We have all become rather accustomed to the fact that executives of a company are often compensated for their services in part by equity in the corporation -- or, in the alternative, by options to buy equity.
Not only does this seem normal, there is a superficially plausible case to be made that it aligns incentives properly. A CEO with stock in the company has "skin in the game," as the saying goes.
There are two sides to that, though. As Roger Lowenstein wrote in ORIGINS OF THE CRASH (2004), "For an incentive to functiom properly, there must be a prospect of pain as well as gain" and the the 1990s dotcom bubble with which Lowenstein was concerned in that book, the very possibility of CEO pain was "trivialized."
Another common complaint about reimbursement through equity is that if executives see themselves as equity holders, they have an incentive to shift wealth away from debt holders, toward themselves and their fellow stockholders. How might they do this? By over-paying dividends, most obviously. If a company is in trouble (in the "zone of insolvency" as lawyers sometimes say, although not across that line yet) and it pays its shareholders a generous dividend anyway, then the company is essentially making sure the shareholders get cash while the 'gettin' is good.' That cash will never be available to pay off the bondholders should the company default and either voluntarily file bankruptcy or be pushed in that direction by debtor action.
So: if executives are compensated in stock, they may have a commonality of interests with their fellow shareholders, but this may express itself not in productive dcisions, but in beggaring other stakeholder groups.
What, then, about compensation in bonds? Perhaps a CEO who really wants to show us that he has skin in the game will load up on debt instruments issued by his company. Here is the recent discussion of that point that has gotten me thinking.
Showing posts with label shareholders. Show all posts
Showing posts with label shareholders. Show all posts
Tuesday, August 17, 2010
Wednesday, April 8, 2009
Delaware Supreme Court news
In an important decision last month, the Delaware Supreme Court rejected post-merger
stockholder claims that directors failed to act in good faith in selling the company.
Delaware, unfortunately, is living down to its reputation as an entrenched management's favorite state, and this decision -- Lyondell Chemical v. Ryan -- will compound that.
The decision, written by Justice Berger, rejects attempts to impose personal liabiolity on directors EVEN on the assumption that they did nothing to prepare for an imnpending offer and upon receiving the offer entered into a merger agreement with a no-shop provision and a 3.2% break-up fee.
Lyondell had moved for summary judgment in the Court of Chancery. That court had refused to grant summary judgment, setting the stage for a trial. But the state's highest court has now short-circuitesd any trial, holding that "the directors are entitled to the entry of summary judgment."
This is precisely the sort of decision that ticks me off, and that has me convinced there has to be a serious shareholder-rights movement, which would among other goals put pressure upon managements to incorporate in places other than Delaware. For the record, you can find the decision yourself here.
stockholder claims that directors failed to act in good faith in selling the company.
Delaware, unfortunately, is living down to its reputation as an entrenched management's favorite state, and this decision -- Lyondell Chemical v. Ryan -- will compound that.
The decision, written by Justice Berger, rejects attempts to impose personal liabiolity on directors EVEN on the assumption that they did nothing to prepare for an imnpending offer and upon receiving the offer entered into a merger agreement with a no-shop provision and a 3.2% break-up fee.
Lyondell had moved for summary judgment in the Court of Chancery. That court had refused to grant summary judgment, setting the stage for a trial. But the state's highest court has now short-circuitesd any trial, holding that "the directors are entitled to the entry of summary judgment."
This is precisely the sort of decision that ticks me off, and that has me convinced there has to be a serious shareholder-rights movement, which would among other goals put pressure upon managements to incorporate in places other than Delaware. For the record, you can find the decision yourself here.
Monday, March 30, 2009
Marks & Spencer
Marks & Spencer, the big Brit retailer, (clothing, food, furniture, etc.) holds its annual shareholders meeting in July.
The key thing to know about M&S in the run-up to that meeting is that its chief executive, Stuart Ross, is also the chairman of the board.
