Three brief items

1. Chicago Sun-Times solicitations.

The next best thing to a proxy fight is a consent solicitation campaign.

It is a more slow-motion, though. The shareholders seeking a material change solicit written consent to that change from more than 50% of the outstanding voting shares. This is often more difficult than winning a true proxy campaign, after all, in the case of a consent solicitation, inaction always amounts to a pro-management vote, a refusal to consent to the change.

Anyway: the Davidson Kempner hedge fund wants a new board of directors on the Sun-Times. They've sent a letter of solicitation that blames the incumbents for "the near total erosion of stockholder value."

On Thursday, December 11, the Chicago Sun-Times announced that the proxy-advisory firm Glass Lewis & Co. is taking its side.

2. Bullish report on Asian securities exchanges.

The consultancy Celent has posted a report on the Asian securities exchanges as businesses. It's pretty bullish.

The report says that a total of more than 14 trillion shares, with a value equivalent to $21 trillion US dollars, was traded on the major Asian exchanges in 2007. the top six of those exchanges account for 80% of that value.

The author of the report, Arin Ray, says: "The Asian exchange industry, following a worldwide trend, has undergone major changes in structure and governance model, and many exchanges have become publicly traded companies through demutualization. The exchanges are highly profitable and growing, with an average profitability of almost 50 percent.”

3. On Madoff.

When the Bernie Madoff story first broke I wrote here about the "payment for order flow" angle, postulating that Madoff's determined defense of that practice back in May 2000 should already have been a red flag to the observant.

I'm happy to report that I'm not the only one thinking along those lines. On December 24, the Financial Times ran a story by Greg Farrell under the headline "SEC inaction that helped fuel scheme."

The second graf of this story reads: "But it was the SEC's decision in the 1990s not to take a stand on the controversial issue of 'payment for order flow' that helped fuel the rise of Bernard Madoff Investment Securities, the successful broker-dealer operation two floors above Mr Madoff's private fund operation in Manhattan."

That way of putting it implies a government-centered way of looking at the world. There are lots of parties other than the SEC who missed this and shouldhave gotten it -- like the folks responsible for due diligence at the various institutions than invested in Madoff's operations.

Still, I do think the whole idea of payment-for-order-flow stinks. If the Madoff meltdown does help finally discredit it, that will be some slender silver lining.

Orient Express: in Peru?

I offered two entries to this blog in October that discussed a dispute among shareholders of Orient Express Hotels Ltd.

I mentioned of course that the company operates the railroad for which it is named. What I didn't say at the time (because I wasn't aware of it) was that it also operates rail service to Machu Picchu, the great Peruvian/Andean archeological site and tourist attraction.

Now the government of Peru has indicated that it wants to withdraw the company's concession for that trip -- or, at least, withdraw the monopoly right, and stimulate competition in order to bring down fares and encourage more tourism.

Meanwhile, the Swiss finance firm Reyl & Cie, which owns around 8% of the equity of Orient Express, expressed great confidence in the firm's long-term profitability, despiute a recent stock price slide.

Reuters is quoting Francois Reyl, chief executive of Reyl & Cie, thus: "We are long time players. There is great value embedded in this company."

Reyl said nothing about the Peru situation specifically. He said, though: "The stock has been penalized by fighting between shareholders over the legal structure of the company. We are confident that, over time, these types of squabbles will recede."

Those types of squabbles are of course what first caught my attention this autumn.

Tecumseh litigation

The Herrick Foundation, which was defeated in a proxy challenge to incumbent management at Tecumseh Products last month, has won a victory in court.

Herrick filed a lawsuit demanding injunctive relief against the compressor manufacturer's recapitalization plans, which would have significantly diluted Herrick's voting rights.

The judge of a Michigan state court, Timothy Pickard, granted a preliminary injunction on December 24, finding "substantial likelihood" that the plaintiff would prevail in its claims that the stock split is inequitable, without compelling justification, and a violation of the company charter.

Herrick Foundation spokesman Jeff Caponigro issued this response: "Tecumseh likes to portray Herrick Foundation's dispute as simply a vendetta against the company when, in reality, it is the company's own vendetta toward the Herrick's that has led it to repeatedly take improper actions that are negatively impacting all company shareholders."

Sirius XM: Meeting Results and Litigation

Sirius XM, the satellite radio company, held its shareholder meeting one week before Christmas.

The stockholders approved all four of the pending measures: re-electing the board of directors, amending the charter to increase the number of authorized shares, authorizing a reverse stock split, and ratifying the appointment of KPMG as the independent auditor.

Shareholder Michael Hartleib had sought to have this meeting postponed. Obviously, he didn't succeed in that. But his lawsuit, in the central federal district of California, continues. How much longer this case will continue may turn on whether the court reads the complaint as an effort to sue Sirius (the pre-merger entity) on behalf of itself.

For those of you interested in looking it up, the caption of the lawsuit is: Hartleib v. Sirius Satellite Radio Inc.et al. The docket number is 08-cv-00790.

On November 17, defendants in that lawsuit filed a motion for its dismissal. I gave the background of that, the last time I wrote on Sirius in this blog. I'll try not to repeat myself too much. But the next two paragraphs are by way of review.

The complaint focuses on the merger as a breach of fiduciary obligation. "The Board and officers of Sirius ... grossly mismanaged its operations by engaging in reckless financing of the merger [ignoring] warning signs that the merger ... would severely damage Sirius Satellite Radio Inc." Plaintiff says that shares of Sirius traded at about $2 a share before the merger, and have since (as of late October) fallen to 29 cents per share.

In the motion to dismiss, defendants say that such charges are "without particularized facts about the individual directors' supposed conflicts. Likewise, Hartleib carelessly accuses the Board of misconduct ... without identifying specific wrongdoing by any particular member."

In a memorandum opposing dismissal, Hartleib's attorneys (led by Bernard C. Jasper of Irvine, Calif.) explain their view that Hartleib is in a position to sue both derivatively (as a representative shareholder) and directly (as someone who suffered harm distinct from that of other shareholders). A derivative lawsuit involves the claim that the object of the fraud is the corporation itself, which for various reasons (here, the capture of the board by the alleged fraudsters) has declined to or cannot sue on its own behalf.

"Hartleib has standing to sue derivatively because Sirius could sue directly," reads one of the subheads.

The complaint alleges that a RICO enterprise was conceived and hatched by XM, Interoperable Technologies, and various individual defendants. The complaint did not name Sirius itself as a participant in the alleged RICO, accordingly he is not in the untenable positionof eeking to sue Sirius (with regard to those particular accusations of the complaint) on behalf of itself.

The caption of the case really isn't much of a help in making this particular point, because as noted above Sirius is the first named defendant.

Anyway, the defendants replied in a brief dated Dec. 8, re-asserting the case as they see it for dismissal. Short summary of the reply memo as respects the derivatives claim, "yes, you did too." Defendants contend that the RICO claims of the complaint in its two incarnations (it was amended once in response to an earlier motion to dismiss) do too in their sweeping language implicate Sirius as part of the Racketeering Influenced Corrupt Organization.

What do I think? I think that consolidation was inevitable. There's only room for one major satellite-radio provider. So I think efforts to characterize this consolidation as racketeering are dubious.

But, hey, I'm watching and learning with the rest of you as this unfolds.

That SRZ report

Schulte Roth & Zabel have put out a report on "current trends in activist investing" and what affected parties expect in this area during the year ahead. I linked to it yesterday, but this post will serve as an executive summary.

SRZ commissioned a survey of 25 corporate execs and 25 activist investors. As you might expect, there were points of disagreement between the two groups. "Corporate respondents tend to view activist investors as short-term investors out to make the highest returns possible in the shortest window of time ...." On one specific manifestation of that view, a majority of the execs said that the SEC should not adopt rules that would provide shareholder access to the company's proxy statement. A very considerable majority of the activists said that they do think the SEC should adopt such a rule.

The two sides of the survey differed also on the issue of the amount of activism they expect in 2009. The activists themselves think they'll have a busy year, whereas the corporate types think the recession will temper would-be proxy fights and such.

Only one of the activists surveyed said that litigation is the best approach to produce change in corporate policy [or "4% of the sample" in the language of pollsters -- we're supposed to remember at this point in the report that the sample consisted of 25.] None of the execs identified litigation as an effective strategy.

David Rosewater, a partner at SRZ, summed up the gist of the survey thus: "There is clearly a continuing wide gulf in the views of companies versus activists of the appropriateness of activists' engagement and involvement with the company abouyt its strategy. As a result, it seems likely that contentious contests will continue for the foreseeable future."

We might hope for "peace on earth, good will to men," but too much peace in the board rooms, too much goodwill at the annual meetings of shareholders, would be a bore.

Just a quick link

Schulte Roth & Zabel, a law firm with offices in New York, Washington, and London, recently posted on its firm website an intriguing report on current trends in activist investing.

You can read the report for yourself here.

I'll say something about why I find it intriguing tomorrow.

Financial/political crisis in Belgium

The highest court in Belgium ruled Thursday, December 18, that the country's prime minister had exerted improper pressure on the judiciary in connection with the planned state-led break-up of the Fortis financial group.

Fortis is a Benelux fianncial powerhouse that came into being in 1990 when a large Dutch insurer (AMEV), and a Dutch retail banking group (VSB) both merged with a Belgian insurance company, AG.

It has made many strategic acquisitions since, and entered investment banking in 1996 with the purchase of MeesPierson NV.

