Happy New Year, everyone

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

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

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

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

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

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

Bracewell & Giuliani

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

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

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

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

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

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

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

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

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

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

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

Datascope Results: Tie Game

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

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

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

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

Smiles and sugarplums all round, then.

The class action against AIG

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

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

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

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

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

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

PACER and AIG

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

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

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

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

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

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

Labaton Sucharow LLP

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

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

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

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

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

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

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

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

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

Thinking Again About Enron

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

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

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

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

The name of that consultant? Vincent Kaminski.

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

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

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

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

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

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

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

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

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

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

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

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

Philosophy

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

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

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

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

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

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

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

Controlling Group

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

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

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

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

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

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

AIG and New York

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

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

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

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

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

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

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

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

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

Pandit in Charge at Citi

Vikram S. Pandit is the new CEO at Citigroup.

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

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

Sounds like VP has a fan.

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

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

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

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

Three quick notes

1. Conrad Black

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

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

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

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

2. H&R Block

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

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

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

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

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

3. EDO Corp meeting

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

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

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

Ramius, Datascope, blank checks

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

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

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

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

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

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

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

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

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

60 Minutes

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

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

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

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

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

Brog out of Gyrodyne contest?

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

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

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

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

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

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

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

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

BHP/ Rio Tinto

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

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

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

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

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

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

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

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

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

What's a Poison Pill?

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

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

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

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

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

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

Three brief items

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

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

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

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

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

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

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

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

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

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

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

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

What's a Gyrodyne

I recently encountered the name Gyrodyne, as that of the plaintiff in a lawsuit against Phillip Goldstein and Bulldog Investors. My reaction was that same as I imagine yours would be (given my conception of who "you" are -- a digression that you wouldn't want me to enter into either). Who or what is Gyrodyne?

I cared because the name of Phillip Goldstein is very familiar to me. I've covered some of the litigation in which he's been enmeshed. When the SEC sought to require hedge funds to register as investment advisers, most of the hedge fund industry thought this a small matter, a little added paperwork, much easier to comply with than to fight.

Goldstein fought. He contended that the SEC didn't have the statutory authority it claimed, and he pursued that question, successfully, to the US Supreme Court, destroying the registration mandate.

I saw Mr. Goldstein at a convention of activist investors in California last month, and the moderator of one particular panel in which he was a participant introduced him as a "libertarian hero."

When that moderator opened the floor to questions, I spoke very briefy to Phil Goldstein, not about the registration matter but about the idea of "empty votes," the hedging away of the real economic interest of shares to retain only their voting value. Some scholars have thought such a tactic to be a real threat to rational corporate governance, others have thought it a phantom.

That, then, was the gist of my question. I may discuss the "empty votes" controversy here another time. For now, let it stand only as evidence that I have followed Goldstein's career. For that reason, I care when I run across a lawsuit in which he's a defendant.

The plaintiff, again, is Gyrodyne Company. Who's that? Its the owner of some industrial and commercial real estate on Long Island, NY.

Goldstein is apparently waging a proxy fight to take over Gyrodyne's board of directors, on the ground that the company has depressed its own value through a "poison pill" discouraging potential acquirers.

Gyrodyne responded with a lawsuit in Manhattan federal district court last week, saying that Goldstein/Bulldog is using false and misleading proxy materials.

The following is directly from Gyrodyne's press release:

"We filed this suit ... to ensure that our shareholders receive complete and accurate information about the Bulldog group's interests, plans and motivations that is required by the federal securities laws....We will continue to take appropriate steps to protect the interests of Gyrodyne shareholders."

As kids of the playground, watching a fight develop, might say at this point: Ooooooo.

Gyrodyne's annual meeting is a week from today. I hope to come back to this before then.

Harry Potter and the structured investment vehicles

I wrote yesterday about HSBC and a dissident investor, Eric Knight, and promised I'd get back to the subject today. That, as it turns out, was a good bit of timing.

At about the time I was writing that post, HSBC's London office was making an announcement: its going to bail out two of its structured investment vehicles (SIVs). Those of you who don't know the jargon: please don't let those eyes glaze just yet. This is big.

An SIV is sponsored by a larger organization, but its assets and liabilities are kept off the larger institution's balance sheet.

The sponsoring organization isn't required to rescue SIVs. The fact that HSBC has voluntarily done so, and is taking their troubled assets ($45 billion in mortgage-backed securities) onto its own balance sheet means something because it is the first of the world's major banks to do so in the current credit crunch.

HSBC isn't acting altruistically of course. It's protecting its brand name. Outsiders are often confident in investing in, or becoming the counter-party of, an off-balance-sheet vehicle with a big name sponsor, precisely because they feel that the big sponsor won't allow it to default. HSBC wants them to continue to feel that way -- at least, when it's the sponsor. This is worth what may end up being a big hit.

