Hmmm in this case the existing shareholders were being bought out at a large premium so they didn't care about priority in the case of a bankruptcy. The current debentureholders of the company were upset that the credit rating of their bonds was being downgraded due to the deal. So the situation was flipped.
Shouldn't issuing debt be a positive in some companies? You aren't diluting ownership...Although I've only seen that said with regards to junior mining companies.
I didn't fully read your article. But that makes sense; it turned into a
fight about each debt-holder group's place in line..
Shouldn't issuing debt be a positive in some companies? You aren't diluting ownership...Although I've only seen that said with regards to junior mining companies.
There is a whole body of research on this topic. One interesting thing I remember
is, in general, companies with higher debt levels are, paradoxically, better managed, because managershave to run a tighter ship compared to very cash rich companies.
This has actually motivated some companies to issued debt, pay out the proceeds
in a special one-time dividend, just to get better over-all performance in its
financial ratios. (Which is what the bond covenants monitor.)
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Bella Sara Charter Superscriber
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End result is that the board of directors now has a duty to consider stakeholders other than shareholders when making decisions.
Do they have to consider other stakeholders generally, or only in the specific instance where the itnerests of the debt and equity holders are not in alignment? Did they include any stakeholders other than debtholders?
Delaware imposes fiduciary duties for debtholders, but only in cases where the company is operating in the "zone of insolvency."
Not much to say about corporate governance - it varies depending on the terms of the Partnership Agreement. For the most part, the Limited Partners are passive and have very few rights. A fund itself has several tricks to handle corporate governance of the companies in which it invests.
If you want the optimistic view, private equity funds play a valuable role by providing companies with capital and expertise. In my experience, companies backed by private equity tend to be cleaner, have higher caliber lawyers and accountants, manage their corporate affairs and stockholders better, and provide a way to aggregate capital while dispersing risk.
If you want the less optimistic view, private equity funds often sabotage the American dream of building a business and getting wealthy. People tend to focus on the Jobs, Gates, Zuckerbergs, et al, aka the rare exceptions. The much more common fact pattern is that the founder of the company is out the door within 12-18 months of taking their first dollar from a private equity fund. The founder will retain some equity ownership, but it will be junior to the shares held by fund, and subject to additional dilution as their former company raises more capital. Founders who are scientists (as opposed to MBAs) are the most likely to get tossed out once private equity mony enters the picture (which, to an extent, makes sense given that private equity typically backs companies who need business expertise to make it to the next stage). Of course, you could always argue that these people didn't have the skill to continue developing the business, and never would've become wealthy anyway.
I've seen both.
A fund itself has several tricks to handle corporate governance of the companies in which it invests...
ooh. What kind of tricks???
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Rob Reich is a lefty Shill.
One of the things I love about the RPG community is how it is made up in general of educated thoughtful people. I am therefore always surprised at just how many have bought into anti-capitalistic propaganda. "The invisible hand has never worked" ...please. There is a reason the U.S. is the richest most powerful country in the history of the world. There is also a reason why North Korea is not. Or hey lets be fair to North Korea and just compare it to South Korea. Ooops that just shows the superiority of capitalism as well.
Capitalism is the greatest creator of wealth and jobs that the world has ever seen. To dispute this is to simply be uninformed. What capitalism does not create is equality. No one ever said it does. What it does is create a society where everyone has more but not everyone has the same amount of more.
No system that has based itself on the goal of "equality" has every produced anything but poverty, tyranny, and (you guessed it) more inequality. There are enough reasons for this to fill books, and many have been written, but history is filled with examples of countries that strove for equality but ended up exploding in violence and creating at best mediocrity and at worst horrible desperation. For every French Revolution there is a reign of terror. For every Russian revolution there is a purge. For every Cambodian Revolution there is a Killing Fields.
Where is the communist paradise??? Where are the Utopian Societies of the 19th century? Where are the hippie communes of the 1960's? If these ideas are all so worthwile, why have they not succeeded? It is not like they have not been tried before.
Capitalism is not perfect but if you like being Free, stop striving for Equality. History has proven over and over that Equality must be enforced from the top because people are inherently different. Freedom and equal opportunity. That is what creates success.
