Professor Bainbridge...on law, politics, religion, culture & food

NASDAQ - NYSE Merger?

The WSJ reports that NASDAQ CEO Robert Greifeld approached the NYSE to discuss a possible merger of the two stockmarkets. CNN Money reports that the NASDAQ is denying the WSJ report "as having no basis in fact," which seems pretty categorical. Even if the WSJ report turns out to be true, you can count me as a skeptic that the deal would happen. Despite noises by SEC Chairman Donaldson about the need for a larger central stockmarket, the prospect of a merger between the NYSE and NASDAQ would raise very significant antitrust issues. A merger would also revive the debate over self-regulation by the exchanges, since NASDAQ has spun off its regulatory functions to a separate body but the NYSE refuses to do so. A merger also would make little sense from a business perspective. NASDAQ bungled its merger with AMEX so badly that NASDAQ reportedly now plans to sell AMEX back to its members. Trying to fuse the NYSE specialist-based floor trading system with the NASDAQ electronic market likely would meet the same end. The clash of cultures and technologies would be vast. It's very hard to imagine they could make it work.

Kerkorian v. DaimlerChrysler

The legal kerfuffle in Kerkorian's suit against DaimlerChrysler over former Chrysler exec Gary Valade's late disclosed notes has pretty much confirmed my impression that the deal never was a true merger of equals. Instead, it was a de facto acquisition of Chrysler by Daimler-Benz from the beginning. The WSJ reports, for example:

The prospect of a takeover by Germany's Daimler-Benz AG worried top executives at Chrysler Corp. almost from the start of the merger talks that led to the 1998 combination that created DaimlerChrysler AG, according to notes revealed Monday in Kirk Kerkorian's lawsuit against the German auto maker.

But so what? Even if Dailer and Chrysler did misrepresent the nature of the deal, Kerkorian still has to prove, among other things, that he was (a) misled and (b) suffered monetary damages caused by that misrepresentation. I'm skeptical he can do so. As for being misled, the deal was otherwise fully spelled out in the merger documents and proxy statement. Kerkorian, moreover, had a representative on Crysler's board. Even if management misrepresented the name of the deal, it's hard to believe that Kerkorian was really misled. As for valuation, I think he's got a tough job there too. Although the deal was billed as a merger of equals, an acquisition type in which neither side usually pays or receives a control premium, the Chrysler shareholders in fact got a 28% premium for their shares. Kerkorian must prove they would have gotten even more if the deal had been billed as a takeover by Daimler. Would they? It's hard to know without access to valuation data, but I havew my doubts. Granted, Chrysler was profitable when the deal was done. The market for control of a large automaker is a thin one - few potential bidders with sufficiently deep pockets - and thin markets lead to low premiums. The auto industry generally was plagued by overcapacity and the US manufacturers burdened by goldplated union contracts. As Automobile magazine observed, "it has been clear for some time that Daimler-Benz was the healthier and better run of the two companies, and that Chrysler, with runaway costs and bloated payroll, was likely headed for bankruptcy court or a fire sale without Daimler's deep pockets." This impression is confirmed by comments made by the plaintiff's lawyer in the course of settling a suit by other Chrysler shareholders raising most of the same issues as the Kerkorian suit (via 10b-5 Daily): "The biggest problem for us was that the Chrysler division post-merger performance was horrific." That settlement reportedly brought the plaintiff shareholders a mere 43 cents a share, minus attorneys' fees. So count me as a skeptic on the ultimate merits of Kerkorian's suit.

Speaking of Conrad Black, Here’s David Frum’s Take

On NRO, David Frum offers up an interview with Conrad Black - ex-CEO of Hollinger International and still its majority shareholder and chairman of the board - prefaced by these remarks:

Black is right now at the center of a furious controversy over his business dealings. This is not the venue to discuss the rights and wrongs of that controversy, and I am not the person to do it. What I can say, as someone who has worked at various times for Conrad Black, is that he has been a delightful publisher: creative, encouraging, civilized, fun. I mentioned above that the Spectator published a review in many ways critical of Black’s book. As it happens, Black owns the Spectator. Can you think of any other proprietor who would permit such criticism? And whose staff would understand that he would permit it? That one fact says more about him than I could say in a thousand times the space.