Still, HSBC's brass deserve some credit for corporate statesmanship here. They're the first of the major banks to take this hit. An alternative might have been for their troubled SIVs to liquidate themselves into the market, with an asset fire sale. But that might have triggered imitators, and a rush for the exits.

What happens in a building with narrow doors when everyone tries to exit at once?

This time, the world of finance might not have to find out.

All that said, what were Mr. Knight's contentions about the failings of the bank? His ad in yesterday's WSJ said that HSBC has perennial stock market underperformance compared to its peers. It has pursued geographical diversification instead of comparative advantage, it has never achieved the optimal scale in key markets -- the UK, the USA, and France. According, he thinks, HSBC should play to its strength and its origins. It should move its headquarters away from London, into China. The People's Republic has rules limiting the activities of "foreign" banks and the HSBC could have much more freedom of action in the region it knows best if it ceased to be "foreign" there.

He is also unhappy with the way in which the top execs of HSBC decide upon their compensation. He wants the bank to make public minutes of all meetings in which they discussed their bonuses. So far, they've refused.

As far as I can tell, if they have helped avert the worsening of the credit squeeze by their announcement yesterday, they've earned something of a bonus.

Okay, the "Harry Potter" reference above was a bit misleading. Still, I was going to write "HSBC and the structured investment vehicles" but that just triggered the association to the characteristic Rowling's titles and I couldn't resist.

HSBC Critic Buys Ad Space

The founder, principal, chief-cook-and-bottle-washer of Knight Vinke Asset Management (KVAM) has renewed his criticism of HSBC. Today's Wall Street Journal contains Eric Knight's indictment of the giant global bank, taking up two thirds of page B6.

HSBC traces its history back to 1865, when a Scot named Thomas Sutherland decided that there was money to be made in providing banking services along China's coast. He set up a bank in Hong Kong in March and another in Shanghai in April -- hence the name, "Hongkong and Shanghai Banking Corporation," which gave rise eventually to the more economical name: HSBC.

Skipping forward a bit ... HSBC shares are traded on four exchanges: Hong Kong, Paris, London and New York. It isn't literally true that trading never stops -- a really persistent trader/specialist might allow himself a bit of sleep after the New York close and before the Hong Kong opening bell. But not much.

Sticking to New York and to US dollar denominations: HSBC's stock was trading in a range between $96 and $98 for much of October. Through November, it has broken decisively out of that range -- downward. The price is now in the mid $80s. This is unsurprising, given the credit turmoil in the US especially. Why shouldn't investors in HSBC simply ride out that turmoil and wait for a rebound? What in particular makes Mr. Knight unhappy with management?

I'll leave that as my cliffhanger. More in tomorrow's entry.

Who Wants to Buy Nymex?

It has been a big year for consolidation among stock, options, and futures exchanges worldwide. It just seems to make sense, as the geographical proximity grows less relevant to investors, traders, and brokers alike.

The London Stock Exchange is now about one-third owned by enterprises that are themselves the arms of two rival Gulf states. Eventually, it seems the LSE will enter into a combination either with the Qatar Investment Authority or with the Dubai Borse. Which one? -- that is in Allah's hands.

The Chicago Mercantile Exchange and the Chicago Board of Trade, once fierce rivals despite their proximity, are now among the parts of the CME Group.

The New York Board of Trade is now a subsidiary of Atlanta based Intercontinental Exchange.

That will suffice for examples for now, though it would be easy to lengthen the list, even staying strictly within developments of 2007.

This leaves the question: why is Nymex still a stand-alone? and how long will that remain the case?

Steven Sears, writing in Barron's recently, suggested one reason. The internal politics at Nymex is, he says, of such distressing complexity that a potential acquirer might wisely want to steer clear of it. In the same way that a wise superpower might want to avoid sending an occupation force to a country with ... oh, never mind.

Shake-up at H&R Block

The tax-preparation company, H&R Block, announced yesterday that its Chairman and CEO, Mark A. Ernst, has resigned from both of those posts.

Ernst has been replaced as chief executive, on an interim basis, by Alan Bennett.

The new chairman is Richard Breeden, and that (for proxy partisans) is the story here.

Breeden has wanted Ernst out of the way for some time. Breeden, who was the chairman of the Securities and Exchange Commission through most of the administration of George H.W. Bush, has been keeping busy recently as the manager of a hedge fund, aptly called Breeden Partners. In that capacity, he's been a very activist stockholder in a variety of the companies in his fund's portfolio.

