Happy New Year, everyone

In yesterday's entry, I wrote about a story in this month's issue of Vanity Fair, one that concerned Mayor Giuliani's campaign for president and, in consequence, the law firm in which he is a name partner, Bracewell & Giuliani.

Today I'd like to stay within the four corners of VF. For it has another story with at least a tangential relationship to the themes of this blog: David Margolick's article on Governor Elior Spitzer of New York, and the tough year he has had in Albany.

The reason that's of interest to Proxy Partisans, of course, is that in his last job, as state attorney general, Spitzer put himself front-and-center as the "sheriff of Wall Street." In his view, the SEC wasn't doing its job, so he would.

Margolick contends that Spitzer developed a model of "strategic craziness" -- planned tantrums, really -- for getting what he wanted in terms of changes in the way business is done on Wall Street, but that this model, become a habit, has backfired on him.

He quotes an unnamed source explaining the difference between being a prosecutor and being a governor -- a difference that (this is the gist of the piece) -- Spitzer has yet to grasp: "If you're a C.E.O. at a company and I call and I say, 'I'm going to fuck you, I'm going to destroy you, I'm going to indict your company,' and I sound totally crazy, you hang up on the phone, and you go see your chairman of the board, and you say, 'This guy is crazy, we need to settle,' because you're given no option. If you're a state legislator and you get the same thing, you hand up the phone, you call the Albany Times Union, and you say 'This guy is crazy,' because you don't give a shit."

Perhaps tomorrow I'll look back upon Spitzer's days as New York A-G, especially in connection with two high-profile scandals (a) "market timing" in regard to mutual fund shares, and (b) the relationship between research and underwriting.

Bracewell & Giuliani

The latest issue of Vanity Fair has a feature story about former New York mayor Rudy Giuliani. Some of the buzz about this issue has suggested that this story, written by Michael Shnayerson, would be a great take-down piece. A serious blow to Rudy's candidacy.

It isn't. Frankly, I got the sense reading it that Shnayerson was flailing about a bit, trying to score a solid punch and missing.

Example: In 2005 (as the story accurately reports), Giuliani became a partner at what had been the Texas law firm of Bracewell & Patterson. It's now, of course, the Texas & New York law firm of Bracewell & Giuliani.

By the time Giuliani put his name on the door, Bracewell had become, we're told, "the go-to law firm for major polluters in oil and gas as well as coal companies."

Shocking. Until you give it a second's thought. A prominent Texas law firm represents oil and gas companies? Such companies, when accused of environmental violations, hire lawyers to defend them? What's the shocker there again?

Then we get a long graf re-hashing the Citgo connection. No "mini-scoop" here. This stuff was all thoroughly vented months ago. Yes, Citgo is run by the Venezuelan state, which is currently run by Hugo Chavez, a nasty piece of work.

"Bracewell & Giuliani [has] been happy to take Chavez' money," our intrepid reporter breathlessly informs us.

Would he be happier -- would he want us to be happier -- if B&G hadn't taken Chavez' money? Suppose they had represented Citgo's interests in the US for free, and called it their pro bono work for the year. Feel better?

Either way: they're in the business of advocacy, aren't they? A law firm can, without any shadow to its reputation, defend a serial killer -- for money if he can pay it. Why is it hard to believe that a law firm can work for the interests of a company that does a lot of business in the US, that is run by the government of a foreign state.

The fact that I say "big whoop" to this doesn't make me partial to Giuliani. (Although, for the sake of full disclosure, I might as well admit that a couple of the lawyers who work in Bracewell & Giuliani -- NOT the candidate -- have been valuable sources to me in explaining some legal issues pertinent to stories I've been working on.) I'm not partial to Rudy as a candidate at all -- indeed (a) I don't believe in politics, (b) even if I did believe in politics, it would be a sort of politics that would involve the rejection of the two major parties, and (c) even thinking within the box of those two parties, the only candidate who makes even a smidgen of sense to me is Ron Paul. So there, for Rudy.

Still, I recognize a flailing boxer in the ring when I see one. And that is the figure Mr. Shnayerson cuts.

Datascope Results: Tie Game

Datascope held its annual meeting on December 20. This was the big showdown. Or (as Jon Stewart likes to say) not so much.

The activist investor/hedge fund manager Ramius wanted to put two new faces on the seven member board. The company stood by the two corresponding incumbents up for re-election, James J. Loughlin or William L. Asmundson.