That, and the rest of an acquisition binge lasting into 2007, left Fortis with a balance sheet heavy with debt. Then in June of this year the honchos at Fortis noticed that an international credit crunch was underway, and decided that their balance sheet needed some cleansing. They issued 200 million new shares of stock at a price of 10 euros each, and they cancelled this year's dividend, saving 1.5 billion euros.

The share price headed south -- because the new shares diluted the value of the old, and/or because the dividend cancellation diminished the whole.

By late September, a run-on-the-bank was underway. On Friday, September 26, 20 billion euros were withdrawn from Fortis accounts.

The company was partially nationalized by the three Benelux countries acting in concert the following Monday. Since they don't want to stay in the banking business. these governments appear desirous of selling Fortis to a French firm, BNP Paribas.

The courts of Belgium in particular have thrown a monkeywrench into the works, holding that the private investors have to have a say on the future of their company -- so the government(s) have to comply with normal procedures in terms of holding a shareholders' meeting before concluding the sale.

Those are the judicial proceedings with which the country's executive branch allegedly interfered, leading to a scandal and round of resignations last week.

Meanwhile, I understand that BNP Paribas is bow saying that time is/was of the essence of its deal to buy Fortis. Since this is all taking too much time, BNP may be pulling out, rendering the issue of a shareholder meeting rather moot.

So turns the world. Use it or lose it.

New boss at the SEC

Many of the announcements that have been coming from the camp of the President-elect in recent weeks have been designed to assure us that not too much will change.

They've made these announcements even at the expense of disillusioning their base. One example (IMHO a trivial one) involves the choice of Rick Warren to pray at the inaugural ceremony.

Another example, one that has a good deal more to d with the pulic welfare, as well as with the interests of this blog, than who does the ceremonial praying, is: who will head the Securities and Exchange Commission?

Subect to Senate approval, Obama's answer to that question is Mary Schapiro.

The world of Wall Street knows Ms Schapiro. They're comfortable with her. This seems to have been her chief recommendation for the president-elect. At the press conference announcing this pick, he read from her resume: Mary Schapiro currently serves as the chief executive officer of the Financial Industry Regulatory Authority, the largest regulator for all securities firms that do business with the United States. Before that, she served as an SEC commissioner, and as chairwoman of the Commodity Futures Trading Commission

FINRA, of course, isn't a "regulator" in the public-sector sense. It's a New York based brokerage industry self-regulatory body. ("Not that there's anything wrong with that," I say in Seinfeldian tones. My goal here is clarity we can believe in.)

Schapiro was an SEC commissioner for six years, a period that began while Ronald Reagan was in office, continued through the presidency of the elder Bush, and into that of Bill Clinton. Under Clinton, she moved to the CFTC, where she served from late 1994 until early 1996 -- about 15 months. She thereafter accepted a job with the self-regulatory arm of the NASD. That arm then merged (in the distant summer of 2007) with the self-reg folks at NYSE to become FINRA.

Somewhat amusing sidebar: the first plan was to name the merged entiity SIRA, for "Securities Industry Regulatory Authority." That name was abandoned for reasons havibg something to do with Danish cartoonists, i.e. it was deemed insensitive because of its similarity to an Arabic term describing the traditional biographies of the prophet Mohammed. FINRA was adopted as least likely to give any offense to anybody.

You can make of this what you will. Personally, I have to leave now to worship at the holy church of flyng spaghetti, where we study our finra texts carefully for signs of the apocalypse. And we're really offended by this appointment.

Three brief items

1. Microchip Technology says that it has plans to wage a proxy battle for control of Atmel, and has announced seven nominees for the board of directors.

Atmel, a company headquartered in San Jose, Calif., manufactures microcontrollers, advanced logic, mixed-signal, nonvolatile memory and radio frequency (RF) components.

Microchip made an unsolicited bid to acquire Atmel in late October and was rebuffed. This week's announcement is in response.

2. RA Capital Healthcare Fund, a hedge fund with a biotech focus, is urging the board of Northstar Neuroscience Inc. to make a cash distribution to its shareholders or to implement a share buy-back program.

Northstar, based in Seattle, Wash., makes medical devices, especially a system that delivers targeted electrical impulses, "cortical stimulation," to the brain for what the company's website describes as "investigatory purposes."

RA Capital's letter is mostly limited to "urging" a course of action. There is no real "or else" clause because RA seems to be aware that it isn't in much of a position to forcefully re-direct corporate policy.

3. Whatever you might want to say about Marc Dreier, the lawyer who was caught impersonating a pension plan official last week, you can't argue with his timing. If one is going to be caught in stupid high-level criminality, one should make sure that it is squeezed between Gov. Blago's arrest on the one side and the follies d'Madoff on the other.

For those who have forgotten Dreier and thus aren't sure what I'm talking about ... well, that's the point. And here's a reminder.

Rectifier Update

International Rectifier has set the date for its annual meeting.

I last wrote about IRF in September. Since that time, the price of the stock has dropped steadily, from the neighborhood of $20 to that of $12.

Yes, everybody else has been dropping during that priod, too, but not as severely. If we round out the period in which we're interested to an even three months, the math is easier (or, tobe frank, the Nasdaq site will do the work for me).

IRF has lost 44.9% of its value over three months. The Nasdaq 100 has lost 31.4% of its value. The DJIA has suffered comparatively little, -22.5%.

Anyway, the IRF has set the date: January 9, in Los Angeles, California.

I had thought, in September, that there would be a challenge slate. But it now appears that the challenge didn't materialize, that the two members of the board up for re-election are running unopposed.

On the other hand (the "good news" for fans of conflict), it does appear that the meeting will consider a proposal to de-classify the board.

Payment for order flow

There is an intermittent controversy among those whom manage stock exchanges, brokerage houses and related institutions -- and among those who regulate them -- about a practice known as "payment for order flow."

Back in January 2003, for example, the then-chairman of the Securities and Exchange Commission, Harvey Pitt, wrote to the heads of each of the five US exchanges where stock OPTIONS are listed, just to give them what one might call a heads up.

"Hey guys, we're looking at this issue down here in DC. I'm not saying nothing, I'm just sayin'." [Not his exact words].

The idea was that an exchange would pay a brokerage firm for routing an order to them rather than elsewhere -- the payment might be a penny per share.

The controversy arises because your broker is suppsoed to be working for you, the investor, trying to get you the best deal. If he can get you a better deal for certain options on exchange A than on exchange B, shouldn't he rout your order through exchange B? If a payment from exchange B persuades him to do otherwise, aren't they cheating you?

The same might well be asked also if you're trying to buy the underlying stocks, though Pitt's January 2003 letter involved options for reasons I won't get into today.

Likewise, the same questions might be asked when it is a market maker, rather than an exchange, that is paying to keep orders on some form of security or other flowing. From whomever the money is coming, the broker who receives that money may be putting itself into a conflicted situation vis-a-vis its client.

I'm thinking about such matters today because an investment manager named Bernard Madoff is all over the news this weekend, even putting the continuing controversy over the auto bail-out in the shade for the moment.

Prosecutors claim that Madoff told senior employees at his firm, a market maker, that his operations were "all just one big lie," and "a giant Ponzi scheme."

If there is anything to the charges, the ongoing scandal may further discredit the whole idea of anyone -- exchange or market maker -- paying for any kind of market flow. Because Madoff had been closely associated with the practice, and was in fact a public voice in its defense.

He once told a reporter from CNN who interviewed him on the subject (May 2000): "If your girlfriend goes to buy stockings at a supermarket, the racks that display those stockings are usually paid for by the company that manufactured the stockings. Order flow is an issue that attracted a lot of attention but is grossly overrated."

The analogy is borderline absurd. The stocking manufacturer isn't in a relationship of contractual privity with the shopper, so such issues don't normally arise.

Here's some further reading for the curious.

Anyway, when this is all sorted out we may think of the whole idea of payment for order flow as an important warning sign. For the mark of a pyramid schemer is an increasingly desperate desire to keep increasing order flow.

Votes are in at Grubb & Ellis

Grubb & Ellis, the real estate investment operation based in Santa Ana, California, now says that its stockholders voted (Dec. 3) to re-elect the three nominees on the incumbent board: Harold H. Greene, Devin I. Murphy and D. Fleet Wallace.

Accordingly, they rejected Tony Thompson and the other two members of his slate -- Harold Ellis Jr. and Stuart Tanz.

Wait, I just noticed something. Sometimes I'm slow. But, one of the members of the defeated dissenting slate has a family name that looks a lot like the name of the company.

Harold ELLIS Jr., versus the incumbents of Grubb & ELLIS.

Ah, yes, there's more than one foiled comeback saga here. I understood that Thompson, the leader of the dissident slate, was a former chairman of the company, trying to return to it after a (brief) period at Elba. But what I didn't realize until just now was that the Ellis on his slate is also the Ellis on the company door. He founded the company half a century ago.

Ah, corporate history. Ah, humanity.

Cioffi and Tannin trial date

I see from the wire services that the US district court, eastern district of New York, has set a trial date for two securities-fraud defendants who once worked for Bear Stearns: Ralph Cioffi and Matthew Tannin.

Jury selection begins September 28, 2009.

Cioffi and Tannin ran two hedge funds within Bear Stearns that made big bets on subprime mortgages. The quick collapse of these funds in the summer of 2007 was one of the first claps of thunder in the storm that continues to this day.

So are Cioffi and Tannin mere scapegoats? They were wrong about the subprime market and those who invested in their ability to be right consequently lost a lot of money. But their investors were grownups (and well heeled grown-ups too -- nobody got evicted from his/her garrett because Tannin and Cioffi lost the rent money).