One of those companies, of course, is H&R Block. And Breeden's contention is that under Ernst, the company has drifted from its moorings as a tax-services company, ineffectively dabbling in other fields. He's presumably going to be a back-to-basics kind of chairman.

Breeden's unhappiness on this point appears to have preceded, but it was certainly fed by, this summer's subprime mortgage crisis, which hit H&R's mortgage lending unit especially hard.

One analyst is quoted in today's WSJ saying: "H&R Block has delayed recogizing the losses in their subprime businesses ... because they were trying to get the sale done with Cerberus."

Cerberus. That darned dog shows up everywhere, doesn't he?

But congrats to Breeden, and I hope his victory doesn't end up giving him indigestion. I may need the services of the company he's now heading ... next March or thereabouts.

I wish everyone celebrating the holiday tomorrow the best for the long weekend. You'll hear from me again here on Sunday.

Proxy Rules Debate

The ongoing debate over the SEC rules and "proxy access" reached the banking committee of the US Senate last week.

As regular readers of my other blog, Pragmatism Refreshed, (cfaille.blogspot.com) know, I'm all in favor of the Second Circuit's AFSCME decision, and in favor of letting it stand. The decision opened the doors for a sort of meta-election, in which dissident stockholders can get on a proxy ballot asking the whole body of shareholders to determine rules for directorial elections.

I'm happy about AFSCME not despite the possibility that it will prove a "slippery slope," to other avenues for shareholder democracy, but largely because it might.

By itself, this is a small matter. I can't imagine a lot of election-rules tinkering breaking out in corporate America as a result of anything the SEC does or doesn't do, nor do I think a lot of good would be accomplished it it did.

Still, the shareholders own the company, and it is good to remind the company management, their employees, of that simple fact.

At any rate, the SEC has under consideration two rule proposals which would (to differing degrees) cut back on the AFSCME precedent. Those rules were the subject of the banking committee hearing last week, and SEC chairman Cox gave the usual bureaucratic on-the-one hand but on-the-other-hand sort of testimony.

I think the very fact that the SEC is short handed now will prevent it from doing anything rash in the immediate future. Its good to know, though, that the members of that agency know that the legislature, with its oversight responsibilities in mind, is looking over their shoulder.

Votes to Withhold

Suppose the incumbent directors of a company are running unopposed for re-election. For whatever combination of reasons, opposition has developed too late to meet the deadline for the filing of an alternative slate. But, now, opposition HAS developed.

Is there any significant manner in which it may express itself? Yes.

Stockholders may withhold their votes (or, as it is sometimes put, they may vote Withhold). Sometimes an impressive showing in a vote-withhold campaign will make the point.

The already-classic example of this played out at Disney in 2004 - 2005. It was in March of the first of those years that Disney's shareholders withheld 43% of the votes for the re-election of Michael Eisner as a member of the board.

The campaign that achieved this result was led largely by Roy Disney, Walt's nephew. Eisner remained on the board, but the other members reacted to the 43% vote by stripping him of the chairmanship. He stepped down as CEO a little more than a year later.

This comes to mind right now because I've been following the aftermath of a shareholders meeting at a company somewhat less visible than Disney: at Sparton Corp., a Michigan based manufacturer of circuit boards. There was a withhold campaign here, too.

in August one activist investor declared in a letter that he has "become increasingly troubled by the Board's inaction and acquiescence to Sparton's perennially underperforming management team—a team that has presided over a decades-long decline in both the Company's book and stock values." The meeting took place in October.

That investor, Andrew Shapiro, told me when I interviewed him early this month that he has been somewhat surprised that Sparton hasn't yet disclosed the size of the "withhold" vote, though he infers from what the company has disclosed that the number is 30%.

He also advocates what one might call a stand on fiduciary principle -- the members of the board should press the CEO to doff his other hat, as trustee of the Sparton Defined Benefit Pension Plan. This is a conflict: the pension plan has over-invested in Sparton common stock, Shapiro contends. This in turn has contributed to the entrenchment of the incumbent board.

Although the spelling of the company's name isn't quite right for it, I did try to work in some reference to a stand at Thermopylae in this blog entry. Really I did. I couldn't bring it off, though, unless this meta-reference counts.

The time for gratitude approaches

Let's cast our minds back to the earlier months of this year, because I'd like to say something about two decisions in the Delaware Chancery Court for which members of incumbent boards of directors might be a bit grateful when they bite into their Turkey or Turducken or tofu creation this coming Thursday.

In January 2007. an activist hedge fund, Harbinger Capital Partners, sued Openwave Systems, a California software company of which it held a substantial block of stock.

Harbinger said that it had nominated two candidiates for the board of directors, and that Openwave was putting obstacles in the way of a fair vote.