So until the government kills me because I am a teacher, because I am educated or because I wear glasses...make me a capitalist.
Sorry for the wall of text now fire away.
Capitalism is the greatest creator of wealth and jobs that the world has ever seen. To dispute this is to simply be uninformed. What capitalism does not create is equality. No one ever said it does. What it does is create a society where everyone has more but not everyone has the same amount of more.
I agree and wonder if we can make something even better.
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No system that has based itself on the goal of "equality" has every produced anything but poverty, tyranny, and (you guessed it) more inequality. ...
I feel compelled to add we should all be equal in the eyes of the law.
That is, the playing field should be level for everybody.After that, it is up to each person's intelligence to make a happy life.
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There is a reason the U.S. is the richest most powerful country in the history of the world.
Because we were one of the few industrialized nations that had a fully intact infrastructure after WWII?
Note you picked North Korea over China...
To be clear, I am not in favor of communism for any number of practical reasons, and I even think socialism far over reaches any practical benefit when it expands into anything non-essential.
Don't create the false dichotomy of an either or choice of absolute equality vs absolute freedom.
The fact is power consolidation in all forms is a problem, be it government authority or individual wealth.
The many are smarter than the few.
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End result is that the board of directors now has a duty to consider stakeholders other than shareholders when making decisions.Do they have to consider other stakeholders generally, or only in the specific instance where the itnerests of the debt and equity holders are not in alignment? Did they include any stakeholders other than debtholders?
Delaware imposes fiduciary duties for debtholders, but only in cases where the company is operating in the "zone of insolvency."
http://canlii.org/en/ca/scc/doc/2008/2008scc69/2008scc69.html[40] In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. 1998 CanLII 5121 (ON CA), (1998), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., 2007 SCC 44 (CanLII), [2007] 3 S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions.
I'd have to go do a review to see what practical effect the judgment has had - when I did Corporations the decision was still brand new. It has been cited in 116 cases since 2008 though.
One way of looking at that paragraph is it enables directors to look at interests other than shareholders and the courts won't interfere. Our business judgment rule protects directors quite a bit.
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Bella Sara Charter Superscriber
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A fund itself has several tricks to handle corporate governance of the companies in which it invests...ooh. What kind of tricks???
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The usual panoply of investment docs covers them pretty well. Also, to help my sanity, I'm going to start referring to the investors as VCs (venture capitalists).
Here's a brief summary
1. Certificate of Incorporation (VCs have a different class of shares with additional rights, which could, in theory, allow them to destroy the company if they so choose (which they won't usually do, unless it's to gain leverage in negotiations))
- This is the document that makes a corporation a corporation, and expressly limits the power, authority, etc. of the company. This fundamental nature is very important because, if the company breaches a contract, the other party has a right to bring suit. If the company breaches its Certificate of Incorporation, the action is invalid (and is much easier to prove and enforce than a general contract claim).
- VCs always demand and recieve preferred stock, which, (a) is paid out upon liquidation prior to the holders of Common Stock, (b) can be converted into Common Stock at the holder's whim (which is relevant in the event the VCs need to influence a Common Stock class vote, and allows them greater upside if their preference is capped), (c) votes as a separate class on certain important matters (e.g., merger, additional financings, the amendment of the Certificate of Incorporation itself) and (d) can have additional rights if the VC has the power to engotiate them (e.g., an annual dividend, redemption rights, etc).
- Another important fact about stock ownership. While it is true that members of a company's board of directors owe the stockholders fiduciary duties, the same is not true with respect to the stockholders and each other (with a few exceptions, such as in California, which has a body of law relating to minority stockholder oppression). Why do I mention this? Because you may have a transaction where the member of the board apponited by the VC must vote one way on a transaction due to the fiduciary duties of directors, but the VC itself can vote its stock any way it pleases.