It now appears that one of the two dissident nominees, David Dantzker, has won a seat, but that the other, William Fox, has not. It isn't clear yet whether Dr. Dantzker's victory will be at Mr. Loughlin's expense, or Mr. Asmundson's. That will presumably be straightened out when the meeting reconvenes January 3.

The December 20 meeting seems to have been devoid of bile. Although this lessens the amusement value of the enterprise since the snappiest quote I can give you from a Ramius representative at the meeting is: "We do believe operations and corporate governance can be much improved," the amity is probably good for the stock price. Datascope was worth $2.30 a share at close of business last Tuesday, a little more than a day before the meeting convened, but is trading above $2.40 as I write.

Smiles and sugarplums all round, then.

The class action against AIG

The usual drill in a class-action securities fraud lawsuit is to create a "class period," defined by two dates. Date A is that day on which the company should have disclosed some specific important piece of information. Date B is that day on which the public became aware of it anyway.

The class, then, consists of all persons who bought the defendant company stock between A and B. It is worth noting that just holding stock during that period doesn't make one a member of the class so defined. Nor does selling stock then have any relevance. The class consists of buyers within the class period.

The reason? only a buyer can claim to have been over-charged. The buyers are complaining that between A and B, the market price was higher than it would have been had the market in general been aware of the realities.

The filing against AIG last year fit this pattern. The class period begins in October 1999, on the basuis of a press release put out that month that described consolidated assets as $259 billion and shareholders' equity as $32.3 billion. The class period continues until October 2004, when the CBS MarketWatch issued an article headlined "Spitzer attacks insurance industry," which disclosed to the public (as the plaintiffs see it) that the kind of claims re: assets and equity the company had been claiming for fivce years were based on the manipulation of the financial statements.

The law firm that represents AIG is Paul Weiss Rifkand. It has argued that the plaintiff doesn't have a case for "scienter," or in layfolk term that they were knowingly committing fraud. They can't be held responsible for the fact that a New York State A-G would eventually get a bee in his bonnet about certain practices, after all. Did they understand that the accounting procedures and re-insurance deals at issue would result in pumping up the price of their stock?

That's enough work for me on a Christmas Day. Enjoy the holiday, all.

PACER and AIG

I used the acronym PACER in yesterday's blog entry but neglected to explain myself.

Here goes, then. PACER stands for "Public Access to Court Electronic Records," and it provides exactly that (for a modest fee) for anyone with internet access.

For a reporter nowadays it's a wonderful time saver in contrast to the old days when you'd have to cajole a court clerk into faxing you the files. Alas! not every state court system has caught up with the digital era. Some of the states have their analogs to the federal PACER, but they vary wildly in ease of access and use.

PACER itself, though, is marvellous. Thanks to it, I just typed in "Ohio Public Employees Retirement System" for the district court, southern district of New York and found the four cases there in which OPERS is a party, Two of them seem relevant (judging from the name alone) to the matter I was discussing in yesterday's entry -- OPERS v. Greenberg et al., and In Re AIG Securities Litigation.

The "In re" case is, as such titles generally indicate, a consolidationof several distinct filings. The "OPERS v. Greenberg" lawsuit claimed that in order to get out from under that action, in which he was a co-defendant, Greenberg made a "fraudulent conveyance" of his stock to his wife without compensation, and OPERS (filing in May 2005) asked the court to set aside this conveyance.

The "fraudulent conveyance" case was dismissed by agreement of the parties three months later. The big "In re: AIG" action is still open. I'll wait to open that file, though, until Christmas day.

Labaton Sucharow LLP

A Merry Christmas to the lawyers of Labaton Sucharow and their staff.

I mentioned in an entry on Veterans' Day that somebody at Labaton, a prominent securities-litigation law firm, had googled the name "Hank Greenberg" and ended up at this blog as a result.

Labaton, a New York based firm, represents the Ohio Public Employees Retirement System, which is lead plaintiff in a lawsuit against AIG and Greenberg for their use of sham reinsurance agreements that made the books look unrealistically favorable and allegedly induced pension fund executives to buy and/or hold the stock when they wouldn't have otherwise.

I'd like to extend an invitation to anyone from Labaton to comment on this blog about the nature of that lawsuit.

A couple of questions come to mind. First, are the managers of public employees retirement systems supposed to be very sophisticated folk, knowledgeable in the ways of the investment world? If they lost some money on AIG ... so what? my guess is the portfolio was diversified, and nobody has missed any pension payments as a consequence of a dip in the value of this particular stock, have they?