The idea of one person holding both of those titles is customary enough in the United States, but unusual in the Mother Country, and that is what one of the institutional shareholders of M&S is challenging.
In fact, at last year's meeting, 22% of investors voted against Ross as chairman, an extraordinary degree of shareholder rebellion.
The Local Authority Pension Fund Forum, which claims to control more than 1% of M&S equity, said today that it is offering a resolution at this year's meeting to appoint an independent chairman by July 2010. Such a resolution would need the support of 75% of M&S shares to pass.
This sounds a bit quixotic but .... hey, who am I to deny the appeal of the knight of doleful countenance.
“The separation of powers at the head of a company is a fundamental governance principle, and one that is accepted by the rest of the market,” said the LAPFF Chairman in a statement.
The key thing to know about M&S in the run-up to that meeting is that its chief executive, Stuart Ross, is also the chairman of the board.
The idea of one person holding both of those titles is customary enough in the United States, but unusual in the Mother Country, and that is what one of the institutional shareholders of M&S is challenging.
In fact, at last year's meeting, 22% of investors voted against Ross as chairman, an extraordinary degree of shareholder rebellion.
The Local Authority Pension Fund Forum, which claims to control more than 1% of M&S equity, said today that it is offering a resolution at this year's meeting to appoint an independent chairman by July 2010. Such a resolution would need the support of 75% of M&S shares to pass.
This sounds a bit quixotic but .... hey, who am I to deny the appeal of the knight of doleful countenance.
“The separation of powers at the head of a company is a fundamental governance principle, and one that is accepted by the rest of the market,” said the LAPFF Chairman in a statement.
Sunday, August 31, 2008
Joyce v. Morgan Stanley
I'm not sure whether this case is important in the big scheme of things, so I'll try to think it through here. If any one out there has commentary, I'd be happy to hear it.
Joyce v. Morgan Stanley is a decision of the 7th circuit court of appeals, issued August 19, that arose out of a merger of two telecomm firms in 1999.
The decision itself is available through the website of Wachtell Lipton.
Morgan Stanley was the financial adviser to one of the firms involved in the merger, the target company. Stockholders in the corporation it was advising brought this lawsuit, alleging that MS didn't warn them how to minimize their exposure to a decline in the value of the counterparty's stock's price.
On the plaintiff's theory, MS had a fiduciary responsibility to the shareholders in the target corp., and it breached that because of a prior conflict-generating relationship with the acquirer.
At first blush, then, the shareholders' claim is of the sort usually characterized as a "shareholders derivative" lawsuit. The district court certainly thought so. It dismissed the case on the ground that the plaintiffs had failed to follow the proper procedures for bringing a derivative claim. Thus, they were dismissed at the district court level for lack of standing.
The appellate court made things more complicated. It said this ISN'T a derivative lawsuit, because it wasn't a decline in share price per se that constitutes the harm alleged by a failure to hedge against such a decline. So the district court was wrong to use the standing argument.
But, the appellate court continued, Morgan Stanley didn't have any duty to warn the shareholders that they should hedge, so the question of whether it had any "conflict" with that alleged duty doesn't arise, and the district court was right to dismiss the case anyway.
As I indicated above, I'm not sure whether this is important. In fact my head hurts just thinking about it.
Joyce v. Morgan Stanley is a decision of the 7th circuit court of appeals, issued August 19, that arose out of a merger of two telecomm firms in 1999.
The decision itself is available through the website of Wachtell Lipton.
Morgan Stanley was the financial adviser to one of the firms involved in the merger, the target company. Stockholders in the corporation it was advising brought this lawsuit, alleging that MS didn't warn them how to minimize their exposure to a decline in the value of the counterparty's stock's price.
On the plaintiff's theory, MS had a fiduciary responsibility to the shareholders in the target corp., and it breached that because of a prior conflict-generating relationship with the acquirer.