Both men have pleaded not guilty.

One question you might ask yourself: why is this case going to trial in the eastern district of New York? That district consists of Long Island, Staten Island, the Queens, and Brooklyn. Didn't Tannin and Cioffi work in Manhattan? Manhattan, along ith the Bronx, constitutes the SOUTHERN DISTRICT of New York. Yes, they did.

And there have been times when the US Attorney for the southern district was the big cheese in such matters, the sheriff of Wall Street (that's how Rudi Giuliani first became a national figure after all, back in the 1980s).

Some commentators, like Peter Lattman have read the ED attorney's involvement as an incident in an ongoing rivalry between SDNY and EDNY.

Furthermore, the bill of indictment says little more about the reason for the involvement of the U.S. Attorney for the eastern district than this, beyond, "Some of the fund's investors resided within the eastern district of New York." There's surely more to it than that.

I'm hoping for an embarrassment for the prosecution. I hope Cioffi and Tannn's attorneys can make the ED guys wish they had left Wall Street alone. Leave it to the SD forever after, I imagine them telling one another when this is all done.

I'm sure I'll have more to say about this at some point in the nine months between now and trial.

Hain Celestial

Yes, some stockholders at some corporations are interested in pressing for the re-incorporation of the corporations out of Delaware and into North Dakota in order to get what they see as the advantages of the ND new-model corporate charter.

Among the few corporations where this issue has arisen so far is health-food concern Hain Celestial Group. Its best known for its Celestial Seasoning tea, it is headquartered in NYS and ... chartered in Delaware.

Here's a link for more.

The shareholders proposed a non-binding resolution on this subject in July. In October, Hain Celestial asked the SEC for permnission to ignore it on procedural grounds (via a no-action letter). They were denied. So it appears there will have to be a vote.

North Dakota

I don't know that this blog has ever been visited by anyone from North Dakota. But if you drop by in the future and see this message: Hail!

I understand that last year your state enacted a remarkable corporate-governance statute.

It creates a new chapter of the state's corporations law, 10-35, by which a company chartering in that state can opt to be governed. If it does, it will get a low franchise fee, only half of what it would pay if it incorporated in Delaware, but it will have to abide by various rules designed to keep the management responsive to the shareholders.

For example: the term of directors shall not exceed one year and will not be staggered into different classes. So every annual meeting will involve the re-election (or not) of the entire board.

The chairman of the board will be ineligible from holding any executive office. We've become accustomed to seeing the phrase "chairman and CEO" after a bigwig's name. The new 10-35 corporations will have two people for those two distinct posts.

Provision is made for access to the company's proxy materials by major shareholders -- provisions analogous to those recently considered, but never adopted, by the SEC.

Shareholders must approve of certain public issuances of shares: in other words, they can veto actions that would dilute their voting power.

There are other important provisions in 10-35, but those examples will give you an idea of the direction of the whole package.

What difference might this make? Are a lot of firms going to beat down the door to re-charter in North Dakota, either for the low franchise fee or because their shareholders are pressuring them to do so or for any other reason?

More on this tomorrow.

Tecumseh victory

Tecumseh Products Co. announced Friday that it has defeated a challenge by dissident shareholders led by the Herrick Foundation.

In a statement, the chairman and chief executive of the compressor manufacturer said: "We thank our shareholders for thoughtfully reviewing the voting alternatives and providing their support for our current board of directors and, by extension, for the strategic direction we have set."

Anyway, I did enjoy the opportunity this particular proxy contest gave me to learn a little bit about the different sorts of compressors. See my entries for Nov. 10th and 11th for the particulars.

Tecumseh's class B common stock (the class with voting rights) trades on Nasdaq under the ticker symbol TECUB. It's price reacted well Friday to the late-morning announcement of the incumbents' victory, rising from $8.23 a share to $8.79.

The Herrick Foundation issued a statement that sought to make lemonade out of the lemon-like result. The provocateurs there are encouraged by the supportive votes they did receive, and will continue to seek to protect Tecumseh shareholders' best interests, blah blah blah.

It's the usual post game locker-room stiff-upper-lip stuff.

Conflict of Interest

So what's the most dramatic piece of this puzzle in which I've been trying to interest you this week?

Why should we pay attention especially to the proxy fight over Grubb & Ellis at today's shareholders meeting?

It features a dandy conflict-of-interest charge.

The playbook sometimes calls for the incumbent management to say, "shareholders, please don't vote for the challengers. They, or some of them, or the leader of the gang, owns interests in other companies which have interests that compete with yours and our. If they take over this company, they'll end up running it for the benefit of those competing interests, at your expense."

The charge in this case, as made by the incumbents, is that "Anthony Thompson is attempting to take control of Grubb & Ellis and install Stuart Tanz as CEO with the intention to cause Grubb & Ellis to buy or absorb Thompson's newly formed company, Thompson National Properties, a direct competitor."

Thompson's answer is that the two companies aren't direct competitors. They're both real-estate related but that phrase covers a wide range of actual operations.

As Thompson describes TNP, it is more a customer of G&E than a competitor, having purchased 3 buildings from them in 2008.

What about the claim that Thompson wants G&E to purchase TNP?

Thompson and his slate scoff at this, too. Even if they win the election today, they'll have at most three seats out of the eight, so they couldn't push through such a decision by themselves.

Also, Thompson owns a 14% stake in G&E. So, he asks, why would he press actions that would undermine the value of that stake?

One could speculate about responses to such points. After all:

(1) customers are sometimes also the competitors of their suppliers.
(2) even a consistent customer-supplier relationship could generate conflicts of interest. Conceivably, TNP could want to buy G&E to so arrange things that it could thereafter pay lower commissions when it buys buildings [just a hypothetical off the top of my head folks -- in other words, I just made it up!] but
(3) Thompson could for all I know be angling to have G&E buy TNP at an inflated price regardless of what their relationship to each other has lately been -- and could reckon that his gain on one side of that deal would exceed his loss at the other, and
(4) A three vote block on an eight member board is a formidable one, especially if the other five aren't a cohesive block themselves.

And so forth. Round and round the mulberry bush we could go.

Let's wait and see who wins this one.

Charge and Reply

In the proxy dispute over Grubb & Ellis that I described in yesterday's entry, the dissident slate's filings make the following points:

1. Financial Performance has deteriorated over the last year. In the first three quarters of 2008, the company lost $55 million. In the same three quarters of 2007, it made a profit of 14.4 million.

2. Stock price has suffered. Mr. Thompson, leader of the dissidents, left the board in February 2008. Since then the stock has lost 82% of its value. Of course, all stocks have been down in that period, althoughthe dissidents contend Grubb & Ellis has underperformned its peers,

3. There's nobody at the helm. The CEO, Scott Peters, resigned four months ago. The board hasn't named any permanent replacement. The dissidents say, "In our view, Rome is burning and this is hardly the time for the Board to fiddle."

4. An alarming amount of turnover lately, both in management positions and in the company's brokerage division.


To such charges the company responds that althouygh times are turbulent, its results ARE in line with industry peers. It has eliminated more than 10% of its brokerage professional because they weren't meeting expetations, and it has attracted new blood to key managerial roles -- these facts are, in the incumbents' view, signs of strength not of weakness.

As to the CEO post, they say they're working on it. Or, in the relevant lingo: "The Board of Directors is undertaking a comprehensive search for a permanent CEO to lead the Company forward and to continue to execute on our strategic initiatives to the benefit of all stockholders." Don't taz me, bro.

There are more dramatic charges flying around, involving conflicts of interest. But I'll save them until tmorrow, which happens to be the day of the showdown, errr, meeting.

Grubb & Ellis

The shareholders of Grubb & Ellis, a major real-estate services company, meet Wednesday.

Elections to the board are staggered, so only three of the eight seats are in play this year.

Tony Thompson, the former company chairman, was ousted earlier inthe year but he remains the company's second largest shareholder (with 14%) and he wants back on the board.

The largest stake belongs to one of the directors who is not up for re-election this year, C. Michael Kojaian, who was 23%.

The largest institutional stake is in the hands of Wellington Management Co., Boston (7.5%),

The two other members of Mr. Thompson's challenge slate are Stuart Tanz and Harold Ellis. The three incumbents they're seeking to replace are: Harold H. Greene, Devin I. Murphy, and D. Fleet Wallace.

That's the score card. More about the state of play tomorrow.

The four transparencies

A story in Friday's Financial Times (p. 18) formulated with some concision a point I've been mulling for some time. We'll hear a lot about "transparency" in coming months, from regulators in many countriesand in multi-national groupings as well. But "transparency" as it applies to investment funds refers to four very different facts, and it is well that we not lump them together.

In the words of Andrew Baker, of AIMA, as quoted in the FT, it could be "transparency of holdings, transparency of transactions, transparency of who the underlying investors are or of what the performance is".

The case for the proposition that information is and ought to remain proprietary, and thus opaque, is strongest with transactions and holdings. Leaks in these areas contribute to bandwagon effects, or to a sort of ganging up on the injured wildebeest, and in either case the managerial reflex of keeping things close to the vest appears perfectly sensible.

Conversely, the case for transparency is very strong in the matter of investor identity (given the global concerns over money laundering and the financing of terrorist activities) and strong, as well, on performance (in that Mr. Market ought to be able to make comparative judgments).

Let's keep these distinctions in mind. A principle extends no further than the reasons for that principle.

Best Way to Ensure Competition

A deal long in the making, the acquisition of one global mining company by another, won't happen. It has been sideswiped not so much by the credit markets (just two weeks ago BHP insisted it was going forward notwithstanding) -- it has been sideswiped by the competition policy of the EC.