The matter was tried in March, and the court issued its decision in May. In essence, the court acknowledged that Openwave's bylaws governing elections were on one reading blatantly contradictory and on any reading at least confusing. Still, it upheld the exclusion of the slate that Harbinger had sought to nominate.

“Confusion does not excuse Harbinger’s failure to comply,” reads one subhead in the court’s opinion, issued in May. It was all reminescent of the butterfly ballots in a certain Florida election in November 2000. Yes, they were confusing, but the results stand.

Another hedge fund, Pershing Square LP, challenged another incumbent board of directors, and brought a claim before the Delaware Chancery Court at around the same time that Harbinger's was pending.

In the course of a proxy fight concerning Ceridian, Pershing Square had sought access to letters written by senior management figures. It suspected (because of a leaker) that the letters contained allegations of mismanagement on the part of a former chief executive of Ceridian and an absence of oversight on the part of the board.

The court decided that the stockholders weren’t entitled to the letters at issue. “A corporate defendant may resist demand where it shows that the stockholder’s stated proper purpose is not the actual purpose for the demand,” it wrote. This is all rather unkind to the old-fashioned notion that shareholder own the darned company. Shouldn't they be able to demand pertinent documents without undergoing a session on the couch to alow Dr. Freud to figure out their 'real' motivation.

Of course, it's Oedipal! The hedge fund, the court rather accusatorily opined, just wanted “to find a legal vehicle by which Pershing Square can publicly broadcast improperly obtained confidential information.” The court said that it must protect the confidentiality of certain exchanges in order not to chill the candid expression of views among executives and directors, so … Pershing lost.

Delaware is still largely an incumbent board's state, which is of course why company's continue to incorporate there.

Do I have any reforms to propose? Heck, no. Hedge fund managers are big boys and they can take a couple of set-backs like this. Over time, the pressure of economic reality and ther litigation it generates does transform legal systems, even Delaware's corporate law. But it is a slow process, as perhaps it should be, and the gladiators give some of us spectators some grist for our analytical mills.

For which I am grateful.

Four Days a Week

Just a scheduling note. I've fallen into a pattern and it makes sense to be explicit about it.

For the foreseeable future, I'll be adding entries to this blog each day from Sunday until Wednesday.

Thursday through Saturday, my blogging is confined the Pragmatism Refreshed, a different and less focused venue. cfaille.blogspot.com.

Since Sundays allow lots of time, I expect to create entries for both PR and PP on each Sunday, making me a four-days-a-week presence in each place.

Your comments, of course, are always welcome.

News Sense

Okay, my news sense isn't always infallible. Sometimes I think I'm on to something big, and it fizzles.

Such is the case with the Microsoft annual meeting held yesterday. There were two shareholder resolutions, and I discussed them in Monday's entry. There's really nothing to say about yesterday's meeting, though, except that all members of the board of directors were re-elected and, as the company management had recommended, both resolutions went down to defeat.

Sometimes I sense a story in the world of academic in-fighting, too. This can work out, but might not.

On Friday, I wrote a story for HedgeWorld (my dayjob) about such an academic dispute, in the world of quantitative finance. I over-state the degree to which I understand such things when I write of them, but hey -- I did take a course in calculus once.

The underlying conflict is between Nassim Taleb and the remaining authors of the famous/infamous Black-Scholes articles concerning the pricing of stock options. Fischer Black, alas, is deceased. The other namesake of the formula, Myron Scholes, is very much alive, as is Robert Merton.

Both Scholes and Merton won a Nobel Prize for their work on Black-Scholes, sometimes more generously called Black-Scholes-Merton. But Nassin Taleb, the author of a couple of widely-read books on risk and its management, says that the formula in the form they offered it, doesn't work very well. Options traders don't use it. Further, he says, it wasn't original enough with them to have their names on it, so it should be called Bachelier-Thorp if referenced any more at al.

I thought this was a big story. I did the usual consacientious reporterly work, wrote up various views of Black-Scholes on the one hand and Taleb's challenge on the other, and my editors posted the result at HedgeWorld.

One of the responses I've had since then has been to the effect that it isn't really newsworthy. Some bitter second-rate fellow envies the Nobel Prize winners and is trying to tear them down: why is that a story? one reader asked me.

All I could say is that arguing over what is newsworthy and what isn't is a mugs game, and I declined to get involved in it. She might be right, and Taleb might simply disappear.

Or, this might be the start of something big, and my readers would have heard of it early on. Damned if I know which is the case.

UK Regulators Propose a Rule

The UK's Financial Services Authority published a "consultation paper" yesterday -- that is, a request for public comment on a proposed new regulation.

