If you’re an activist investor your job is to (1) think of an idea for how to make a company’s stock go up, (2) buy stock in the company, (3) convince them to do your idea, and (4) sell high. Step 3 tends to involve lots of attention-seeking – it’s easier to wear a company down into doing your idea if they’re constantly hearing about it from other shareholders and reporters and stuff – but steps 1 and 2, importantly, don’t.1 If you tell everyone about your great idea for Apple to issue GO-UPS,2 then they’ll all realize that Apple will certainly do it and unlock tens of billions of dollars of value, so they’ll bid up the stock before you can buy it and you’ll lose the opportunity to benefit from all those gains. That may be a bad example but just work with me here.
There’s another way of putting that, which is: if you secretly conceive of an idea to make Apple a better company, and then secretly buy up a bunch of Apple stock, and then announce to the world “surprise! I have 12% of Apple’s stock, and a brilliant idea that starts with a thematically appropriate lowercase i!,” and the stock goes up, and you make a lot of money – isn’t that unfair? You got to buy stock at the low, pre-publication-of-your-idea price; the people who sold to you were bamboozled into selling out too low because they didn’t know about your great idea. It almost “smacks of insider trading.”
Or something. I may not be doing this theory justice because I think it’s silly: that great idea is your idea; why shouldn’t you be able to make money off of it? (And why should anyone else?) The money is your incentive to come up with the idea in the first place, and do the hard ego-stroking work of pitching it to CNBC and the target company; if you had to share it with free-riders why would you take on the responsibility? We talked about this a little last year when there were vague rumors that the SEC was buying into it, and that they might require investors to disclose 5% stakes within 1 day of acquiring them (instead of the current 10 days), and include synthetic share ownership in computing the 5%, in order to make it harder for activists to secretly accumulate shares. I have not heard much about that proposal since, though I hesitate to assign any causality.
But last week in another, colder part of town, someone proposed the same thing. Canada, I mean. Canadian securities regulators proposed: Read more »
If you own stock in a company that announces it’s being acquired, and you think the acquisition price undervalues the company, there are three things you can do about it: you can vote down the deal, you can find or propose an alternate deal, or you can sue. No I’m kidding of course you can’t do any of those things: you don’t have enough shares to vote down anything, you don’t have the money to propose something else, and you aren’t a plaintiff’s lawyer (are you?) so you aren’t in the business of suing companies, which turns out to be the sort of specialized skill you can’t just acquire in a fit of pique. Those are the tools, but they can only be wielded by specific people.
[L]ast year, 92 percent of all transactions with a value greater than $100 million experienced litigation. The average deal brought five different lawsuits. In addition, half of all transactions experienced multi-jurisdictional litigation, typically litigation in Delaware and another state.
Left out of that description is what percentage of last year’s mergers were agreed to by lazy corrupt self-dealing boards of directors who were putting their own interests above those of shareholders. I submit that it’s strictly between 0 and 92%.
Take the recently announced buyout of Dell. There are already 21 lawsuits pending in Delaware Court of Chancery, and three more pending in Texas state court.
Have you had enough Icahn and Ackman and Herbalife yet? Probably, right? Still, I should mention two more things, mostly because I kind of got them wrong this morning.
The first thing is that I thought Icahn is long via options, rather than shares, for financing reasons. He sometimes uses this method to avoid HSR antitrust filing requirements, but here he actually did the filing and waited the thirty days to buy more shares. But in fact there are a number of thresholds that require pre-acquisition filing; Icahn seems to have waited to cross the $70-ish million threshold in physical shares, but he’s now re-filed to get permission to take physical possession of the full ~$500-ish million that he currently owns synthetically. (And more, potentially.) Icahn said on CNBC this afternoon that he’s planning to convert into physical shares as soon as he gets that approval.1 If true, that suggests relatively little focus on leverage and cheap financing, and relatively significant focus on short squeezing and fucking with stock borrow. So that’s exciting for everyone.
Second: I said this morning that one option that might be appealing for Icahn would be to take profits on his position by dumping some of the stock after this morning’s run-up.2 Nope! Not appealing! Terrible idea! Don’t do it Carl!3Read more »
If you’re a certain kind of dork you will enjoy the hell out of the Argentinian pari passu clause decision out of the Second Circuit today; the opinion is here and here are good things to read from Anna Gelpern and Joseph Cotterrill. In 1994 Argentina issued bonds under New York law that said “The payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future unsecured and unsubordinated External Indebtedness.” Then it exchanged those bonds into new unsecured and unsubordinated external bonds, at 25-29 cents on the dollar, in 2005 and 2010, promising holders that if they did not take the new haircut bonds then they’d never see a penny on the old bonds. Then Argentina went merrily on its way, making regular payments on the new bonds and not the old ones. A bunch of hedge funds, including mainly piratical Elliott Associates, bought the old bonds and sued to get them paid back.
If you’re a human and can read you would predict the result:
Argentina was paying the new bonds,
it wasn’t paying the old bonds,
so it’s definitely treating the old bonds worse than the new bonds, payments-wise,
so doesn’t that mean that “the payment obligations [on the old bonds don’t] rank at least equally with” the new bonds?
And the answer is some sort of indeterminate quantum state. You can take the regular-human reading – bonds that you don’t pay, and explicitly say you’ll never pay, do seem to be getting screwed vis-à-vis bonds that you do pay – or you can take the legalistic reading, which is that never paying interest on a bond is not the same a ranking its interest payments lower. The old bonds and new bonds rank equally as to payment, it’s just that one of them is being paid and the other one isn’t. Simple!
Weirdly that latter theory has lots of support. From the opinion: Read more »
A surprising percentage of conversations at Dealbreaker HQ go like this:
Bess: Can you really sue someone for [thing someone is suing someone else over]?