I refer of course to BHP Billiton, the Anglo-Australian company that had planned to buy the Rio Tinto Group with a share swap at 3.4 to 1.

As I noted back in June, when world credit conditions looked a lot better than they do now, even then the stock of the target company was trading at a level below that suggested by the 3.4 to 1 ratio suggesting that even then the market was concerned that regulators would scuttle the deal.

BHP is the larger of the two concerns, but Rio has the more illustrious history. Rio traces its origins to 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.

At any rate, the deal faced scrutiny from regulators in several of the countries in which both companies did business, including South Africa and Australia. But it was the EU that did the scuttling, by making unexpectedly severe demands in terms of the assets that would have to be sold off by the combined entity.

I'll use my humble blog to express baldly an opinion. Scuttling mergers is NOT the best way to ensure competition. There are several reasons for this. One of them is that the predictable action of authorities along such lines preserves incumbent managements against the threat of takeover -- and that the threat of takeover is a valuable deterrent to laziness or self-dealing by incumbents. I'm not making any such charge against the Rio Tinto management, by the way. I'm only saying that in general when authorities act as those in the EU have done, they remove a worry from corporate managers -- and the public needs to have corporate managers worry. Takeovers are among the things they should be worried about.

The best way of ensuring competition is to look for barriers to entry and then lower them. Why is some well-capitalized industrial company somewhere not even now putting money into a start-up iron ore mine? Because the market demand for iron ore doesn't make it profitable? or because there are administrative barriers? If the latter, then the EU might look into how those barriers can be lowered. That would give existing managements more, rather than less, to worry about

Merry Christmas, Target

Bill Ackman of the hedge fund Pershing Square Cap Management, said yesterday that over the next five weeks at least Pershing won't press for talks with giant retailer Target, regarding Ackman's REIT plan.

Ackman had proposed -- and Target management has so far rejected -- a plan in which Target spins off a real estate investment trust consisting of the land underneath its stores, which it will thereafter lease from its spun-off entity.

Target claims that "the potential value created, if any, is highly speculative and insufficient to merit pursuit of a transaction given the costs, strategic and operating risks, and loss of financial flexibility."

Ackman? "We intend to pursue the matter in the new year, after the holiday season.”

My guess is that if holiday shoppers are good to Target's bottom line, the issue will go away for longer than that. This coming month is off course generally the make-or-break time for US based retailers.

Win Ben Stein's Cheapened Money

Ben Stein, the droning voice of Ferris Bueller's teacher, fancies himself an economist, like his father, Nixon adviser Herb Stein. When he's not a game show host, or an anti-Darwinian propagandist.

Ben has recently posted on Yahoo!Finance a column about why the US and all the other major industrial nations should print money like mad. All the dangers are on the "deflationary" side, he says. There's no danger in the other direction, from inflation/reflation. So ... let's go for it!

Hey, sort of like Zimbabwe, right? How's it working out there?

Here's Ben's column, just so you won't think I'm inventing a straw man!

And here is a fine take-down of Ben's nonsense, by the economics junkie, who rightly says that the Stein column is "so utterly wrong" that somebody had to call him out.

Good work, EJ.

Also, over at Portfolio, Felix Salmon has a semi-regular feature, his "Ben Stein Watch," in which he tilts with this windmill pretending to be a giant. I recommend that.

Now that I check, I see that this is the fourth mention of Stein's economic views I've made in the brief history of this blog. So just follow the tag if you've got the stomach for more. Thanks.

Timminco Again

The last time I wrote in this blog about Timminco, the Toronto, Canada-based silicon-processing concern, was late August of this year. The stock price was around C$15 at that time.

The price has slipped to $2.75 since.

The reason for returning to the subject, though, isn't that slide in itself. It is morethat the company has removed a positive report on its technology from its website. The report was called the "Photon Consulting Operational Review," and it purported to review Timminco's production of materials used in the manufacture of low-cost solar cells.

The review came under fire as soon as it was issued, back in the spring, i.e. back when the stock price was C$24.90! Now Timminco seems to be admitting that its critics had a point. In corporate-speak, it "believes that some of the material factors or assumptions originally used to develop the forward-looking information in the Photon Report, including in respect of revenues, production volumes and costs, may no longer be valid."

Here, as in many other instances, the short sellers of a stock aren't nasty manipulators throwing dirt at a well run company. There has surely been short interest in Timminco, but the shorts in these situations come out looking like detectives who ferreted out valuable information, thereby making themselves a profit while performing a public service.

Don't you love it when things work out?

A few words about Mark Cuban

I can't say I've admired Mark Cuban in recent years. His public persona is that of the standard-issue billionaire big-mouth, a real-like Tony Stark without the titanium suit, and the ideas behind Cuban's "Sharesleuth" project seem to me entirely misguided.

Gary Weiss explained the problems with Sharesleuth welll in several items posted on his blog in 2007, when that project (supposedly a new model for finance journalism) was at its peak. I'll just link you to one of those items, thereby taking that task off my own shoulders.

Instead I'll say this: unimpressed though I am with Cuban, I suspect he is in the right in his latest fight. The SEC has chosen him as its newest target for its intermittent anti-insider campaign.

I've never been impressed with the idea that punishing insider trading makes sense. Some deterrent for breaches of fiduciary duty is appropriate of course, but that's rather hard to find here.

So I'm rooting for Cuban. Fight the power, MC!

Joe Nocera’s recent book, Good Guys & Bad Guys, makes a related point. It’s in a reprinting of a story Mr. Nocera wrote for GQ in December 1992, concerning Drexel Burnham and Michael Milken.

For the record, Mr. Nocera occupies a ‘moderate’ position on the spectrum of reactions to Mr. Milken [who was in prison when the story was first written]: Nocera argues that the infamous financier was guilty of some crimes, but not of the worst of those of which he was accused, and that his sentence was excessive.

But that isn't what intrigued me about the article. The passage I have in mind quoed an unnamed associate of Milken's saying: “”When a Drexel salesman heard that the corporate-finance department was buying a stock – for what reason he didn’t know – and then advised a client wanting to sell that same stock that he might be better holding on to it, was that an example of insider trading? Or was it something more innocent?”

Good question. Indeed, it’s a better question than Mr. Nocera (who soon drops the query) may understand. There is nothing extraordinary about such an instance, and since given existing law and prosecutorial practices there is no good answer to that question, then the courts and prosecutors who punish insider trading are in effect telling traders, brokers, bond salesmen, etc. that they have to drive 55 miles per hour or below – and that they can’t use a speedometer, because none are available.

That’s wrong.

Personally, when I use the phrase “free markets,” I don’t mean the word “free” as an adjective. I mean it as a verb. Let’s free markets.

More on Sirius XM

Sirius has scheduled its annual shareholders' meeting for December 18, and has filed an agenda with four items: the re-election of the board of directors; approval of an amendment in the certificate of incorporation to increase the number of authorized shares of stock; approval of a reverse stock split; and ratification of the appointment of KPMG as accountant.

This is the meeting that Hartleib and allies hope to have postponed.

I've done some quick research on the lawsuit mentioned in Mr. Hartleib's recent press release. It appears he actually filed it months ago, in July, when the precursor company defendant was still known as Sirius Satellite Radio Inc.

The original complaint charged, (and I emphasize, I'm only conveying an accusation, one made as a matter of public record, and I don't intend thereby to give it any cerdence): "Upon information and belief, Sirius and XM did develop an interoperable radio, but based on claims that it could not be marketed commercially, never made the radios available to the satellite radio using public."

The plan to merge the two companies developed, the complaint says, as a way of avoiding the competition that interoperability would have made necessary.

At the end of that month, the merger closed.

In September the defendant moved to dismiss the case, arguing as follows: "Basically, Plaintiff, a private citizen, seeks through this action to substitute his own judgment for that of the Federal Communications Commission and the Antitrust Division of the United States Department of Justice, both of which conducted comprehensive reviews of the proposed merger and its competitive effects over many months -- and approved it."

The court granted the motion to dismiss, but in doing so gave the plaintiff leave to amend -- i.e. until October 27 to file an amended complaint that might cure the defects of the first effort.

So the plaintiff filed his amended complaint on time. This one focuses on the merger as a breach of fiduciary obligation. "The Board and officers of Sirius ... grossly mismanaged its operations by engaging in reckless financing of the merger [ignoring] warning signs that the merger ... would severely damage Sirius Satellite Radio Inc." The complaint notes that shares of Sirius traded at about $2 a share before the merger, and have since (as of late October) fallen to 29 cents per share.

The defendant has again, as of yesterday, Nov. 17. moved to dismiss. In its motion, it says thst the sort of charge I just quoted is a conclusory allegation "without particularized facts about the individual directors' supposed conflicts. Likewise, hartleib carelessly accuses the Board of misconduct ... without identifying specific wrongdoing by any particular member."

That's where matters stand as to the lawsuit. My guess (which is only a guiess) is that Hartleib himself is concerned that things aren't going his way, that the defendants may win this one as well. If so, then it makes sense that Hartleib would go public with a press release just as the defense is making its second motion to dismiss -- appealing over the heads of the judge to the public and the shareholders, so to speak.

Sirius XM

Michael Hartleib believes that the management of Sirius XM has been unjustly enriching itself at the expense of its shareholders.

This raises the question: "Who is Michael Hartleib?" Other than the fact that he's the subject in the lead sentence above, I can't find that he "is" anybody whose name most of us should recognize.

