Hank Greenberg Should Maybe Get His $25bn Back, But Not For The Reasons He Thinks

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Remember a couple of months ago when former AIG CEO and current dog fancier Hank Greenberg sued the government for $25 billion because it had stolen AIG from him? We all had a good giggle at that but some people think he wasn't entirely crazy. One of those people is friend of Dealbreaker and Stanford GSB student Ed Couch, who feels Hank's pain but also has some doubts about his lawyers' efforts on the case. We pass along his views on the complaint in case you are (1) Hank's lawyers (give Ed a call!), (2) particularly keen on Hank getting or not getting, as the case may be, his deserved or undeserved $25bn from AIG's government captors, or (3) just generally interested in the wonky mechanics of equity-linked voting and exchange procedures, which YOU DAMN SURE KNOW I AM but the rest of you can keep your own counsel. Here's Ed:

Contrary to the common view, AIG’s shareholders have substantial valid claims against the government. Unfortunately, the two complaints filed by Starr International Company* jeopardize the rights of the class they seek to represent by strikingly misconstruing the publicly available facts of the case. There are other errors in the complaint; this note only discusses one.

Starr devotes significant attention to a vote by the common shareholders that was required for conversion of the government’s Series C Preferred into about 80% of AIG’s common stock. The complaints allege that this vote occurred and failed, and that the conversion was accomplished by underhanded means. But neither the vote** nor the conversion ever occurred.

Instead, the C Preferred was exchanged for common stock in January 2011 as part of a larger restructuring involving the Series E and F Preferred. The exchange differed fundamentally from conversion because the conversion terms had been agreed to in 2008; the proposed exchange was

In connection with the restructuring the AIG board procured two fairness opinions.*** This fairness opinion is described in an SEC filing as follows:

[T]he consideration to be paid by AIG in connection with the exchange of the Series E Preferred Stock and Series F Preferred Stock for AIG Common Stock… was fair to the holders of AIG Common Stock.... The fairness opinions ... do not opine as to the fairness of the exchange of the Series C Preferred Stock for shares of AIG Common Stock [emphasis added]. The ...[AIG board committee] did not deem it necessary to receive a fairness opinion regarding this exchange because the number of shares of AIG Common Stock received by the [government] for the Series C Preferred Stock was derived from a previously agreed formula (i.e., the number was determined based upon the number of shares of AIG Common Stock the [government] would otherwise have been entitled to if the Series C Preferred Stock had been converted in accordance with its terms).****

It is unusual for a board of a public company to exclude one specific part of a restructuring from a fairness opinion because of the ease of determining the fairness of that part. The board’s supposition that fairness was evident because of a conversion ratio from two years prior is not appropriate. That prior agreement was undertaken at a very different time. In addition, the conversion ratio required a shareholder vote, which was unobtainable, in order to have any relevance. (A board can agree to terms that aren’t accepted, as we saw in the case of the Bear Stearns board agreeing to a $2/share acquisition.)

A fair exchange ratio would have differed substantially from the conversion ratio. The government might respond that the Series C Preferred Shares carried the same economic and voting rights as the common into which they were exchanged, and so the exchange was fair. For reasons that can be discerned from public documents, this is not valid.

There is an excellent case to be made, using publicly available information, that AIG’s common shareholders are owed significant compensation from the government for the damage they have suffered; yet the complaints do not evidence sufficient knowledge of the facts that would be necessary to make that case.

Note on Starr International’s Complaints Against the US Government (pdf)

* Starr’s lead counsel in the case is Boies, Schiller and Flexner LLP

** The complaints rely on the legal requirement that passage of a proposal to increase the number of authorized common shares to 19 billion was required prior to conversion of the Series C into Common. Such a proposal could only pass with a vote by the common shareholders. The basis for the legal requirement is summarized in one of the complaints: “(i) Delaware law, (ii) the Delaware Court Order, (iii) all securities filings by AIG and Defendant, and (iv) the Series C SPA itself.” The complaints explain that at the AIG annual shareholders meeting in June, 2009, shareholders voted on the required increase to the number of authorized shares in Proposal 3, and that the vote “failed”: “the only vote in which AIG Common Stock shareholders were entitled to a separate vote to protect their property and interests with respect to Government takeover, failed” [emphasis in original]. The complaints further explain that Proposal 4, which was approved, underhandedly creates sufficient authorized stock by authorizing a reverse stock split without decreasing the number of authorized shares. But this interpretation is not correct. In fact, Proposal 3 sought to raise the authorized share count to 9.225 billion in order to satisfy the obligation of a prior outstanding debenture, far fewer than the 19 billion required for conversion of the Series C. Thus proposal 3 had nothing to do with the government’s taking 80% ownership of AIG’s common stock. *** See Appendix C-1 of AIG’s December 10, 2010 Information Statement.

**** See page 4 of AIG’s December 10, 2010 Information Statement.