Shouldn't there be anything of "caveat emptor" in our reactions to such situations?

Of course, in the case of blatant corruption there should be some recourse. If somebody on AIG's payroll had bought a really nice beachside condo on the Gulf Coast of Florida for somebody in the relevant Ohio bureaucracy, and the day after that sale closed the pension plan suddenly put a lot of $ into AIG stock ... okay, I can see how the people of the fine state of Ohio would be ticked off at that.

But so far as I can tell, there's been no such allegation. In fact, since I'm too lazy to go to PACER right now to look it up, let's count that as my second question. Am I right that there's been no charge of that sort of corruption at AIG?

So: in your own words Labaton ... what gives?

Thinking Again About Enron

A story I was working on for my day job yesterday got me thinking about Enron again.

The story involved Amaranth,the natural-gas concern that went bust a little more than a year ago.

Both FERC and the CFTC have commenced proceedings against FERC, as have the managers of the San Diego County employees' pension fund. The two agencies claim Amaranth manipulated natural gas prices. The pension managers claim it lied about how risky its portfolio was.

Anyway, the story on which I was working yesterday involved FERC, which contracted with a professor at Rice University, in Texas, to study the natural gas market for them as a consultant, and tell them whether Amaranth had a large enough share of that market to have manipulated the prices. He said that they did.

The name of that consultant? Vincent Kaminski.

To fellow Enron-scandal nerds that name will ring a bell. He was Enron's "risk manager" when some of the decisions were made (over his protest) to take risks that proved disastrous.

Here's a news report on the Kaminski testimony at the Lay and Skilling trial last year: http://www.cfo.com/article.cfm/5623848

While my stream of consciousness flows back toward Enron, I'm also reminded of my own impression, as it unravelled, that the decisive internal battle at that company was the one in which Rebecca Mark lost out, the battle over whether Enron would be an asset-lite or an asset-heavy company.

Jeffrey Skilling believed in an asset-lite business model. Ownership of old-fashioned physical assets was a burden best shrugged off the shoulders of an up and coming new-economy company. Who needs pipelines and power plants? Less tangible assets ... contracts, trading positions, trading systems ... those were the gleam inhis eye.

Mark believed in those old-fashioned tangible assets, though. And her division was in charge of building them around the globe, including an especially controverial power plant in Dabhol, India.

Here's the URL for a rather admiring profile of Mark, post-Enron, http://www.fastcompany.com/magazine/74/enron_mark.html

And here's a less admiring view:
http://www.swaminomics.org/articles/20020216_rebeccamark.htm

The obvious truth (though even to state it would probably sound absurdly philosophical to a Jeffrey Skilling) is that physical assets ultimately back all the less tangible sorts of wealth that the Skilling's admire. If there aren't power plants, tankers, port facilities, and pipelines, then what possible good is a bright new idea of the more efficient trading of energy futures? Can it be a great business model to fob off those assets on 'somebody else' somewhere else?

Another obvious truth: lenders want collateral. Tangible assets are very good for this purpose, so they help ensure the continued solvency of any operation that possesses them.

When I've written about this subject, I've gotten a range of responses. One line of thought has been: the asset that matters most isn't the kind that Mark was in charge of. It's simply cash in the bank. Her projects were draining Enron of that asset, not building it.

But I think that's wrong. There is such a thing as being too liquid for one's own good. LTCM was dramatically tooliquid for its own good and that should have been a valuable lesson at precisely the moment that Lay was encouraging the Skilling/Mark rivalry.

But that's enough of a trip down memory lane for today. My head hurts already.

Philosophy

Today is as fine a day as any for a broad statement about the glasses through which I view the world of proxy ballots, boardroom disputes, mergers and acquisitions, friendly or hostile -- the whole world of corporate control.

My view is simply that the shareholders of its company are the owners thereof, not in any overly-sophisticated, qualified, legalistic sense. But in the common sense plain-English meaning of ownership. Proxy fights are good things simply because they help remind the company management, their employees, of who they work for.