At first blush, then, the shareholders' claim is of the sort usually characterized as a "shareholders derivative" lawsuit. The district court certainly thought so. It dismissed the case on the ground that the plaintiffs had failed to follow the proper procedures for bringing a derivative claim. Thus, they were dismissed at the district court level for lack of standing.
The appellate court made things more complicated. It said this ISN'T a derivative lawsuit, because it wasn't a decline in share price per se that constitutes the harm alleged by a failure to hedge against such a decline. So the district court was wrong to use the standing argument.
But, the appellate court continued, Morgan Stanley didn't have any duty to warn the shareholders that they should hedge, so the question of whether it had any "conflict" with that alleged duty doesn't arise, and the district court was right to dismiss the case anyway.
As I indicated above, I'm not sure whether this is important. In fact my head hurts just thinking about it.
Sunday, March 23, 2008
Section 6.10
Those wonks who've been following the news about the disintegration of Bear Stearns in recent days will know at once to what the above subject line refers.
Section 6.10 is the "deal protection" clause of the merger agreement between Bear and itsacquirer, JP Morgan.
The agreement as a whole in all its 47 pages of glory is readily available. Here's one of the clicks that will get you there.
6.10 provides that if the shareholders of Bear Stearns vote against this chintzy two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
"Company" is Bear and "Parent" is JPMorgan.
What this seems to mean is that the shareholders can't say "no." At least not on the first try. They can at worst say, "maybe not, restructure it a bit and try us again."
But how many times would they have to say that before it amounted to a "no"? This seems a bit like the infamous closed loop on the shampoo bottle's instructions, said to keep many a blonde busy for days. "Apply, lather, rinse, repeat."
The Deleware courts have imposed certain restructions on the enforceability of such "deal protection devices," such that this language may be subject to challenge by those shareholders.
For more on the legal issues involved, you might want to click here.
Section 6.10 is the "deal protection" clause of the merger agreement between Bear and itsacquirer, JP Morgan.
The agreement as a whole in all its 47 pages of glory is readily available. Here's one of the clicks that will get you there.
6.10 provides that if the shareholders of Bear Stearns vote against this chintzy two-dollar deal, "each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein ... and to resubmit the transaction to Company's shareholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent."
"Company" is Bear and "Parent" is JPMorgan.
What this seems to mean is that the shareholders can't say "no." At least not on the first try. They can at worst say, "maybe not, restructure it a bit and try us again."
But how many times would they have to say that before it amounted to a "no"? This seems a bit like the infamous closed loop on the shampoo bottle's instructions, said to keep many a blonde busy for days. "Apply, lather, rinse, repeat."
The Deleware courts have imposed certain restructions on the enforceability of such "deal protection devices," such that this language may be subject to challenge by those shareholders.
For more on the legal issues involved, you might want to click here.
Tuesday, February 5, 2008
Back to the US
As everyone who hasn't been living in a cave for the last few days by now knows, Microsoft wants to buy Yahoo!
What is a bit newsier is that Yahoo's management doesn't really want to let that happen.
They don't have the final say in the matter. Of course, Yahoo isn't "their" company beyond whatever psychological identification they may feel with it. Yahoo belongs to its owners, the shareholders, and MS can go over the heads of management to bring this merger about.
Here's an analysis from the San Jose (Calif.) Mercury
Yahoo faces few options.
I'm interested especially in what the Mercury calls the "Disney ending." To what white knight might Yahoo possibly appeal? Hmmmm. Any ideas out there?
What is a bit newsier is that Yahoo's management doesn't really want to let that happen.
They don't have the final say in the matter. Of course, Yahoo isn't "their" company beyond whatever psychological identification they may feel with it. Yahoo belongs to its owners, the shareholders, and MS can go over the heads of management to bring this merger about.
Here's an analysis from the San Jose (Calif.) Mercury
Yahoo faces few options.
I'm interested especially in what the Mercury calls the "Disney ending." To what white knight might Yahoo possibly appeal? Hmmmm. Any ideas out there?
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