One of the casualties of the 2009 bailouts is United States bankruptcy law in Chapter 11. Chapter 11 provides a complex procedure for the reorganization of bankrupt companies. Once reorganized, the companies emerge as continuing operating businesses. An emergency short-circuit of the reorganization procedures is contained in section 363 of the Chapter. The section permits a bankruptcy judge to approve the sale of the company (or a major part of the company) to an outside bidder, with the proceeds of the sale distributed to claimants in a Chapter 7 style liquidation distribution. The government used the section in both auto bailouts, to sell Chrysler to itself, Fiat and the unions and to sell GM to itself, Canada, the unions and the secured creditors. In the Chapter 11 for Lehman Brothers, Barclay bought Leman’s United States broker-dealer subsidiary in a 363 sale. The risk, of course, it that a 363 sale, made in a rush, can under-value company assets. In a huge suit over the Lehman Brothers sale to Barclays, what is left of Lehman is now arguing exactly that — that Barclays got a steal, literally. The year following the Lehman sale, Barclays booked a $4.2 billion gain on the deal, a deal that was supposed to be a “wash” of assets and liabilities. The eventual outcome of the case will be notable not only on the facts of the deal but also on whether 363 sales should be so widely used in distress situations involving major american companies.
Harvard MBA students created an Oath and induced more than 4,000 people in 300 business schools to sign it. It was a crock: Each signers promises ” to act with utmost integrity…[and] will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.” The problem is obvious. How does the oath fit in with the shareholder primacy principle that shapes the fiduciary obligation of corporate managers in the United States? The principle has legal sting and a strong ethical basis as well, all apparently unknown to Harvard students. Well…. the drafters of this feel good nonsence have quietly changed the language to omit “co-workers” and “society,” major changes and all unexplained. Do Harvard students no longer care about society and workers? I hear that the language has quietly “evolved.” You bet, it was simplistic and embarrassing for Harvard students to be peddling in the first place and they have 4,000 sucker signers.
One could be excused from thinking a few years ago that fraudulent transfer attacks on LBOs had all but gone the way of the dinosaur. The use of “solvency opinions” by reputable analysts to support the deal price and the strong incentive of the LBO buyer group to insure the solvency of the surviving entity would seem to protect deals from fraudulent transfers attacks when a company deal does fail after an LBO deal. Now we hear that such a claim has surfaced in the Tribune Company Chapter 11 proceeding. A special examiner’s report concludes that there is evidence for concluding that the second stage of the buyout is vulnerable to a fraudulent tranfer claim. The buyout itself was wacky. Sam Zell concocted an Employee Stock Ownership Plan buyer, threw in a bit of cash, and took a 15 year option on 40% of the company. The deal was a stretch from the start and the employees in the ESOP should have rejected it. In any event, if the claim prevails, the company in bankruptcy will clawback the cash paid to the previous owners, including Chandler family. The case signals a rebirth for the previously discredited fraudulent transfer allegation in LBOs.
A corporate governance database, FactSetSharkRepellent, has reported that less than 20 percent of the companies in the S&P 500 have poison pill plans in place to slow down takeovers. Over 60 percent of the companies had such plans in place in 2002. Moreover, the number of companies with staggered terms for directors has fallen by half in just the last eight years. Are takeover defenses passe? No. Target boards threaten by an unwanted bidder can put poison pill plans in place in a moments notice if need be. Moreover, the variety of poison pill plans has mulitpied; they can be inserted not only into stock contracts but also into labor, debt and supplier contracts. The staggered board change is real, however. A new board can revoke an old poison pill plan. Without a staggered board, a bidder can seek control of the board in a single proxy solitication contest. At most this takes a year. With a staggered board, a bidder must win two contests, often taking two years. The prospect of the second contest is a significant deterrent to bidders and their financial backers. The investor market has apparently decided that poison pills backed by staggered boards are too powerful a disincentive to takeovers and that the threat of poison pill plans alone are optimal, giving target boards just enough bargaining power to extract a higher price from a bidder but not enough power to block or deter entirely a wealth enhancing bid.