2. Right of First Refusal and Co-Sale Agreement (The Founder can't control who buys their shares and might lose a portion of their equity for pennies)
- This agreement dramatically restricts the ability of the Founder to sell his/her shares. When the Founder tries to sell shares, they must offer them to the VCs first. The VCs have a choice - they can buy the shares from the Founder or insist that the Founder sell fewer shares and that the VCs be allowed to participate in the sale and unload some of their shares. In either case, the Founder will have trouble finding a buyer willing to run out the clock on the VCs rights (typically 30-90 days worth of back and forth). On the bright side, the VCs must pay the same as the third party for the shares, so the Founder isn't totally screwed, which is why we invented...
- Stock Restriction Agreements! The VCs will often insist that the Founder sign a Stock Restriction Agreement, which allows for the repurchase of the Founder's shares at a reduced price (often at the purchase price, which is generally less than a penny). This right lapses over time, typically 2-3 years (but recall what I said above about founders only lasting 12-18 months...)
3. Investors Rights Agreement (Despite it's name, this may be the most benign of the documents, as it mostly governs the rights of the VCs as between themselves and other investors)
- Registration rights are one of the most common provisions in the IRA. The former provides the VCs with the right to have their shares registered first upon an IPO (the IPO creates a public market for the shares, which allows for liquidation of those shares), subject the rights of the underwriters to have their shares included first.
- The other common provision of the IRA is the right of first offer. This is like the right of first refusal, but applies to new issuances made by the company (i.e., if the company wants to issue a new class of preferred stock in a financing, they must offer the shares to the VCs first (again, at the price they would offer them to a third party)). This provision is actually more important for tag-along preferred stock investors than it is for VCs (e.g., Daddy Warbucks puts $500k into a $5m financing, this lets him participate in future financings to avoid dilution (unless the VCs waive the right, which they always do)). Plus, as noted above, the company can't even offer any shares without VC aproval.
- The IRA often contains provisions limiting the Board's power to take certain actions, and this is at a much more granular level than in the COI. So, the approval of a stock option grant, entering into a debt agreement for more than $10k, etc., would require approval of the board member appointed by the VC.
4. Voting Agreement (The Founder and other holders of stock will vote the way the VCs tell them to vote on certain key issues, such as the sale of the company and appointment of members of the Board of Directors)
- The Voting Agreement has two primary functions. First, it ensures that the VCs will have a representative on the Board of Directors. The Voting Agreement grants the VC the right to nominate a member of the board and everyone else party to the agreement must vote that person in.
- The second primary function is the drag-along. One thing that a potential buyer will not want when it acquires a company is a stockholder pool that can challenge the transaction (these are known as dissenters, and in order to preserve their rights, they must vote against the transaction). The Voting Agreement provides that, if the Board approves the sale of the company (within certain parameters, usually), everyone else will vote for the sale (thus eliminating their dissenters' rights) and tender their shares. We often put in a proxy to allow the shares held by the unruly masses to be voted by the secretary of the company, which provides an additional level of control.
I'm sure I can think of more, but those are the highlights. Once a VC is in a company, they control it for all intents and purposes, even if their holdings only represent, say, 20% of the company's equity. Again, this structure can be, and often is, a Good Thing; but the game is set up to favor the VCs, protect their interests, and give them the lion's share of any sale of the company (which is their goal - they want their investment liquidated at some point, and that only happens if the company is acquired, redeems their shares (highly unlikely), or goes public (even more unlikely)).
Oh, and in case it isn't obvious, the above isn't legal advice, and you shouldn't take legal advice from some random a~!%!*$ on the internet, no matter how much of an a%$!!++ he is. I reserve the right to clarify, contradict, and otherwise restate the above (which will likely happen using the edit feature in the next hour or so).
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Well, if.....Sebastian is involved with them, they must be soulsucking vampires.
I rest my case.
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Bella Sara Charter Superscriber
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I'd have to go do a review to see what practical effect the judgment has had - when I did Corporations the decision was still brand new. It has been cited in 116 cases since 2008 though.One way of looking at that paragraph is it enables directors to look at interests other than shareholders and the courts won't interfere. Our business judgment rule protects directors quite a bit.
Thanks. I need to look into Canuckistani securities laws at some point. Apparently, offerings on the Toronto Exchange are the new offerings on the London Exchange.