Managements tend to entrench themselves, to seek safety behind various procedural barriers. They like "staggered boards," for example. In this gambit, the shareholders are allowed to vote in or out only one-third of the boards at any one meeting. They justify this by talk of preserving continuity and experience, etc. But the empirical research shows that shareholders don't benefit from that continuity in any way that would show up in, say, the value of a company's stock.

http://www.researchmatters.harvard.edu/story.php?article_id=592

When challenged on their responsiveness to their shareholders, or lack thereof, incumbent boards and their apologists, the advocates of entrenchment, or of what one scholar calls "directorial primacy," like to say that if shareholders aren't happy with how the company is run, they can always sell the stock. They shouldn't have to, though, That's the point. They're owners, not renters.

If you live in a home with a leaky roof and you don't like it, you can move. The owner can then either fix the roof or find another tenant who'll tolerate the leak. Even if its your home, you might of course decide that fixing it is too much trouble, in which case you can sell.

But you, as owner of equity, also have the option of hiring a contractor who'll fix the roof. And if your contractor proves dilatory in doing this job, of firing him and hiring another.

Controlling Group

I over-promised yesterday, when I said I'd discuss the legal issue today of whether Greenberg is running a "controlling group" in the meaning of New York's law governing who does or doesn't get to control an insurance company.

Researching the matter turns out to be more trouble than I thought, and would expect that words like "control" and "group" have the same meaning in New York state law, in particular in its insurance law, that they have in the federal securities regulatory system.

But maybe not. The point, after all, is different. In federal securities law, the question often arises, "is so-and-so seeking to acquire control of a company without paying a control premium for it?" That is, after all, how the temptation to buy shares through surrogates, acting informally as a 'group,' would arise. An acquirer given its druthers wouldn't announce on the news "I'm going to start buying up AIG shares until I control the company"! That would be akin to saying, "Please demand ever-higher prices from me for that stock -- I'll pay them," and this of course gets to be expensive. Hence the phrase "control premium."

But the acquirers don't get their druthers. If you act surreptitiously, as a 'group,' to acquire the stock without paying such a premium you're in violation of the securities laws and regulations which require candor on such matters, on the theory that its only fair to pay the stockholders that sort of control premium, and you've cheated them out of something if you avoid paying it.

There's more to it than that, but my point is just that the significance of words "control" and "group" in the typical securities litigators' setting is different from the concern of the insurance regulators of a state to keep track of just who it is they are regulating. The meaning of the words may not be the same.

And of course you must suppress any impulse that arises in your throat to say, "maybe group just means plain-old-English 'group'." Tautologies don't enlighten.

AIG and New York

New York State's insurance department has taken a position that may frustrate Hank Greenberg's efforts to ... do whatever it is he's planning to do, in connection with AIG, the global insurance giant he headed for years.

Perhaps the reader will recall my discussions from Nov. 4 through Nov. 7. I didn't know then, and still don't know, whether Greenberg seeks outright control of AIG, or whether he'll be satisfied engineering some profitable change in its corporate structure and policy. But something is up.

The New York Insurance Dept. filed a letter December 7 stating its position, which is that too much is up.

New York law says that if individual stockholder or group acting together acquires more than 10% of the equity of a company selling insurance within that state, the acquirer becomes a "controlling entity" -- which requires permission.

New York now calculates that entities Greenberg is piloting control more than the threshold amount of AIG, and must either seek permission to be a controlling entity or "cease and desist immediately from engaging in any further activities aimed at exercising a controlling influence over AIG."

An attorney for Greenberg, Marcia Alazraki, has replied, saying that the various entities involved aren't a group in the relevant sense, and asking for a meeting with NY officials to discuss the issue.

Ms Alazraki knows the issue well. She was deputy superintendent at the NY Dept. of Insurance herself in the early 1980s, and assistant counsel to the Governor of the state, Hugh Carey, before that (1979-81).

She's also got a fine, somewhat intimidating, photograph on her webpage. One likes that in a lawyer.
http://www.manatt.com/Attorneys.aspx?id=1247&item=1245

Tomorrow, then, let's examine the issue of when does a group of shareholders act in concert for purposes of sucg regulatory concerns.

Pandit in Charge at Citi

Vikram S. Pandit is the new CEO at Citigroup.

Whether or not that turns out to be a great thing for City, I offer no opinion. But Pandit has had a fascinating career. He left Morgan Stanley as the Purcell period there was coming to its crashing end two years ago.

A recent book on the Purcell era, BLUE BLOOD & MUTINY, by Patricia Beard, refers in passing to Mr. Pandit's "gravitas, stature, brilliance, and mannerly demeanor."

Sounds like VP has a fan.

