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.