Still, he has taken two actions worthy of note in this place. He has created a group called SaveSirius with the idea of waging a proxy fight, and he has filed a derivatives lawsuit in a federal court in California.

SaveSirius has sent formal letters of demand to the SIRIUS XM directors. It demands, specifically:

* postponement of the vote that is seeking shareholder approval to further dilute the common stock by increasing the number of shares in the fully diluted float from 4.5 billion to 8 billion.

* postponement of the proposed reverse split, ranging from 1 for 10 to 1 for 50.

* immediate suspension of all stock compensation plans and other bonuses.

Three brief items

1. Grey Wolf Inc., a provider of oil and gas land drilling services HQ-ed in Houston, plans to merge with Precision Drilling Trust, of Calgary, Alberta, Canada.

Shareholders of record as of Oct. 27 will meet on December 9 to approve of the merger agreement.

I don't as yet see that anybody is actively opposing this. I may be missing something, because when I see a company issuing a press release as Grey Wolf did last week saying that two proxy advisory sevices have recommended shareholders approve its impending merger, I tend to imagine there is a fight underway.

When I did an EDGAR search just now I saw a lot of items described thus: Additional definitive proxy soliciting materials and Rule 14(a)(12) material but nothing that says "non-management proxy soliciting materials."

Darn, no fight. "Nothing to see here people. Move along."

2. Carl Icahn hovering over Lions Gate.

Lions Gate Entertainent Corp. is an independent film and television studio behind the cable series "Mad Men" and "Weeds." On November 10 it reported second quarter earnings,. They were below Wall Street's expectations.

This news didn't cause a budge in the stock price (NYSE: LGF). The stock continues to tradfe in a range betwen $6.25 and $6.75.

One factor that tends to keep traders interested in a stock is that Carl Icahn is hovering about, whichis the case here. Icahn bought a large stake in the stock last month, and some fruther news from him is considered likely.

Lions Gate issued three movies in the second quarter that had disappointing box office: My Best Friend's Girl; Disaster Movie; Bangkok Dangerous. Not so boffo.

3. Plaintiffs' bar in securities litigation suffers a defeat in F-cubed action before the 2d circuit.

The 2d circuit has upheld the dismissal of a class action brought against National Australia Bank Ltd. in New York.

NAB is (as you might have guessed from the name) an Australian financial corporation, which has suffered significant losses on mortgage-related investments in the US. NAB is listed on the Australia Stock Exchange. This lawsuit was brought in a federal court in New York by foreign investors, for blatant forum shopping reasons.

These are called F-cubed because such cses have three indicia of foreignness: foreign issuer, foreign plaintiff, foreign exchange listing. The alleged nexus to the US is only that the defendant made bad investments in the US. The second circuit says this isn't enough.

The next Treasury Secretary?

There's a good deal of speculation these days about the composition of the incoming Obama cabinet. It gets almost as much attention in the broadcast networks' news shows as the choice of a new White House puppy.

One intriuing bit of guesswork is that Timothy Geithner may be the next Treasury Secretary.

Geithner, who since November 2003 has been president of the New York Fed, would be a non-partisan choice, certain of Senate approval sans fireworks. He has held important posts under both the Clinton and the Bush (II) administrations, and is himself an avowed independent.

The New York Fed, institutionally, is the Wall Street annex of the federal reserve system itself. Though the brains of our central bank has to stay in Washington, it has to have both its eyes and its hands in southern Manhattan.

Geithner was profiled in the June issue of Portfolio, by Gary Weiss. In those innocent days, before the Lehman collapse, before the stock market panic of September and October that killed the McCain campaign and led to the nationalization of key financial firms -- before all of that, Weiss focused on Geithner's "informal brains trust," a group of Wall Street luminaries with whom he has been consulting.

These may also be figures of moment in Washington for all or some of the next four years: John Thain; Gerald Corrigan; Paul Volcker. No spring chickens in the group. John Thain is the reative youngster, at a spry 55 years. Volcker was the head of the Federal Reserve in the late Carter and early Reagan years, for goodness sake. Corrigan was Volcker's special assistant in those days.

If the Obama administration recruits its economic team from such a crowd, it will have made the decsion that the country needs some old wise white-haired heads around, for when those emergency calls come in at 3 AM from Greenwich, CT or the Isle of Man.

Scroll Compressors

I'll pursue the technological point I mentioned in yesterday's entry for a moment today, because I do think its healthy for those of us who characteristically write about the financial side of business news to re-focus when we can on the operational side -- on the fact that companies do stuff, they make things, they provide services to people, etc.

The cash flow, and everything connected with it, ultimately is founded on this doing-of-stuff. Operations should drive finance, not the other way around.

So in trying to understand the dispute over Tecumseh, I found myself wondering what exactly is a "scroll compressor."

To start at the start: a "compressor" in the relevant sense is a device that increases the pressure of a gas by reducing its volume. The more traditional sorts of compressor are: rotary, reciprocating, or wobble-plate. Reciprocating compressors, just for example, use pistones driven by a crankshaft.

A scroll cmopressor, on the other hand, involves two spiral-shaped surfaces, interleaved. One is fixed, the other orbits eccentrically without rotating. If you look at a diagram of this, the effect is positively hypnotic. There's a photograph that will give the general idea.

The site that includes that photograph also gives a list (in the context of their use cooling milk) of some of the benefits of scroll compressors: they require less electrical current than the alternatives, make less noise, are easier to maintain since there is no metal-on-metal friction, etc.

So now I understand: one of the contentions of the dissidents in the Tecumseh proxy fight is that the management failed to make a transition to scroll compressors in a timely way, and is now behind the rest of the industry.

On the other hand ... scroll compressors are not without their drawbacks. They're more vulnerable than other compressors to damage caused by foreign objects, or by brief power interruptions.

At any rate, these issues have been under consideration within Tecumseh for more than a decade. In the company's 2000 annual report there's a reference to the company's investment in a scroll compressor manufacturing facility, with the rueful observations that, "In 1996, unacceptable field testing results led to the abandonment of this particular design. Since then, several new designs, intended to serve primarily commercial applications, have been under development and testing."

So that's my bit of didacticism on engineering for the day. Back to finance tomorrow.

What's a "scroll compressor"?

Tecumseh Products, a Michigan-based manufacturer of compressors for heat pumps and refrigeration products, especially for the commercial and industrial markets, is seeking to put a chill into a bid for control by the Herrick Foundation. The matter will come to a head at a special meeting on November 21.

The proxy advisory firm Glass Lewis has come to Tecumseh's aid with a report that says among much else: “We see no reason to believe that the replacement of current directors with the [Herrick Foundation] nominees would provide more meaningful returns to shareholders than management’s current strategy.”

Glass Lewis praised the company's improvements in "operational performance," its recent asset sales, and its cost reduction efforts.

This proxy fight has a nearly two-year time line. It was in February 2007 that Herrick informed Tecumseh that it would be nominating three candidates for director. This was a bid for control, since the board has only five seats.

Tecumseh replied by expanding its board to seven seats. After some back-and-forth over the following weeks, the parties reached a one-year standstill agreement in April. This agreement left Herrick with two of the seven seats.

So in the spring of this year, that agreement came to its end and the back-and-forth manuveuring resumed. In April 2008, the Tecumseh board amended the company by-laws to make it very difficult for shareholders to call a special meeting. Herrick sued.

In August,the circuit court in Lenawee County, Michigan, ordered a special meeting for November 21. The purpose of the meeting is to consider the removal of two directors and the election of new directors to fill the vacancy if removal is approved. The two directors that Herrick has targeted for removal are Tecumseh's longest-serving directors, Peter M. Banks and David M. Risley.

Obviously, if Herrick manages to replace Messrs Banks and Risley with two directors more favorable to itself, its share of the seven member board rises from two seats to a majority four.

An intriguing but rather isolated line in Herrick's proxy materials says, "The industry trend is toward the use of scroll compressors, which competitors have had for some time, but Tecumseh is in the early stages of offering."

What's a scroll compressor and how does it differ from the sort of thing Tecumseh does offer? A homework assignment!

Rousseau's deal with Noront

A considerate reader has answered a question I asked in mid-October.

I observed, on October 13, that the hedge fund Rousseau Asset Management was challenging the incumbent board at Noront Resources Ltd. and I wondered aloud what was the inspiration for the fund's name? the painter? the Enlightenment philosopher?

So today I make an overdue acknowledgement of reader "Rosedale," who told me (on October 28, the very day on which the meeting was scheduled) that RAM is named after Canada's Lake Rousseau, where the fund's manager, Warren Irwin, has his boat.

Noted. Now ... what happened about the proxy fight?

The day before the meeting, October 27, Noront and Rousseau settled their differences. Noront's president, Richard Nemis, agreed to step down as Prez and to become instead "chairman emeritus" and "special advisor" to the board.

The office of president is now occupied by two men, Joseph Hamilton and Paul Parisotto, as a team. But they are doingso only on an "interim basis" while theboard looks for someone to take the job on permanently.

As to the question of who is to sit on the board (which is after all at least the headliner issue in most proxy fights), the two sides worked out an elaborate ballet. They jointly recommended the election of three nominees from the incubent board and four nominees from the challenge slate. So they have a seven seat board, right? Wrong.

Immediately after the election, by agreement, one of he nominees from the challenge slate and two of the nominees from the former incumbent slate resigned as directors. The challenge-slate resignee, Michael Woollcombe, was not replaced. But the two incumbent resignees, Maurice Stekel and John Blancheflower, were immediately replaced by two appointees nobody had nominated.