The subject of the proposal is an instrument known as a "contract for difference." This is a contract in which a party is paid when an underlying asset increases in value or perhaps pays out money when the asset falls in value (takes the long side), or vice versa (for the opposite party of course takes the short side). The significance of the CFD is that the speculator -- typically a hedge fund -- never acquires title of the underlying asset, so the transaction unbundles title from economic risk.

The FSA is concerned that undisclosed CFDs can mess up the system of corporate governance. Consider, for an easy case, a corporation's stockholder who has sold CFDs to a hedge fund. The hedge fund has the "long" position -- it has an interest in an increase in the value of that stock. The stockholder now has a "short" position -- it will receive money if the stock price falls. The stockholder still has title to the stock, though, and accordingly still has a vote in proxy contests.

Will the stockholder exercise that vote in such a way as to sabotage efforts of corporate management, or to help install an incompetent board, so as to benefit from the difference, the price fall, that will result?

That's an easy problem to imagine, but not the FSA's central concern. After all, look at the matter from the point of view of the hedge fund that bought the long position. It wouldn't be likely to do so if it thought the stockholder was about to sabotage the company so blatantly. Or, at least, it wouldn't make the same mistake twice. Can't the contracts between the long and short parties be trusted to ensure that the economic interest and the voting interest remain in some alliance?

Now we get to the real regulatory concern. The contracts can do that job all too well. The FSA is worried that hedge funds and others with CFD, but without titles to the stock, are exercising informal control over how the stock is voted, and that this makes the corporate governance system too opaque -- management and the other shareholders don't know who is pulling what strings.

Accordingly, the FSA's proposal focuses on disclosure. In essence, they want managements to be able to flush out all CFD holders with an economic interest of 5% of more of their equity.

There is a tax angle to this, too. CFDs are a flourishing part of the UK equity market, accounting for 30% of all trades, because in Britain there's a 0.5% stamp duty levied by the government on the sale of the actual shares, the underlying asset. CFDs are a way of playing the market without paying the tax, and the "unbundling" of votes from economic interest is more of a side effect than a positive benefit of these instruments.

The bottom line though is that if you want to comment on the FSA proposal, you've got three months. The clock is ticking.

Microsoft annual meeting

Microsoft is holding its annual shareholders meeting in downtown Seattle, Washington, tomorrow.

There are two contested shareholder resolutions on the agenda. One proposal, from the New York City Pension Fund, requests that "management institute policies to help protect freedom of access to the Internet" including certain minimum standards. The NYC pension fund is managed by the office of the comptroller there, William C. Thompson.

Mr. Thompson notes, on behalf of his proposal: "that some authoritarian foreign governments such as the Governments of Belarus, Burma, China, Cuba, Egypt, Iran, North Korea, Saudi Arabia, Syria, Tunisia, Turkmenistan, Uzbekistan, and Vietnam block, restrict, and monitor the information their citizens attempt to obtain."

The company recommends through its proxy statement that shareholders vote "no" on this: "In our view the most effective approach toward this subject requires more flexibility than the proposed standards would allow. We believe that availability of our products and services has increased the ability of people worldwide to engage in free expression and has helped transform the economic, cultural, and political landscape of nations throughout the world."

The second proposal would establish a board committee on human rights. The company likewise recommends a No vote on this one.

Miscellaneous News

Three things today:

1) Icahn has reached a confidentiality agreement with BEA Systems Inc. I wrote about BEA and its rebuff of Oracle in the waningdays of October. Management apparently hopes to persuade him that they are in the right in insisting that they won't sell control for anything less than $21 a share, and they'll share confidential material with him in order to pull off this feat of persuasion.

2) AIG reported its third-quarter operating profit Wednesday: and the news was bad. The third-quarter operating profit fell by 13% percent, or 27 cents a share below analysts' estimates.

In a conference call the following day, AIG honchos warned that revenue in some parts of the company probably wouldn't improve in 2008.

It warned in a conference call on Thursday that revenue in some parts of the company, such as the mortgage insurance unit, probably would not improve in 2008.

This has had the predictable effect upon AIG's stock price and may well lead stockholders to look kindly upon whatever Greenberg is cooking up.

3) By the way, I'd like to say a big "hello" to anyone who is reading this from Labaton Sucharow LLP, a prominent securities-litigation law firm. Labaton reprsents the Ohio Public Employees Retirement System, which is lead plaintiff in a lawsuit against AIG and Greenberg for their use of sham reinsurance agreements that made the books look unrealistically favorable and allegedly induced pension fund executives to buy and/or hold the stock when they wouldn't have otherwise.

I infer that somebody at Labaton has the job of periodically googling the name "Hank Greenberg" and writing a report on what he finds. In that case, he's reading this, too. Welcome.