I emphasized the line "Black owns the Spectator" because it reflects a fundamental error. Black does not own the Spectator. He owns a majority of the stock of a company that owns a company that owns the Spectator. Being a majority stockholder gives him a ton of control, making it difficult to dislodge him, as I have explained before. Being a majority shareholder does not entitle Black to run the Spectator as a personal soapbox. Being a majority shareholder does not entitle Black to use $8 million of Hollinger's money to buy up FDR papers so that Black can write a better biography of FDR, as has been alleged. Being a majority shareholder does not entitle him to take 19 million pounds in unauthorized payments from the corporation, as has also been alleged. Why? Because there are minority shareholders to whom he owes fiduciary duties! Black's apparent inability to understand the difference between being an owner and a majority shareholder is precisely what landed him in his present pickle. Being treated like an owner by his syncophants probably didn't help.

Hollinger’s Black Still on Board

Hollinger's ex-CEO Conrand Black has refused to testify before the SEC, reportedly invoking his 5th Amendment right against self-incrimination. Black remains non-executive chairman of Hollinger's board, which is a little surprising. As I've explained before, it's awfully hard for a board of directors to get rid of a board member. Under the circumstances, however, one might have expected them to ask him to -- maybe even make him -- step down at least temporarily as chairman of the board.

Last chance for comments on SEC shareholder access proposal

The comment period on the SEC's Security Holder Director Nominations ends next Monday (12/22). I just submitted my comments by emailing the SEC my article criticizing the proposal. A pointless exercise in all probability, but there may still be some chance of peeling off Commissioners Atkins and/or Glassman, which might help with the eventual legal challenges.

Economics and Morality

Tyler Cowen blogged some interesting thoughts about the relationship of economics and morality this morning over at the Volokh Conspiracy:

I would defend economics as providing a good analysis of rules of the game. It can tell us which rules make it easier for people to be moral, and thus offer some good social advice. ... I find it much harder to defend educating individuals in economics as a tool of moral improvement.

As someone whose scholarship operates at the intersection of law, economic analysis, and Catholic social thought, this is a problem in which I have considerable interest. A couple of years ago I published an essay entitled Law and Economics: An Apologia in Christian Perspectives on Legal Thought, an anthology I would recommend wholeheartedly even if my essay were not in it. A very restrictive copyright agreement prevents me from making the essay available online, but I suspect excerpting the key passage would qualify as fair use.

Shutting Spitzer Down

Regular readers know that I am a competitive federalist who nevertheless thinks the feds need to stop Eliot Spitzer's attempt to become governor of New York by regulating the capital markets. Looks like Congress is finally waking up to the problem (hat tip to an alert reader):

Representative Richard Baker, chairman of the House capital markets subcommittee, said New York Attorney General Eliot Spitzer exceeded his authority when he forced Alliance Capital Management Holding LP to reduce its mutual fund fees to settle trading-abuse charges.

``I see this as an overreach,'' said Baker, a Louisiana Republican. Setting fees to remedy wrongdoing ``is not the function of an attorney general,'' he said in an interview in New York with Bloomberg News. [Ed.: Yep.] ...

The Alliance decision ``adds considerable momentum'' for congressional action to prevent future conflicts over the roles of state and federal regulators, he said.

Good. About time.

New Paper on SEC Shareholder Access Proposal

My paper A Comment on the SEC Shareholder Access Proposal can now be downloaded. Abstract:

The Securities and Exchange Commission (SEC) recently proposed a set of amendments to its proxy rules intended to provide shareholders of public corporations with a limited ability to nominate candidates for a corporation's board of directors and to have their nominee placed on the corporation's own proxy statement and card. This essay reviews the principal features of the proposal and identifies several issues remaining for resolution. The essay concludes that the SEC likely has authority to adopt the proposal, but argues that the costs the rule will impose on corporations outweigh any likely benefits from greater shareholder democracy.