So the company now has a six-seat board of directors. One of these was a member of the previous board, three were from the challenge slate, and two are agreed-upon appointees from either.

Curious. And as theatrical in its own way as any drama ever barred from the City of Geneva.

Cliffs meeting re-scheduled

The Cleveland, Ohio based mining company, Cliffs Natural Resources, has rescheduled its special shareholder meeting, called to approve its proposed merger with Alpha Natural Resources.

The company was known as Cleveland-Cliffs until last month, and it had planned to hold the special meeting on November 21.

Now they have set a new date -- almost a month later. The meeting will take place December 19, with a "record date" of November 19.

Ohio statutes require a supermajority of shareholders to approve of such a merger, so opponents can block this deal with 35%. Such opposition does exist, as those who've been following the matter along with me know.

My reading of the delay is that the management at Cliffs knows they don't yet have the votes to push this through. But they think they can persuade some of the dissidents to vote their way given the extra month they've now given themselves.

Alpha is unhappy. It has brought a lawsuit in Delaware seeking to obtain an order invalidating this re-scheduling. What gives there? Does Alpha want to push the deal through quickly? or do they want to kill the deal by holding the vote befoe any of the dissidents can be persuaded to change their views? (Seller's remorse?)

Election Day thoughts

First, I hope for my own sake and that of my fellow countrymen and women that the decision today isn't especially close so we don't end up spending the next two months debating about hanging chads, butterfly ballots, disputed absentee ballots from military bases, or whatnot.

It appears, from what little we know so far (I'm writing a little after 9:30 AM in the east) that this will not be the case. Senator Obama seems likely to end the night with a mandate.

I'm not especially trusting of polls, but I do have a high opinion of the efficacy of prediction markets such as this one. Intrade is showing as I write that you have to pay more than 91 cents for a chance to win a dollar on the bet that Obama will become President. You can buy onto McCain's Straight Talk bandwagon for just 9 cents. It is petty clear what that means.

In terms of economic/financial policy, I suspect a Prsident Obama would go along with the rising call in Europe and East Asia for a new Bretton Woods-style conference to develop a global system for the co-ordination of monetary policies, exchange rates, etc. What would come out of such a conference? One likely result would be the formalization of a new role for the Chinese yuan as the central pillar in this new system. It is the only currency that could possibly hold the position that the US dollar once did.

That's an index of the size of the changes underway and the changes to come.

Penn National Gaming

Penn National Gaming owns and operates gambling facilities, (including racetracks) -- operating in 14 of the states of the US and in the province of Ontario.

Just last week it issued 12,500 shares of preferred stock to raise $1.25 billion. It had to raise that money in order to get out of a contract to be acquired by Fortress Investment Group and Centerbridge Partners -- a deal that was drawn up in the summer of 2007, and thereafter unravelled as have so many others during this credit crunch.

PNG holds its annual stockholders meeting on November 12. The management will ask stockholders to approve its long-term incentive compensation plan. There will be some opposition to this.

Indeed, at last year's meeting stockholders voted against a similar plan, which as this year involved seeting aside a substantial chunk of the issued equity for awards of various sorts to both employee and non-employee directors. One of the proxy advisory groups, Proxy Governance, has said that that vote reflected "a level of shareholder opposition infrequently seen."

This year the board's compensation committee is saying, in effect, "if the shareholders don't approve this set-aside, we'll just have to incraese the honchos' compensation with larger cash salaries."

As threats go, that's pretty lame. If shareholders are ticked off at management, they'll express this in the manner available to them.

Proxy Governance's report also makes the case that the compensation to these honchos is already high relative to the compensation of directors in comparable firms.

Personally, I'll be pulling for another rebellion in the ranks this year.

Target and the proposed REIT

Target's shares (NYSE: TGT) fell 6% on Thursday, AFTER bill Ackman announced his plan to enhance the value of Target's equity through a REIT spinoff.

It seemed safe to conclude the market doesn't like his plan. But then, the stock gained most of that value back on Friday. So one might have to re-think this.

I'll attaching a stock chart for last week. Target's price moves are the blue line, compared here to those of the DJIA, in yellow.

Target seems to have risen Tuesday and Wednesday. The DJIA too was rising Tuesday, but was flat on Wednesday. We can infer, I think, that traders were "buying on the rumor" as the old adage has it. They were buying on the expectation that Ackman would present a plan, even without knowing what the plan was.

What's the other half of that aage? "Buy on the rumor, sell on the fact." My own best guess is that when Ackman publicly announced his plan, whatever it was, there was bound to be some decline.

then on Friday, with the twin requirements of that adage satisfied, did the market finally express its considered opinion of the plan? If so, the plan is good, but not a Wowser! kind of good. The price rose Friday, but so did the DJIA as a whole, and the Target rise was only slightly greater than the Dow's.

I'm in a lazy Sunday kind of mood so I've let the market do my thinking for me. Here's a link to those ho want to read some less lazy blogging on this issue.

Update on the Pershing Square story

Yes, as he promised, Pershing Square's principal Bill Ackman did explain his plan to improve the value of the equity of Target Corp. today.

He said that the company should spin off a separate entity that will own the land on which its stores are built, then lease the land from its corporate offspring for a period of 75 years.

Target responded non-committally. It is reviewing the plan, but it has "serious concerns on a number of important issues."

It sounds like sleight-of-hand to me, but I'll give myself three days to mull it over. Catch you folks here Sunday.

Three brief items

1. More on Porsche, VW, etc.

A report in today's Wall Street Journal says that several hedge funds have taken a beating as a result of their speculation in VW shares, and the spike in VW's share price I discussed in yesterday's entry.

"Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital," the p. C1 story said.

There have been rumors of effects going beyond that list, and beyond the hedge fund world.

2. Ackman has a plan for Target

Pershing Square Capital Management, which owns nearly 10% of the giant retailer Target, said it has a plan for a transaction that will boost Target's value. It will present its plan today, Wednesday.

Bill Ackman is the principal of Pershing Square, a hedge fund that has been involved in some memorable corporate in-fighting over the years. To his credit, Ackman was arguing in a very public way, before it became a commonsensical observation, that credit ratings agencies and banks were co-operating to prop up bond insurers such as MBIA so that the banks wouldn't have to write down their exposure to such insurers.

Anyway, Pershing's latest statement on Target is as follows: "Pershing Square believes that the insights gained by sharing the potential transaction in a public forum will benefit Target and all of its stakeholders."

One clue to what he has in mind: Mr. Ackman recently expressed interest in a potential derivatives transaction that he said would let Target effectively retire more of its own shares. That provides a nice segway to my final item of the morning.

3. Canada wants to restrict bank share buybacks

The most important fnancial regulator in Canada at the federal level, the Superintendent of Financial Institutions, put out an advisory note Monday that banks shouldn't be buying back their own shares. That runs counter to the goal of strengthening their balance sheets.

Canada's banks are in general in better shape than those in the US or in Europe, where as one would expect the temptation to buyback/retire shares just isn't a big problem right now. Canada's financial institutions generally have a strong retailing base, and their mortgage-lending practices have remained conservative. So I'm a bit baffled by the SFI's concern.

Apparently, though, he thinks their practices may not be quite conservative enough. The SFI's note said: "The current environment calls for increased conservatism in capital management."

Porsche and VW

VW shares shot up on the Deutsche Börse over the last two days in what looks like a classic "short squeeze." I'll take this as an opportunity to go into full-pedantry mode and explain what a short squeeze is. Those of you who already know, or who neither know nor care to learn, are of course free to click yourselves elsewhere at this point!

The price of a share of equity in Europe's largest auto manufacturer increased by 147% Monday, and is up again, though somewhat less dramatically, today.

Here's a closely-related fact: as of last Thursday, 12.9% of VW's shares were on loan to short sellers.

A short squeeze in an uncomfortable event in the life of a short seller. Specifically, it is what happens when a substantial share of a company's stock is out on loan for purposes of a short play, and the stock's price unexpectedly starts to rise. The short sellers need to cover, and they all may decide they need to cover at the same time, because they now expect the stock price to continue rising and they have to cut their losses. So they head for the same exit door at the same time, shouting "buy, buy, buy!"

This of course makes the price of passage through that exit increasingly expensive.

That, then, is what is going on with VW. Over the weekend, Porsche unexpectedly disclosed that through the use of derivatives it has recently accumulated a 74.1% stake in VW, up from 34%. The state of lower Saxony owns 20.1% This means that there is a "free float" of only 5.8% of VW's capitalization. It also means, as a matter of arithmetical necessity, that some of those shares on loan must actually be the property of Porsche or Saxony, though the short sellers presumably obtained them through the services of a prime broker.

It didn't take long for short sellers to do the math and decide that the exit door was shockingly narrow.

VW is one of the shares on which the Teutonic DJIA, the Dax index, is built. So Dax has shot up along with VW. This morning the Financial Times quotes one analyst thus: "This is a special situation and I think it will go on as long as Deutsche Börse doesn't make a decision regarding these extreme movements in VW shares."

More BCE Excitement

Common shareholders of BCE Inc., the holding company of telecomm giant Bell Canada, have filed a class action lawsuit demanding the payment of a dividend they had expected this summer.

Black-letter law is that no one can claim a right to a dividend. If an investor wants regular payments as a matter of right, the instrument he wants isn't a stock, it's a bond. Dividend policy is a matter within the business judgment, i.e. the nearly-unlimited discretion, of the board of directors.