Hank Greenberg's Resources

Now to the big question, to cap off this week's entries.

If Greenberg's filing means that he does plan a comeback, putting himself once again at the helm of AIG, then what are his chances of pulling that off?

The most obvious point is that he still has admirers. There are people who believe AIG's stock price has suffered from his absense, and who'd love to have him back. The price was above $70 before Spitzer pressed the issue that led to his departure. It immediately sank to $50, although it didn't stay that far down for very long. There's been a lot of zig-zagging since, but as of the close of business yesterday, Nov. 6, the price was at $62.05.

Of course, Greenberg's admirers might be wrong. For all we know the stock price might have been at $62.05 right now even if Spitzer had never interested himself in AIG, and Greenberg had never left. Or, it might be at $100. Alternative-universe hypotheses are difficult to test. Still, there is some sentiment in his favor.

There is also the China connection. Recall that the company got its start there. More important, the whole world seems to be heading to China right now. Optimism about China is the engine that has kept the world economy moving over the past few months as the US and the European nations have suffered through mortgage-market related problems.

Greenberg is said to feel quite at home in China. He helped the PRC get into the World Trade Organization. Last year, Long Yongtu, the chief negotiator for China's entry into the WTO, said to an interviewer: "Mr. Greenberg is the most famous U.S. business leader in this country. Perhaps most important, he is a long-standing friend of the Chinese people."

That's the sort of connection one has to count as a resource in a struggle for corporate control.

(This post will be my last on Proxy Partisans until Sunday. I'll confine my blogging for the remainder of the week to Pragmatism Refreshed. cfaille.blogspot.com Feel free to drop by.)

Greenberg Keeps Busy

So what has Greenberg been doing since he left AIG in 2005? Quite a lot. He started his own financial-services company, C.V. Starr & Co. -- tellingly, that name alludes to his mentor, the founder of AIG, Cornelius Vander Starr.

Greenberg has also occupied a seat on the board of directors of the Council on Foreign Relations, involved himself with a variety of philanthropies and ... when this much doesn't keep him busy ... he's been litigating, both as a defendant and as a plaintiff.

AIG settled with Spitzer in February 2006, but Mr. Greenberg, as an individual defendant, continued and continues to fight.

In September 2006, the state of New York dropped two of the six charges it had brought againt Greenberg (in a civil case, I ought to add). Four charges remain. Depending on who you believe, this was either a matter of dropping the peripheral matters to focus on the core of the case, or an admission that the case was always a witch hunt and is now just a continuing search for technicalities to justify the expense.

Also, AIG and Greenberg have litigated against one another, including one case filed by each against the other in Delaware state court this summer.

Two months ago, Mr. Greenberg invoked his fifth amendment right against self-incrimination in refusing to answer questions from the SEC.

But what is at stake in any coming battle for control over AIG isn't just a grudge match, dramatically interesting though the idea may be. It is the question of how deeply involved AIG has become with the mortgage market and the problems that has caused this autumn for so many other financial giants. Is it hiding something important here, or will it likely emerge unscathed.

It is begining to appear that anyone who does emerge unscathed will be strengthened, not on general philosophical "that which does not kill me makes me stronger" grounds, but because so many competitors will have been ... well ... scathed.

The history of AIG

American Insurance Group is the sixth largest company in the world, according to Forbes.

It was founded by Cornelius Vander Starr, a native of California, of Dutch descent, 88 years ago, set up as a Shanghai-based operation selling insurance to the Chinese.
It was marvellously successful, and soon had operations around the world. Of course with the Communist takeover in the 1940s, the company moved its headquarters to New York.

Greenberg climbed up the corporate ladder as Vander Starr's protege, and became his successor when the company founder retired in the late 1960s. Soon thereafter, the company went public. Greenberg remained its chief for more than 35 years.

In October 2004 the New York Attorney General Eliot Spitzer, who has since become Governor, announced a lawsuit against Marsh & McLennan Companies -- a brokerage -- for steering clients to preferred insurers with whom the Company maintained lucrative payoff agreements, and for soliciting rigged bids for insurance contracts from the insurers.

Spitzer also announced in a release that two AIG executives had pleaded guilty to criminal charges in connection with all this steering and rigging.

The resultant brouhaha led to Greenberg's departure early the following year. In February 2006, the State of New York and the post-Greenberg management at AIG agreed to a settlement, including a fine of $1.6 billion.

Greenberg hasn't taken well to retirement. One doesn't get the impression that he's spent a lot of time at the Elba fishin' hole, kicking back with a brew. We'll get into what he HAS been up to, tomorrow.