Matt: Anyone can sue anyone for anything.
Bess: Did you even go to law school?1
What you don’t learn in law school, though, is that “what the law says” and “what you can settle a case for” are two different things. One thing people love to sue about is “doing stupid shit with shareholder money.” Weirdly, though, the state law that governs who can do what with shareholder money not only allows but actively encourages doing stupid shit with shareholder money; if you go to Delaware state court and say “hey the CEO of my company did stupid shit with my money and now it’s gone” they will LAUGH AND LAUGH AND LAUGH at you and then make you go away.2
If you go to federal court and say “the CEO did stupid shit with my money” you will also be kicked out of court, but for purely technical reasons: that is not technically a thing federal courts care about. But you can fix it easily; all you have to do is say “the CEO did stupid shit with my money and then didn’t tell me about it.” This is called “securities fraud,” and it is something federal courts care deeply about. And a moment’s reflection should tell you that those sentences are essentially equivalent: how many companies have you seen issue press releases that say “hey, FYI, we did some stupid shit this quarter, but no one’s noticed yet”?
When people talk about financial innovation one of the main things they mean is legal innovation. CDOs, ETFs, MERS, the poison pill – most of the ways to smooth or roughen the path of investment take the form of jamming entities and contracts together in ways they’ve never gone together before.
Sort of by definition this innovation gets you ahead of what you know works legally: in the Anglo-American legal system, you mostly know for certain that something works because it already exists and some court or regulatory body has looked at it and found it okay, and for that to happen it has to exist first, before you know it works, all exposed and risky.* (You might ponder in your cold cold heart whether this order of operations helps explain why banking is so scandal-ridden.**) So you go to lawyers and you ask them if it works and they read the tea leaves of statutes and prior court decisions and they say go with it and mostly they’re right – because if that wasn’t the case you’d get better lawyers – but sometimes they’re wrong.
Sometimes you’re sort of surprised they’re right. Once upon a time a lawyer told a company “here’s what you do: you issue rights to all your shareholders, and as soon as a hostile bidder acquires 15% of the company, that bidder’s rights will be cancelled and everyone else’s will flip into a zillionty billion shares and the hostile bidder will be diluted down to nothing and you’ll be like ‘haha, now try taking us over.'” This was before my time, but I’m pretty sure that when he said this everyone looked at him funny. And then eventually someone did it, to see what would happen, and the courts looked at it and said “yeah, that sounds good,” and now that is a thing (though not as much as it used to be), and that lawyer is pretty rich.
Other times – most times – the lawyers seem right, so you do it, and that becomes self-reinforcing. One company does a novel thing because the lawyers think it’s okay, and then another company does that thing, and pretty soon everyone’s doing that thing, and every lawyer thinks it’s okay because, hey, everyone’s doing it, and then when it gets to the courts the lawyers are all “of course this is okay, everyone does it, are you nuts?” Often the courts are persuaded by this, though not always, and again go think about banking scandals where everyone just assumed that what they were doing was okay because everyone else was doing the same thing.
One aspect of good salesmanship is that you have to offer an attractive proposition not merely to the abstract entity that is your nominal client – El Paso, Italy, Greece – but also to the specific human being who is your contact at that client. Telling a corporate treasurer who is five years from retirement that a trade will have a significantly positive NPV due to huge cash flows in years 11-15 is not always as effective a sales technique as buying him a nice steak and an evening of unclothed entertainment. I suspect, though, that the latter strategy is more highly correlated with whatever you’re selling ending up on the front page/op-ed page/sec.gov.
The SEC alleges that Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it.
Got it? Argyll gave corporate executives margin loans at 50-70% loan-to-value based on the market price of their stock (based on the volume weighted average price over five days leading up to the closing of the loan). They took the stock as “collateral.” They then trousered the stock and sold it for, y’know, 100% of the market value, with 50-70% of that funding the loan and the remaining 30-50% funding miscellaneous expenses that presumably included unclothed entertainment for themselves. The loans had three-year terms and were not prepayable for 12-18 months, so the expected life of the scam was at least 12 months (but see below). Read more »
Possibly the best thing about the Wynn-Okada saga is the payment to Okada in exchange for poofing his shares away. Recall that Wynn’s charter lets the board disappear the shares. But they can’t just disappear them for free – that would be unfair. They have to pay a fair price for them:
“Redemption Price” shall mean the price to be paid by the Corporation for the Securities to be redeemed pursuant to this Article VII, which shall be that price (if any) required to be paid by the Gaming Authority making the finding of unsuitability, or if such Gaming Authority does not require a certain price to be paid, that amount determined by the board of directors to be the fair value of the Securities to be redeemed; provided, however, that the price per share represented by the Redemption Price shall in no event be in excess of the closing sales price per share of shares on the principal national securities exchange on which such shares are then listed on the trading date on the day before the Redemption Notice is deemed given by the Corporation to the Unsuitable Person …. The Redemption Price may be paid in cash, by promissory note, or both, as required by the applicable Gaming Authority and, if not so required, as the board of directors determines. … [T]he principal amount of the promissory note together with any unpaid interest shall be due and payable no later than the tenth anniversary of delivery of the note and interest on the unpaid principal thereof shall be payable annually in arrears at the rate of 2% per annum.
As it happens, Okada is now the proud owner of a $1.9bn 10-year subordinated note at 2% interest. Wynn has 2020 first mortgage bonds trading at 4.4%. Let’s generously say that a 10-year parent company subordinated note should trade at 7%; that makes a 2% note worth about 65 cents on the dollar, making that Wynn note worth about $1.26bn. That’s call it $1.5bn less than the $2.77bn value of Okada’s shares on the day before the February 18 redemption notice (24.55mm shares at $112.69), or about a 55% discount.