At any rate, upon leaving MS, Pandit became one of the founders of multistrategy hedge fund Old Lane Partners.

Citigroup bought Old Lane, for about $800 million, this April, and Pandit was part of the deal. He became the chief executive of Citigroup Alternative Investments.

Now he moves up from CAI to heading Citigroup as a whole -- a very big step up.

Good luck to him. Its possible he's entering at a trough in Citigroup's fortunes and he'll look like a genius as things turn around. Or its possible he really is a genius, and will be instrumental in turning things around. Other possibilities come to mind, too ... but they're less pleasant to contemplate than those two.

Three quick notes

1. Conrad Black

A district court judge sentenced Conrad Black yesterday to 6 and a half years in prison, a forfeiture of $6.7 million, and an insult-to-injury fine of $140,000.

The sentencing judge, Amy St. Eve, said: "I personally cannot understand how someone of your stature, at the top of the media empire, could engage in the conduct you engaged in and put everything at risk."

Her sentence seems, IMHO, rather more harsh than was warranted. I suspect she saw a chance to make an example of him, precisely because of that "stature" she was talking about.

In his heyday, Black was running the third-largest publishing company in the world. He ran it as a personal feifdom, too, and he has been convicted of, and now sentenced for, the intermingling of corporate and business funds -- i.e. for theft. I don't excuse that, of course, but I do suspect the Hon. St. Eve got carried away a bit by the fact that this was her own moment in the spotlight.

2. H&R Block

Regular readers of this blog learned on November 21 that the leadership of H&R Block has changed, due to a successful proxy contest.

The morning after a victory is time for the "what do we do now" feeling, expressed so vividly by Robert Redford in an old movie. H&R Block said this morning that it's delaying the filing of its second quarter results. The 2d quarter of Block's fiscal year ended October 31, and it had previously scheduled an analyst conference call for today at which it was to discuss the numbers.

The numbers aren't ready, and the call won't take place. As a preliminary matter, Block is now saying that the 2d quarter figures when thet are available will be worse than had previously been expected.

The market's initial reaction to Breeden's takeover last month was favorable. The stock price rose to a high of $20.48. But, probably in anticipation of bad news today, the price fell Friday and Monday.

My guess, then, (and its only a guess) is that the market has already discounted the bad news, and that the price will hold steady today.

3. EDO Corp meeting

Two proxy advisory firms recommended yesterday that stockholders in EDO cast their votes in favor of a merger with IT&T, recommended by the management.

The special stockholder's meeting for this purpose is scheduled for a week from today, Dec. 18.

Both ISS and Glass Lewis have now concluded that EDO's stockholder's are getting a fair deal from the proposed terms, $56 per share in cash.

Ramius, Datascope, blank checks

The hedge fund Ramius Capital seeks to put two new faces on the board of directors of Datascope, a medical device manufacturer based in Montvale, New Jersey. Stockholders will vote on these two seats at a December 20 meeting.

Datascope has conducted a series of internal investigations this year and five of the company's top executives have left. It is natural to suspect that the former led to the latter, that "where there's smoke...." And if there isn't any fire, there's been a considerable waste of money in calling out the bucket brigade -- Datascope spent$1.7 million on legal expenses relating to those investigations.

Ramius said in a statement that it hopes the "election contest will send a strong message to the remaining incumbent directors that stockholders are not satisfied with the company's corporate governance and management."

Such troubles might in some circumstances put a company "in play" as a takeover target. But Datascope has the sort of "poison pill" provision I discussed here last week, and that is part of what Ramius objects to in their own proxy campaign. It also entrenches itself through other means, notably through the ability of the Datascope board to issue "Blank Check" preferred stock. This is, like poison pills, a fairly common means of entrenching the incumbents against the threat of acquisition, and a proxy fight is useful as a means of lowering these barriers, empowering a potential acquirer.

I believe this is the first time I've used that phrase "blank check" in this still-new blog. The idea is that a board allowed to make such issuances by its charter or by-laws can issue such stock to a friendly party or "white knight" in the event that a black-suited knight, an unfriendly acquirer, appears. Depending on the conversion rights that go with the preferred stock, it can have the effect of diluting the acquirer's holdings, making the acquisition more expensive and/or less attractive.

Boards commonly argue that the authority to issue such "blank check" stock is good for the company because of the increased flexibility it gives the board in the pursuit of financing. But fiduciaries are wary of it.