The real point of the lawsuit, it would seem, is to derail the underlying deal. What the owners of equity do get, instead of a guarantee of payments, is a right to have a say in the major corporate decisions. That right is the basis for the existence of this blog, after all. I'm not entirely clear on how, in the plaintiffs' view, they've been deprived of that right here, but it seems that "pay us the dividends" is more a measure of damages in their eyes than the alleged legal injury.

The privatization of BCE will be (if the teachers'-pension folk behind it manage to pull it off) the largest leveraged buy-out ever. The deal was signed more than a year ago, though the closing has had to be delayed because the prevailing buisness climate has hardly been conducive to such wheeling-dealing.

A bond rating agency has estimated that if the deal does go through this December as now scheduled, BCE's consolidated debt will be C$42 billion, which is more than twice last year's revenue.

The deal has already generated some fascinating litigation. If you follow that link, you'll get to my earlier discussion of a challenge to this same transaction by bondholders.

So it may yet generate more.

Chuck Grassley v. Linda Thomsen

Senator Chuck Grassley now alleges that he has information (from an "anonymous but specific" informant) that Linda Thomsen, the director of enforcement at the Securities and Exchange Commission, has given information to the general counsel of JP Morgan Chase, concerning the state of various SEC investigations into Bear Stearns.

You'll remember that JPM took over what was left of Bear in a shotgun wedding arranged by the federal government in March.

Apparently it was while that transaction was pending that the executives at JP Morgan became (understandably!) very interested in the regulatory/compliance questions concerning this particular pig in a poke. The general counsel of JP Morgan Chase spoke to Ms Thomsen about the matter.

Ms Thomsen (again, according to Sen. Grassley's source, not according to me!) made representations about these investigations without talking to the staff doing the investigation.

Such conduct, worries Grassley, "would reinforce the appearance that Enforcement decisions, and disclosures of information about them, are sometimes based not on the merits, but rather on access to senior officials by influential representatives of power brokers on Wall Street."

Grassley put all of this in a letter he wrote to SEC chairman Christopher Cox dated October 21 -- Tuesday.

If the charges are right, if these phone conversations did take place, what harm might have been done by Ms Thomsen's indiscretion?

Grassley's answer is that if Morgan received "inside information" in that way,m it might have been able to put together a low-ball bid to Bear and the US government.

What this seems to mean is that there may have been other potential bidders for Bear out there who were scared off by the possibility of enforcement action. But JPMorgan wasn't scared off. Presumably, its general counsel had heard something re-assuring from Ms Thomsen.

Intriguing theory. We'll have to see how this plays out.

A book about AIG

For those who have an interest in entrepreneurship, or the history of the insurance industry, or just the recent business/regulatory history of the United States, I'd like to recommend a book, FALLEN GIANT: The Amazing Story of Hank Greenberg and the History of AIG (2006).

The book is the work of Ron Shelp "with Al Ehrbar." As usual that formulation means that Shelp is the insider guy, but Ehrbar is a professional writer who helped Shelp put this into shape for publication.

Shelp was a trouble-shooter and righthand man for Greenberg in the 1970s and 1980s. The book isn't a corporate PR department style puff piece, though. I don't think a puff piece would include this anecdote, about the kitchen for the company headquarter's dining room.

"At one point [circa 1981] there was an equal opportunity suit threatened by an Irish waitress against AIG because the dining room had exclusively Chinese waiters. To make matters worse, allegedly the Chinese weren't all legal immigrants. So a group of Irish waitresses were hired. They all quit within a relatively short time span because the Chinese made their lives absolutely miserable. I don't know what they did back in the kitchen, but it worked. Today, there are still all Chinese waiters but a few Chinese waitresses as well."

Balancing the Chinese with the Irish? It sounds like the recipe for a transcontinental railroad, not a personnel policy for a major corporation in the 1980s.

Just one more anecdote, then I'll leave you to discover the rest of this book for yourself. Some time in the early 1970s, AIG hired Tommy Corcoran as a lobbyist.

In 1975, Hugh Carey became Governor of New York, and a fellow named Matt Nimitz ran Carey's transition operation. Matt's office while he was doing this was in NYC, not Albany.

Anyway, Corcoran called Nimitz and said, "I am calling on behalf of AIG and we are very interested in talking to you and the Governor-elect about who the next State Insurance Commissioner will be."

Nimitz replied that he was busy.

Corcoran: "No problem, take this telephone number down and call me when you are free. It is a pay phone in Times Square and I will stay here until I hear from you!"

Corcoran was an old man -- and something of a legend within the Democratic Party. He had been part of the brains trust of FDR, and later of LBJ as well. A Carey appointee wasn't going to leave him waiting at a phone booth in Times Square. [Of course, this wouldn't work today, everybody has a cell and everybody knows that everybody has a cell.]

Nimitz made time for him. Later, Nimitz told Shelp, "I actually doubt now that he really was at a Times Square phone booth," but the ploy got Corcoran into Nimitz' office, and "in fact we chose an excellent insurance commissioner whom Hank and others felt comfortable with."

Shake-up at Deutsche Borse

Kurt Viermetz has resigned as chairman of the board of Deutsche Boerse AG, effective December 8.

Deutsche Borse owns the Frankfurt stock exchange, Clearstream (a settlement operation), Eurex (the dominant force in European equity derivatives), and Eurex Clearing.

Viermetz has been its chairman for just three years, and although it isn't clear just what happened behind the scenes leading to his departure, the folks who put him there seem to have lost faith in him.

The hedge funds Atticus Capital and TCI were instrumental in Viermetz' rise to the chairmanship three years ago. The best guess at this point is that they expected him to initiate a buyback of the company's equity by this point. He has resisted doing so, and now he's out.

Atticus reacted quickly to the news: "Atticus is pleased by Mr. Viermetz's decision to resign from the supervisory board of Deutsche Boerse AG, which we believe is in the best interests of the company and its shareholders," it said in a statement this weekend. "We wish to recognize and thank Mr. Viermetz for his years of service on the supervisory board."

To those of us who don't happen to own DB stock, the issue of whether the company is to initiate a buyback may seem a rather trivial one. An operational issue is also under discussion there, though: whether the company should spin off some of its units.

From the point of view of the stock or derivatives investing publics, is it better to deal through an exchange that is separate from the clearing/settlement operation, or with a single integrated company that performs both functions? Should we be hoping that whatever shake-up underway at DB results in a break-up?

A 'beer war' after all?

InBev, the Brussels based company that has entered into an agreement to buy Anheuser-Busch, faces a rebellion at last -- coming from a perhaps-unexpected quarter, from Grupo Modelo and allies.

InBev and AB agreed on the terms of their combination in July. Shareholders of the target company are to get a sizeable premium over the price of their stock before the bid, and Budweiser (not Stella Artois) will be the flagship brand of the combined company.

The key fact for understanding the new development is this: AB owns half of the equity in a Mexican beer company, Grupo Modelo, best known for Corona.

GM has initiated an arbitration action against AB, claiming that the latter was obligated under a 1993 agreement to consult it before concluding a deal with InBev. The arbitration action has instigated rumors that what GM really wants is a chance to buy back that 50% share of its equity. But a spokeswoman for the Mexican company denied this to a reporter for Reuters Friday.

InBev has a statement out expressing confidence "that the claims made by Modelo [and related parties] are entirely without merit."

Anyway, if Grupo isn't seeking the opportunity to buy back AB's interest: what does it want? To throw a monkey wrench in the works of the still-unclosed deal entirely? To get a greenmail pay-out for the shareholders who own the other half of its equity? What?

The price of Grupo shares was flat Friday on the Mexican stock exchange. The price of AB shares rose slightly.

I didn't see it coming

In a sudden fit of humility, suitable perhaps for a Sunday morning, I've decided to remind you of a prediction I made a month ago that has proven false.

Crude oil prices.

I noted the ongoing fall of crude oil prices. They had been at around $150 at their mid-summer peak, but by last month had dipped into the upper $90s.

With my customary brilliance, I said, this has "likely gone as far as it is going to go."

Oops. It has lost another $30 per barrel. And, even better, the fall has shown up in the price of gasoline at the pumps. I'm delighted to have been wrong.

The effective halving of the price of crude might be the only thing keeping our economy going at all at the moment, given the credit squeeze and consequent Wall Street meltdown.

Orient Express and its shareholders

I reported last week in this place that two hedge fund shareholders in Orient-Express Hotels Ltd. had offered a proposal to dismantle the dual-class shareholding system in play there.

OEH held its shareholder meeting Friday. Based on the preliminary results reported by the independent inspector, 70% of shareholders supported that proposal.

But of course the vote is of psychological rather than managerial experience. A scheme devised to effectively disenfranchise class A shareholders can't be effectively dismantled by the vote of the class A shareholders!

In a statement yesterday, the principals of the two hedge funds demanded a meeting with the OEH board. They also said: "We continue to believe that the Company’s circular ownership and voting structure – in which an entrenched Board controls 80% of the shareholder vote and remains accountable only to itself – is unlawful."

The company's response is that the board and its management "consider the matter addressed by the Special General Meeting to be closed, and [they] will continue to focus on delivering shareholder returns and managing the business in the best interests of all [their] shareholders."

Nothing very revealing has happened in terms of the stock chart in the two business days since the meeting. The price of a share of OEH gained some ground Monday and lost that ground again Tuesday.

I wouldn't want to get on a goo-goo high horse here, and I've offered the usual caveats in some of my earlier posts. But OEH's structure does seem uniquely unresponsive, and I wonder how long the market will support that. Presumably, the recourse of class A shareholders unhappy with the situation is to sell. If OEH wants to support its stock price, it should concern itself with the archaic nature of this arrangement.

