien was made aware of the acquisition approximately a month before the public announcement when his law firm was hired by American Medical to conduct a due diligence review of the Laserscope acquisition.
Whole Foods Market said that the SEC ended its probe into blog postings by CEO John Mackey without recommending any action. Last July Mackey's postings, some of which denigrated its merger partner Wild Oats, under an assumed name received a great deal of attention. A special committee of the Whole Foods board conducted an investigation last fall and affirmed its support for management. CFO.com, Whole Foods "Blogging" Probe Dropped by SEC.
Linda Chatman Thomsen, Director, Division of Enforcement, SEC, spoke before the Minority Corporate Counsel 2008 CLE Expo, in Chicago, Illinois, on March 27, 2008, on lawyers' liability in general and in particular with respect to the FCPA.
Kirk Kerkorian's Tracinda bid $8.50 for up to 20 million shares of Ford, a 13% premium over its closing price on Friday. The shares represent about 1% of Ford's outstanding. Tracinda currently owns about 4.7%. Nasdaq, Tracinda Bids $8.50 A Share For 20 Million Ford Shares.
Carly Fiorina, the former "rock-star" Hewlett-Packard CEO, now Victory Chairman of John McCain's campaign, is being mentioned as a possible VP candidate. WSJ, Ex-CEO Fiorina Seems Comfortable Following McCain's Lead.
Saturday was the deadline Microsoft gave Yahoo to agree to a deal. Now Microsoft must decide whether to back away or go forward with a hostile tender offer and proxy contest as Steve Ballmer stated several weeks ago. Many of Microsoft's own executives, however, are said to oppose the deal as diverting resources from other projects. WSJ, Microsoft Confronts Tough Choice on Yahoo.
Mars, privately owned by the Mars family (M&M's, Mars, Snickers) reportedly has struck a deal to acquire the Wm. Wrigley Jr. Co. (chewing gum, Lifesavers, Altoids) for approximately $22 billion. Warren Buffett's Berkshire Hathaway will provide Mars with financing. Wrigley's market value on Friday was $17.3 billion. Mars is the world's largest maker of chocolate by sales. NYTimes, Candy Maker Reported Near Deal for Chewing Gum Giant; WSJ, Mars, Buffett Team Up in Wrigley Bid.
Sunday, April 27, 2008
Twenty Years after Smith v. Van Gorkom: An Essay on the Limits of Civil Liability of Corporate Directors and the Role of Shareholder Inspection Rights, by LAWRENCE A. HAMERMESH, Widener University School of Law, was recently posted on SSRN. Here is the abstract:
With director monetary liability for lack of care (appropriately, in the author`s view) fading or disappearing altogether since Smith v. Van Gorkom, litigation invoking the duty of care seems increasingly unlikely to serve as a vehicle for public scrutiny of, and reputational sanctions for, director conduct that is substandard but does not involve self-interest or lack of good faith. It is therefore increasingly important to examine when information obtained through the exercise of stockholder inspection rights can be made public. A recent case involving the Walt Disney Company - but not the well-known litigation involving Michael Ovitz' termination compensation - addresses the issue of confidential treatment of such information. Prompted by the Court of Chancery's treatment of the issue, this Article proposes that the courts review and balance a number of factors - the subject matter of the information, the level of public interest in the information, the motives of the stockholder in seeking the information and (perhaps) ultimately seeking to make it public, and the context in which the information was generated - to determine whether information afforded pursuant to stockholder inspection rights should remain confidential.
An Eliot Effect? Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7, by ERIC ZITZEWITZ, Dartmouth College, was recently posted on SSRN. Here is the abstract:
This paper examines the negotiated settlements of 20 market timing and late trading cases, comparing the restitution obtained for shareholders with an estimate of shareholder dilution. This restitution ratio varies from 0.04 to 5, or from 0.1 to 10 if penalties are included. While some of this variation is explained by differences in the defendants' conduct, controlling for this, settlement negotiations that involved New York as well as the Security and Exchange Commission (SEC) resulted in restitution ratios that were higher by a factor of 5-10. An analysis that uses the firms' headquarters location and customers' state of residence as an instrument for New York's involvement suggests that this difference is causal, and not the result of New York involving itself in cases likely to lead to large settlements. Given the much larger staff and institutional expertise of the SEC, it is likely that these differences in outcomes are due to differences in aggressiveness, not prosecutorial resources. Differences in aggressiveness are consistent with popular conceptions of the regulators' career concerns, as well as with theories of industry focus and regulatory capture.
The Corporate Governance and Public Policy Implications of Activist Distressed Debt Investing, by MICHELLE M. HARNER, University of Nebraska College of Law, was recently posted on SSRN. Here is the abstract:
Activist institutional investors traditionally have invested in a company's equity to try to influence change at the company. Some of these investors, however, are now purchasing a company's debt for this same purpose. They may seek to change a company's management and board personnel, operational strategies, asset holdings or capital structure.
The chapter 11 bankruptcy cases of Allied Holdings, Inc. and its affiliates exemplify the strategies of activist distressed debt investors. In the Allied cases, Yucaipa Companies, a distressed debt investor, purchased approximately 66% of Allied's outstanding general unsecured bond debt. Yucaipa used this debt position to exert significant influence over Allied's chapter 11 cases and business operations, including its labor contract with the Teamsters. Yucaipa emerged as Allied's majority shareholder under Allied's confirmed plan of reorganization.
Allied is not an isolated example. In 2006, distressed debt investors raised a record $19 billion in investment funds. The research shows that some investors are using these investment funds for activist purposes. Indeed, activist distressed debt investing is on the rise in both the United States and the United Kingdom. This activism is changing the dynamics of corporate restructurings and presenting new challenges for corporate management and public policymakers.
Who Killed Katie Couric? And Other Tales from the World of Executive Compensation Reform, by KENNETH M. ROSEN, University of Alabama - School of Law, was recently posted on SSRN. Here is the abstract:
With average Americans perturbed about executive pay, government officials are taking action. Officials appear to be racing against each other to battle corporate excess. The U.S. Securities and Exchange Commission (SEC) engaged in major rulemaking related to the disclosure of executive compensation, and Congress quickly considered executive compensation legislation. More reform, however, is not always better. Concurrent reform by multiple regulators presents perils.
This Article adds to the dialogue about scandal-driven reform. While much discussion exists about the advisability of particular reforms, the focus here is on the process of reform. The Article conducts a comparative analysis of the SEC and House of Representatives' reform processes, which reveals that different policy-making processes may be more or less likely to yield positive reforms. The Article argues that promoting distinct, more delineated roles for certain public actors could improve synergies between regulatory reform efforts.
Part I explores how the SEC's response to the public notice and comment process for its compensation disclosure rulemaking shows how administrative agencies properly can tailor regulation in a deliberative fashion. Part II then provides the contrasting story of the House's passage of H.R. 1257 that illustrates the pitfalls of scandal-driven reform. Unfortunately, the House's actions followed disturbing trends in mandating content for SEC regulation and in failing to account adequately for synergies between concurrent regulatory efforts.
Part III concludes by suggesting a framework identifying when congressional action on business regulation seems most appropriate given concurrent regulatory efforts. The Article identifies Congress's important potential role in settling authority issues, providing oversight to administrative agency reforms, and being prepared to intervene when agencies are recalcitrant about enacting necessary rule changes. In offering this framework, the Article moves beyond executive compensation issues to see how Congress might deal with other crises of confidence in business regulation. Areas for potential application of the framework include the regulation of hedge funds, imported toys and other consumer products, proxy voting, and subprime lending.