Greenberg to Return From Elba

I can just imagine that vein on Hank Greenberg's forehead. It's been throbbing painfully for two years now, ever since the board at American International Group forced him out as CEO and chairman.

He had turned that insurance company into a financial empire, and he must have felt some proprietary interest in it. Yet those who had been riding along on his coattails turned on him at the first whiff of scandal. That, at least, must be how it seemed to him.

Now, he may think of himself as a certain ex-Emperor on Elba, about to make his return. Such I infer, anyway, from Friday's news.

Greenberg has filed a document with the Securities and Exchange Commission that says that he and entities he controls, believe "there are opportunities to significantly improve the Issuer's [AIG's] performance and strategic direction, as well as the value of their investment."

The filing commits Greenberg to nothing, not even to "holding discussions" with other shareholders, a startlingly radicial possibility it mentions.

Why does one file a document with the SEC that says in effect, "I'm not all that happy with the return I'm getting and I might talk to some others to see if they feel the same way"? People who hold large chunks of stock in a publicly owned company are required to keep the public, and so the management of that company, apprised of their intentions, so there are no takeovers-by-ambush.

Despite all the cautious lawyerly wording, then, it appears that Greenberg is setting the stage and some sort of struggle for control may be in the offing.

Cool. Those of you fans who are new to corporate skullduggery might now have a lot of questions. Like: how important is AIG? What was the scandal that pressed Greenberg to give up the corner office? What resources does he have if he is in fact seeking to march on Paris? Why does he file this just now? I hope to address these in coming days.

Cabbage Night

The morning before Halloween -- usually a good day to see toilet paper hanging from trees, since it's the morning after what we used to call "cabbage night."

I took a bit of a walk this morning, and saw only a couple examples of such youthful enterprise. As my brother and walking partner explained, the great thing about TP is that it dissolves with a couple of rains or even a couple of frosts. The vandals get to feel they've gotten away with something, and the homeowners don't have to work very hard at a clean-up.

All of this is by analogy pertinent to the matter I've been discussing all week, the rebuff by BEA Systems of Oracle's effort to buy their equity, and Icahn's unhappiness at that.

For when a large shareholder is unhappy, one of the more amusing ways in which he can vent that unhappiness is with a letter to the board of directors, and the required 13d filing of that letter with the SEC. The point of these letters isn't that the directors should read it -- but that the SEC will post it on its website and the rest of the world can read it. It's like the TP on that tree in your lawn: it isn't there for your benefit so much as for that of passers-by. And although it may signal coming struggles, the 13D is in itself harmless enough, disappearing after a couple of good rains.

Icahn's recent letter to the board of BEA, as you can discover for yourself from the SEC site (or just read it here -- I'll mine that site so you don't have to) takes a stern tone:

"You should have no doubt that I intend to hold each of you personally
responsible to act on behalf of BEA's shareholders in full compliance with the
high standards that your fiduciary duties require, especially in light of your
past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE
whether or not to sell BEA. BEA belongs to its shareholders not to you."

Caps in original.

I have to say: there are other activist investors who write this sort of letter with a good deal more panache. Robert Chapman has written some classics. He once wrote to the directors of one of the companies in his portfolio: "In essence, you should live and breathe under the cloud that your past failures have subjugated you into a state of perpetual audit."

That's the spirit!

Synergies

That's one of the great buzz-words of business. Synergies. Every merger is justified by the "synergies" it will create.

Way back in the 1970s, the golden age of conglomerate creation, no one bothered with this claim. There was a prevailing idea that a large corporation should be a balanced portfolio all by itself, so that the simple unrelatedness of the businesses brought under a single corporate roof was enough justification for the deals.

But then, that was the era of the Warren Court, and the early years of the Burger Court. Antitrust law seemed to make almost any combination between two businesses that weren't utterly unrelated the object of suspicion.

The judicial and political climate is quite different now. Companies claim synergy for their mergers both because "conglomerates" got a bad reputation back in the old days and because they now feel confident that they can claim synergy without bringing down on their heads adverse consequences.

This all brings us back to BEA Systems and Oracle. They're both software companies. They are even direct competitors in some parts of the vast category of product. Still, in a software world dominated by Microsoft, one can make a case that smaller players need to combine -- that this is pro-competitive -- because the process may creates an effective competitor, a counter-balance to that Big Kahuna.

Oracle's CEO Larry Ellison almost said this (not in terms of public policy, of course, but in terms of his own vision of the market's future} in a conference call in late August.

"Microsoft, with their middleware, a lot of which is embedded in Windows, Microsoft being the number 1 player, IBM being the number 2 player, and Oracle being the number 3 player in middleware. We passed all the other niche players. We really separated ourselves from the niche players. BEA, we’re almost twice as large as BEA right now, BEA is shrinking in terms of new license sales. So, it’s come down to the same big three, but we’re growing dramatically faster than our competitors and our target really is to beat IBM because it’s very difficult to measure the size of Microsoft’s middleware business because so much of it is embedded in Windows."