On the website of American Century Investment Management, for example, you'll find an explanation of that asset management firm's proxy voting policies that includes the following:

"Generally, the Adviser will vote against blank check preferred stock. However, the Adviser may vote in favor of blank check preferred if the proxy statement discloses that such stock is limited to use for a specific, proper corporate objective as a financing instrument."

Datascope's board has seven members, so even if both the dissident nominees are elected -- and they express such wariness in boardroom deliberations -- they may well end up being a minority voice in such matters. Still, I suppose that the issuance of blank check stock by a 5 to 2 vote might itself serve as a red flag.

60 Minutes

I understand that this evening, a new medicine intended to help people in recovery from mthamphetamine addiction with make the ultimate media splash for such a product. It will be featured on a segment of the CBS News program "60 Minutes."

The drug is called Prometa, and the company benefitting from the publicity splash is Hythiam Inc.

I'm mentioning it only to give my readers the benefit of a quick warning. Look before you leap. When news like this hits, there's a temptation to want to jump on the train. But the market may have alrady discounted the potential market value of this particular locomotive. Surely the recent dramatic run-up in its stock price suggests as much. It suggests that there's no bargain to be had here by jumping on the caboose.

More generally, for most people in most circumstances, my own bias is that "stock picking" is an expensive avocation. Stick to broad indexes -- the more passively managed the better.

And, of course, don't take seriously any advice on investing you get on internet blogs. Though I'm happy to imagine you've at least read all the way through this bit of it.

Brog out of Gyrodyne contest?

Today's the day of the Gyrodyne annual meeting. Phil Goldstein and his "Bulldog" hedge fund are seeking to put Mr. Goldstein and an ally on the Gyrodyne board.

They have at least two leading complaints about management, which they hope they'll be able to address when on the board. First, that Gyrodyne (a manager of commercial real-estate) has a claim against the state of New York in regard to an eminent domain issue but hasn't avidly pursued the matter. Second, that Gyrodyne's board has entrenched itself at the expense of shareholder value with a "poison pill" by-law, and the new board members, if Bulldog is successful, will work for its revocation.

If you've been following my earlier posts carefully, though, you may be surprised that I've just spoken of Mr. Goldstein and "an ally" rather than "two allies." Originally, he was part of a three man slate Bulldog nominated for the board, along with Timothy Brog and and Andrew Dakos. But on Monday, Gyrodyne filed amended proxy materials with the SEC that indicate that its settled its difficulties with Timothy Brog, formerly the third man on the Goldstein slate.

"Mr. Brog has also withdrawn his consent to serve as a director if elected and the Company has dismissed its claim against Mr. Brog in the matter titled Gyrodyne Company of America, Inc. v. Full Value Partners L.P., et. al, No. 07-CV-4859. The Company and Mr. Brog have also agreed to mutual releases for claims arising out of the 2006 and 2007 Annual Meetings," the company says.

Who is Tim Brog anyway? When I first encountered that name in the Bulldog/Gyrodyne context, it had a familiar ring to it, but I didn't have the chance to run that down.

Brog has proxy-slate experience. In August 2006 he was elected to the board of directors of bubble-gum marketer Topps as part of a negotiated agreement that resolved a proxy contest there. As a youth, back when I had dentition, I chewed many a stick of bazooka joe bubble gum, so it's unsurprising that his name had stuck (like cognitive gum) to my mind.

That said, I contacted Mr. Brog this morning. He tells me that the Gyrodyne filing is accurate. Also, he said that this doesn't represent any split in views between himself and Bulldog. One of the proxy-advisory services apparently has recommended that shareholders in Gyrodyne note for two out of the three members of the dissident slate. To avoid any scattering of the votes in response to that suggestion, Messrs Goldstein and Brog agreed that Mr. Brog would withdraw his name from consideration.

So things go in the fast-moving world of proxy contests. Ain't this great (though somewhat nerdy) fun?

BHP/ Rio Tinto

The BHP/Rio Tinto saga is complicated but important. Its important because it involves nothing less than control of a large chunk of the worlds active mines excavating iron ore, copper, coal, and a variety of other minerals.

Its complicated because the word "control" in the above sentence has both a corporate and a national significance, and because the laws of several different nations will play a part in helping determine this.

A little less than a month ago, on November 8, BHP Billiton announced a bid for control of Rio Tinto. In a sense there would be four companies involved in any such acquisition because both Rio and BHP have a dual identity: each is both a British and an Australian corporation -- with separate sets of shareholders but with only one board of directors and managerial structure.