Overstock and Gradient: Friends at Last

Overstock.com Inc., the discount retailer based in Salt Lake City, Utah, has announced the settlement of its lawsuit against Gradient Analytics, of Scottsdale Arizona.

Fans may recall that Gradient is the independent stock analyst formerly known as Camelback Research Alliance Inc. Overstock's complaint, brought in a state court in California, was that in 2005, Camelback conspired with hedge fund Rocker Partners to issue falsely negative reports about Overstock in order to benefit Rocker's short positions.

The settlement comes after an unsuccessful effort on Gradient's part to persuade California's courts to set aside the complaint on first amendment and/or SLAPP grounds. [SLAPP is an acronym for "strategic lawsuits against public participation," and a California law aimed at discouraging the practice of stifling public debate by such means.]

According to the statute: "A cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim."

The word "probability" in that statute appears to mean something different for this court than it means to, say, a casino manager. The court said it isn't making a decision about which side has the better hand, but that for purposes of deciding the motion, it accepts as true all evidence favorable to the plaintiff.

Both the appellate court and the state supreme court have said that Overstock's lawsuit isn't a SLAPP, Gradient responded by filing a cross-complaint this spring, and the parties had been preparing to try the matter on the merits, with a trial date set for this coming April.

Now there's been a sudden outbreak of amity. The terms of the settlement are confidential, though Gradient put out a statement Monday, Christopher Columbus notwithstanding, saying that Overstock's accounting policies "did in fact conform with generally accepted accounting principles (GAAP) and regrets any prior statements to the contrary." Rocker Partners [or, strictly, its progeny, Copper River], remains a party.

The chairman and CEO of Overstock, Patrick Byrne, said in his company's statement: "I wish Gradient Analytics the best in their future endeavors. Overstock.com will now focus on the remaining defendants, Copper River, David Rocker, and Mark Cohodes."

Sports fans can take cheer in that last bit. There will still be a trial. The focus thereof has narrowed a bit.

What a cool name for a hedge fund!

Noront Resources Ltd., a Toronto-based minerals-exploration company, has a shareholders meeting scheduled for October 28.

Its incumbent board faces a challenge led by a hedge fund named Rousseau Asset Management Ltd., which owns or controls approximately 9.2% of Noront's common shares.

I know very little about the underlying dispute. But I was intrigued by the name. Rousseau Asset Management? Do they often use the acronym "RAM".

I'm reminded of the song "High Hopes." Maybe they should wage a proxy fight against some company that has just finished construction of a million kilowatt dam.

Aside from the acronym: Is "Rousseau" the family name of the founder? Or was he paying a tribute to the famous painter?.

Or perhaps, less likely I suppose, it was a tribute to the philosopher of the state of nature and the debilitating consequences of civil society.

More prosaically, there's an Henri Paul Rousseau who was the chairman and chief executive of Caisse de dépôt et placement du Quebec, from 2002 until earlier this year. Does RAM have any connection to him or his kinfolk?

If anyone in the wide readership of Proxy Partisans knows anyone connected with RAM, let them know I'm curious. About the name, as about the specific strategy and performance record. [I don't see any "Rousseau" in the TASS database.] Curiosity may have killed a cat or two but I doubt its done any harm to a RAM of late.

GM news

I found the stock price drop-off on Thursday surprising. If you'll read my commentary Wednesday you'll see why. I had thought the fall-off earlier in the week was the result of a one-time event: pressure on a lot of hedge funds to liquidate some of their equity holdings in order to satisfy end-of-quarter redemption demands from dissatisfied investors.

I had hoped/expected some levelling off by Thursday. Instead, the DOw fell another 600-plus points.

Allow me then to make the point that this proves how I don't know nuttin'. So don' take this blog (or any other blog!) as a dispensary of investment advice. Please.

My best guess about Thursday is that the market was spooked chiefly by an S&P announcement in the late afternoon Wednesday. Standard & Poor's put General Motors, a US corporate icon if ever there was one, on "credit watch negative."

By the end of the week, Barclay's had lowered its loss-per-share estimate for GM for 2008. It had previously predicted that when this year's books are done, GM would lose $15.68 per share. Now it's guesstimating $15.87.

How has GM responded? Officially, thus: "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers."

Unofficially, GM is said to be in talks with Chrysler -- or rather with its parent company -- about a merger. How will that help? Won't that simply absorb badly-needed cash (or strain the credit that S&P just put on watch)? Apparently, the idea is that GM will pay for Chrysler with its remaining interest in its financing arm, GMAC. General Motors spun off GMAC two years ago, selling a bare majority of the equity, retaining 49%. So now it will give Cerberus that 49% and ger Chrysler.

Why? To increase its market share, presumably, though that hardly amounts to a cure to its ills. Chrysler suffers from the same ills, which is why it isn't part of Daimler-Chrysler any more.

The reported talks leave me wondering: why has it still occurred to no one that the most logical business combination of the world would be a takeover of the auto industry by the petroleum companies?

I've raised this before, hoping to get some explanations of why I'm wrong. Still nothing. But it seems to me that the logical model here is that of the shaving-blade industry. Gillette sells the razors at a loss. It can afford to do so, because the economic significance of a razor is to lock a consumer into buying a stream of blades that fit it, and the profit from those blades more than compensates the loss on the razor.

If Exxon-Mobil and its peers bought up the US auto industry, they could afford to sell automobiles for a loss, for the same reason. The economic significance of a car is to lock a consumer into the purchase of fuel.

So get to work, deal makers!

Redemptions

What was the selling Tuesday on Wall Street all about?

On Monday, the market spent most of the day going down, but had a significant uptick in the final minutes.

But then yesterday ... boom. The Dow, the S&P, and Nasdaq all declined by more than 5% of their total value which, in the case of the Dow, amounted to more than 500 points.

As usual, the pundits have their theories:

1. The big one-day decline was a response to an announcement from Bank of America that it was cutting its dividend, or
2. It was a reaction to a rumor that MUFG is pulling out of a deal to acquire a large chunk of Morgan Stanley, or
3. Bernanke scared the traders with his mid-day statement, or
4. all of the above and other stuff.

None of that looks persuasive to me. One can hypothesize that one of those butterflies caused this hurricane, but I think there's a much larger wing than any of those flapping about.

Call this the hedge fund capitulation. Hedge funds have lock-up periods, sometimes for months at a time. As the term suggests, hedge funds are by design illiquid. An investor, having put his money in on Monday, can't simply say, "I've changed my mine, I want to liquidate my interest" on Wednesday.

Well, actually, he can say it on Wednesday if he wants, but he can't expect the managers will act on that demand any time soon thereafter. They're entitled to wait until the lock-up period has expired, i.e. that the "redemption" date has arrived.

This can have a systemic impact on the markets because it is natural for hedge fund managers and investors to agree on the end of a financial quarter as the redemption date. Much of the hedge fund industry was committed to allowing hedge fund withdrawals on October 1, AND much of the industry had just had a lousy third quarter, making it very likely that they'd receive demands by September 30.

Those hedge funds that didn't have enough cash hanging around in the office furniture to meet the redemption demands they've just received have taken to selling shares of stock to obtain the liquidity needed to pay off these exiting investors. Hence the downward pressure we've seen of late.

I call this the hedge fund capitulation , because the italicized term is used in finance-world jargon to mean a particular sort of crash -- one with a valuable cleansing effect. It means the final shuddering sell-off after which everybody who can be scared away has been scared away. All the selling likely to be done any time soon will have been done, and a floor established.

October 1987 saw a capitulation. The Dow lost 20% of its value in a single day. Within 1.5 years, it had returned to the pre-crash level.

We didn't have 20% at one clump this time, but the market has lost almost that in about two months. But as August of this year began, the Dow was at 11,500. It is now at 9,447, which is about 18%. Let's hope that's enough, and that with the final kicking-in of this hedge fund liquidation component, capitulation has been accomplished.

The Orient Express

Yes, the hotel management company, Orient-Express Hotels Ltd., is the company that operates the famous tourist train, the Venice Simplon Orient Express.

More germane to my concerns in this blog, though, the company has an annual meeting scheduled for Friday, Oct. 10.

Two hedge fund shareholders, DE Shaw and CR Intrinsic Investors, have offered a proposal that would dismantle the dual-class structure of the company.

RiskMetrics, known until recently as ISS, has supported that proposal. Its report on this particular dispute reads in relevant part: "Irrespective of whether the current structure would be deemed legal or not, the proponents have made a strong case with regards to how the elimination of Class B shares would benefit the company in terms of good governance, which may in turn have a positive effect on the firm's value. The company, on the other hand, has not sufficiently justified how the current share structure benefits Class A shareholders."

Glass Lewis, on the other hand, supports management. Its report: "We suspect that most shareholders both understand and accept the nature and extent of Orient-Express Holdings 1 Ltd's control over the Company and the composition of its Board, particularly since this structure has been in place for a considerable period of time."

The company trades on the NYSE with the ticker symbol OEH. Its value is now at only one-third what it was a year ago.

Yes, everybody has had a bad year. But not that bad. The Dow Jones Industrial Average, for example, is at about 75% of where it was a year ago.

Yet the tourist industry is notoriously fickle, since it represents the first item many families cut when they start worrying about jobs, security, etc.

The question for shareholders asked to choose sides is: does the corporate governance issue that the activists have raised spill into performance, and thus into stock price? If not, why should I care about the abstract rightness of a dual stock structure?