He stoops to conquer. You'll notice that he was recently belittling that "shrinking" company he more recently has sought to buy. Not shrinking so fast as to have nothing to offer, I guess.

Contemplate the activities of belittlement on the one hand and attempted ingestion on the other. Do those activities display any (what's the word I want here?): synergy?

The Usual Arguments

There are some standard arguments that an incumbent management of a target company typically makes when a potential acquirer offers an above-market price for a controlling share of a its stock.

So, yes, the offer is for $17 a share and the stock was selling for $14 a share before the offer was made but stockholders should support our refusal to do the deal because:

1) we are working on a strategic plan that will in time have the price at or above $21., the disruption of a change in ownership will only block that plan
2) the offer isn't reliably financed, so the offering price is illusory
3) the buyers don't know how to run a company of this sort, so they'll destroy its value soon after they take over
4) the control premium they offer is too low, we can get better from another buyer.

Note that although arguments (1) - (3) can be employed to defend the continued independence of a company, argument (4) effectively concedes the need for consolidation.

In the case of BEA Systems, their rather terse public statements have suggested (1). The issue of financing hasn't arisen.

Clearly, in this case, classic argument (3) won't fly. The bidder is Oracle, after all. They are running a business of just the same sort as BEA.

Finally, (4) might avail against Oracle, but doesn't work as against Icahn's dissatisfaction. Icahn is calling, precisely, for BEA to hold an auction -- if it can get better than the $21 Oracle is offering, he'd presumably be happy to see it do so.

Carl Icahn Helps Us Get Started

Carl Icahn wants BEA Systems to auction itself off.

BEA, a company founded in 1995 and headquartered in San Jose, Calif., sells software: largely to financial-services companies, although its products have other outlets as well.

Oracle wants to buy it. Not the software, the company. But BEA's management has allowed the deadline to lapse on Oracle's bid, ticking off Icahn, who doesn't think the stock is worth as much under current management as Oracle is offering. This is a classic set-up for a proxy fight, and Icahn is a grizzled veteran of the game.

This is also a good excuse for us to work through some terminology. Though sometimes used loosely, the words "takeover" and "merger" have in their strict use quite distinct meanings. A merger is the mutual decision by two companies to combine -- it involves a vote by both sets of shareholders. A takeover, on the other hand, is the buy-up of the shares of one company in the market by another.

A takeover can be either friendly or hostile. In the case of a hostile takeover, there are various defenses an incumbent board might put in place to limit a buyers' ability to attain a controlling share of the compnay equity -- we'll likely have a chance to discuss them if I continue writing this blog for any length of time.

But of course the chief reason for an acquirer to try to work within the corporate structure of its target and accomplish a merger is that going the takeover route can be tricky and costly if the target resists effectively.

What Oracle proposed was a merger. It's offering $17 a share, but the management of BEA has taken the position that this isn't enough. It wants a minimum of $21.

That seems quite a brassy demand, since BEA's stock was trading at about $14 in early October. It rose above $18 briefly after Oracle made this offer. In effect, investors bid it up to that level in the expectation that the $17 offer was just an opener, and that Oracle would sweeten it a bit. But as management's hostility to a deal became clear, the price sank below the $17 offering level, and closed Friday at $16.50.

Why do the BEA honchos think their firm is worth $21 a share? or are they just pretending to think so? We'll get to this tomorrow. Feel free to post your comments and tell me I'm an idiot if I'm getting any of this wrong. It's the only way I'll learn.

Proxy Fights Are Fun! Let's Watch

The receipt of proxy materials in the mail is seldom an exciting event. Usually, a corporation tells you that they want to change some blah blah in their charter to bluh blah. You don't see how it makes any difference to you, so you throw it away. If that's the highpoint of your day, you need to get out more.

But if you're lucky, you might some day own shares in a stock that becomes the subject of a proxy fight, in which competing slates of would-be directors, or advocates and oponents of a particular resolution, are competing for your vote. Then you have a decision to make. A decision that may impact your household bottom line. If you are in such a context, then the receipt of materials might in fact be the highpoint of your day. Although it still might be a better idea to get out more.

Anyway: why shouldn't such fights become an event of aesthetic appreciation and enjoyment? A spectator sport, if you will? There's no reason they can't. So I've created this blog, and I'll try to comment on ongoing proxy disputes in corporate America in the manner of a ringside commentator. More like Howard Cosell than Dennis Miller, I hope.

We'll see.