BHP is the larger of the two, but Rio has the more illustrious history. It began with Spanish mines so old the ancient Roman empire had minted coins from the metal taken from that earth. In 1873, two Rothschild firms -- the Parisian and the London -- joined with other investors to buy the Spanish government's interest in these mines. They restructured the company and turned it into a profitable business run from London.

The dual national nature of the company came about in the 1960s, when BHP bought a majority stake in the Aussie firm Consolidated Zinc.

But, to the point: the board of directors of Rio has resisted BHP's offer, claiming that it significantly undervalues the company.

It is often the case that when the directors of a target company resist such an overture, they realize and accept the fact that they are "in play," they their days as an autonomous operation are nearing an end, but their looking for a "white knight," a friendlier company willing to make a higher bid for the damsel.

The government of China, and corporations it sponsors, may be about to put on the white shining armor in this scenario. China Investment Corp. has US$200 billion at its disposal. Yet so large is the scale of Rio's assets and prospects that there is also talk that by the time the auction is over, that might not be enough.

There's much more that might be said about this matter, but I've just offered you a score card -- or at least sketched the outlines of the score card -- for what may be a long game. We'll see how it fills in.

What's a Poison Pill?

The term is employed so often in debates over corporate governance that we ought to be outfront here about just what it means.

A "poison pill" is a plan that increases the value of what existing shareholders are holding, when a potential acquirer accumulates more than a set amount of the equity.

Typically, such a by-law will provide that if one investor acquires more than, say, 10% of the company's equity, each of the other non-acquiring shareholders acquire the right to buy new stock at bargain prices. This dilutes the potential acquirer's holding, and requires that the acquirer pay more than it otherwise would in order to gain control of its target.

Company managements typically call them "shareholder rights plan," because that sounds better. Their effect upon most of the shareholders accorded these rights is probably negative, because if they deter potential acquirers from actually making such a move and passing the threshold they by definition lower the market demand for the stock.

Here's the URL for academic discussion of some of the issues that these provisions raise under Delaware law: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=659322

Sometimes the term "poison pill" is used more broadly for a range of anti-takeover measures. But I'll try to keep to the narrow, and thus the usefully specific, meaning of the term in my postings here. (Other measures with similar goals have equally colorful nicknames, like "shark repellent.")

Three brief items

1. Motorola, a Fortune 100 communications company, announced that Ed Zander is stepping down as its CEO.

Zander will remain as chairman of the board until May, when the company holds its annual meeting. Carl Icahn has said for at least a year now that Zander wasn't right for the CEO job. He put out a statement Friday crowing a bit. Zander's departure is "long past due" etc.

But Zander himself was never the focus of Icahn's efforts at Motorola. He believes the best way to increase the value of the stock for shareholders like himself is to split it up -- make it a company focused tightly on mobile devices and spin off everything else.

My guess at the moment is that the new CEO, Greg Brown, won't be on board with Icahn's agenda any more than Zander was.

2. Readers may recall that here on November 20 I blogged about proxy access rules under consideration by the SEC.

Since then, the agency has made its choice. Its adopted the most restriuctive of the rules under consideration. In other words, it holds that company's can simply exclude from the ballot any shareholder attempt to re-write the company's ruiles concerning elections to the board of directors.

In general, this is bad news, not just for the Carl Icahns of the world but for corporate productivity in the US. This ruling will encourage incumbemnt managemnents to entrench themselves and resist pressures from outside. Entrenchment, as a rule, is a bad thing. Shake-ups are ghood things. Capitalism requires that the pot be kept boiling.

Creative destructive works like that. Protect yourself from the latter, you minimize the former.

3. More about Gyrodyne and Goldstein. As I mentioned Wednesday, Gyrodyne brought a lawsuit in federal court asking for an injunction so that Goldstein couldn't ruin their party this week. Their annual meeting is Wednesday and they don't want him soliciting proxies to replace three of them on the board with himself and two associates.

It's an 8-member board, so even complete success in terms of his slate won't give Goldstein a majority. But his slate would need only 1 convert to produce a tie vote, and deadlock, on a given issue.

At any rate, it appears that the district court refused to grant the injunction, so the solicitations continue.

The big issue? Poison pills. I'll discuss such "pills" in general in tomorrow's entry.