Business Law Prof Blog

Ratings Agency Rules

New York Attorney General Cuomo has cut a deal with the rating agencies to change the way they  will be for fees.  The agencies at present are solicited by issuers, issue ratings, and then ask for fees.  Issuers that are unhappy with the ratings can threaten refuse fees and go to other agencies.  Under a pay first system, the issuers will not have, in theory, such bargaining power.  The solution is empty, however, once one realizes that it does not solve the inherent conflict of interest present when those being rated, the issuers, pay those who rate them.  We need either to suspend all legal requirements that depend on such ratings or find a way to have ratings agencies paid by those who depend on the accuracy of the ratings, not those who are rated.

Brocade and Stock Options Backdating

Late Monday, Brocade Communications Systems, Inc., agreed to pay the plaintiffs in a class-action lawsuit $160 million to settle allegations the network equipment maker injured investors by backdating stock options between 1999 and 2004.  Arkansas Public Employees Retirement System filed the suit. In summer 2006, Brocade's former chief executive, Gregory Reyes, and former VP of human resources, Stephanie Jensen, became the first executives criminally charged over the practice and were later convicted.  Brocade had agreed in May 2007 to pay $7 million to settle allegations by the Securities and Exchange Commission of civil fraud accompanying options backdating.  The SEC settlement was notable for its omission of a condemnation of "spring-loaded" options--options issued just before a company announces good news.  Critics do not like the practice but it is not illegal.  A new set of rules in 2006 heightens disclosure required by the practice however.

A Dutch Company Blocks an Acquisition

On Tuesday, Staples Inc. raised to $2.6 billion its hostile bid for Dutch office supplies distributor Corporate Express NV.  Under Dutch bidding rules, Staples cannot raise its offer again.

   Rather than accepting two previous buyout offers from Staples, Corporate Express last month struck a surprise deal to buy a French competitor, Lyreco SAS, which would create an international competitor to Staples.

   In May, Staples had pitched its second offer directly to shareholders, complaining that Corporate Express's management was not willing to negotiate.

Just another example of an incumbant board hurting its own shareholders.

Germany Plans to Privatize Freight Railroad

Last Friday, according to the decision passed by Germany's parliament, the Bundestag, Deutsche Bahn's passenger, freight and logistics railway divisions will be spun off into a holding company, of which 24.9 percent will be privatized. The government plans to partially privatize Germany's national railway with an IPO in November that could raise up to €8 billion ($12.4 billion).
According to Deutsche Bahn's CEO, Harmut Mehdorn, "It's a good day for customers, taxpayers and employees."

P&G sells Foldgers to Smuckers

On Tuesday, J.M. Smucker Co. stated its intent to purchase the Folgers brand from Proctor and Gamble in an all-stock deal.  Given Folger's annual sales in excess of $1.6B, the price for the business could be upwards of $2B.  The acquisition of Folgers nearly doubles the size of Smucker and would give it the top-selling ground coffee brand in the United States.

Corporate Income Tax

Scholarly research is supporting what corporate executives have known for years, corporations do not pay corporate income tax, they pass it on.  At issue has been to whom.  Most assumed consumers get hit but no research is showing that company blue collar workers may pay up to 70 percent, 70 percent, of corporate tax in reduced wages.  Unions should lobby against, not for corporate tax.

Exxon Shareholder Meeting: Resolutions Lose

Everyone is claiming victory after three notable shareholder resolutions failed at the spring Exxon annual shareholder meeting.  The shareholder's, supported by Rockefeller heirs, attracted close to 40 percent of the votes cast.  One of the resolutions was structural -- to separate the positions of Chair of the Board and Chief Executive Officer.  Two of the resolutions were, in essence, on business strategy.  Shareholder want the company to invest in alternative energy sources and research.  As a shareholder I cast my vote with the board;  I was part of the "losing side", the 60 percent majority.  Exxon is an oil and gas company. If shareholder want to invest in other sources of energy, sell their Exxon stock or use their Exxon dividends to invest in alternative energy companies.  Why push Exxon into areas, wind or solar power, in which it has a competitive disadvantage? 

Shareholders Approve Bear Stearns Deal

On Thursday, Bear Stearns Company shareholders approved JPMorgan Chase & Co.'s $2.2 billion buyout of the investment bank.  The Bank is buying Bear Stearns for approximately $10 per share.  the meeting was short and lightly attended.

Commenting on the ten minute meeting at Bear Stearns' Manhattan office, shareholder Hannah Horgan noted,
"They were up there drinking coffee paid with my money ... and we lost our money overnight. I have nothing left, and they were so calm."

So ends with a whimper one of the more dramatic episodes in American financial history.  The Fed injects $29 million tax dollars into a deal brokering the sale of an investment bank to keep the bank from defaulting on its short term paper.  It is at the outer limit of Fed power and the theory behind what the Fed should do.  We are no doubt leaning towards a belief in a "managed economy."  The belief empowers fed officials who, whenever faced with claim of "chaos will come if....", will now act to broker solutions with taxpayer dollars. 

The SEC Going the Wrong Direction on New Ratings Agency Regulations

The SEC is going the wrong direction again.  The poor performance of the country's rating agencies in the current structured financial debacle should be no surprise.  The agencies have been performing poorly for some time. It just took the current financial crisis to focus our attention on their performance.  The SEC is going to fix it, with more detailed regulations of rating agency rating scales, among other things.  The competitive market should set scales.  The problem is that the SEC has created a protected rating agency market --  ratings are required throughout securities law disclosure regulations and rating agencies are licensed by the SEC (and only a few make the grade).  As we have seen with trading market regulations, once the SEC gets into the details of market services there is no stopping it.  How bout going the reverse direction? Suspend and rating requirements, let firms choose to hire rating agencies to buttress marketing claims, make rating firms disclose all conflicts about any recommendation, and let the firms develop reputations for credibility in a competitive market. 

Airline Mergers

US Air and United will not merge. We should not weep.  Airline mergers have a terrible recent history. Most are prompted by airline desires to restructure.  A merger ought not be needed to restructure a poorly performing airline;  CEOs find the restructuring business after a merger is more expected and therefore easier or some such gibberish.