True enough, but the claim here is that a large debt means the company is being well managed.
A large debt doesn't mean that a company is being mismanaged anymore than buying a home means that you are mismanaging your finances. A company may choose to purchase a factory (so, its debt increases) so that it can increase revenue.
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I think a better way to say it is there is an *optimal* Debt Ratio.
I'll try to summarize how to get to the *optimal* (but remember Ross, Westerfield, and Jaffe are your friends.)
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Is YOUR actual debt ratio greater than or lesser than the *optimal* debt ratio?
ACTUAL > *OPTIMAL* (Overlevered):
Is the firm under bankruptcy threat?
... YES
... ... Reduce Debt quickly:
... ... 1. Equity for Debt swap
... ... 2. Sell Assets; use cash to pay off debt
... ... 3. Renegotiate with lenders
... NO
... ... Does the firm have good projects? (ROE > Cost of Equity; ROC > Cost of Capital)
... ... ... ... YES
... ... ... ... ... Take good projects with new equity or with retained earnings.
... ... ... ... NO
... ... ... ... ... 1. Pay off debt with retained earnings.
... ... ... ... ... 2. Reduce or eliminate dividends.
... ... ... ... ... 3. Issue new equity and pay off debt.
ACTUAL < *OPTIMAL* (Underlevered):
Is the firm a takeover target?
... YES
... ... Increase leverage quickly
... ... ... 1. Debt/Equity swaps.
... ... ... 2. Borrow money & buy shares.
... NO
... ... Does the firm have good projects? (ROE > Cost of Equity; ROC > Cost of Capital)
... ... ... ... YES
... ... ... ... ... Take good projects with debt.
... ... ... ... NO
... ... ... ... ... Do your stockholders like dividends?
... ... ... ... ... ... YES
... ... ... ... ... ... ... Pay Dividends.
... ... ... ... ... ... NO
... ... ... ... ... ... ... Buy back stock.
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Yarp. That's pretty much the whole game in a nutshell.
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"There's a surprisingly safe way for members of the 99 percent club to invest in it."
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Because we were one of the few industrialized nations that had a fully intact infrastructure after WWII?There is a reason the U.S. is the richest most powerful country in the history of the world.
Actually the United States had the most powerful/productive economy in the world long before WWII, in fact by the late 1800's we had surpased both England and Germany.
Note you picked North Korea over China...
And to be fair I compared North Korea to South Korea. But even had I used China as an example it changes nothing. China is a country with 4X the population of the united states but half the GDP ($7 trillion approx to $15 trillion approx) China's currency is not tied to the world market, they protect local industry from foreign competition, and they don't abide by international laws regarding piracy amongst many other things. We will see what happens to the Chinese jugernaut when Vietnam and Cambodia start to undersell them.
To be clear, I am not in favor of communism for any number of practical reasons, and I even think socialism far over reaches any practical benefit when it expands into anything non-essential.
I think you are correct here.
Don't create the false dichotomy of an either or choice of absolute equality vs absolute freedom.
The fact is power consolidation in all forms is a problem, be it government authority or individual wealth.
This is one of the biggest misconceptions out there today. Power is limited. Once you give it up it is gone. Wealth is not the same. There is a direct corelation between how much political power one person has and how much another person has. The President of the US has a lot of power such as Commander and Chief of the Army, etc. By definition no one else can have that power....This is not the case with wealth. If one person has money it has no effect on how much money someone else can have. In fact, the more money in an economy the better as wealth creates wealth. Just because person x has a lot of money does not mean that I can't have a lot of money. Economies are not 0 sum situations. They grow. If I spitefully limit the success of people because they are successful I only hurt the economy as a whole. No one is actually benefited.
The many are smarter than the few.
This is highly debatable. I know that makes me somewhat elitist, but I have seen reality TV.:)
Clear cut your forests and you'll be paying property taxes on land you can't sell for eternity.
Then you just create a corporation out of nothing, sell the land to the corporation for a dollar, and the corporation defaults on its taxes and the government takes the land.
Or you sell it to graze cattle.
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Actually the United States had the most powerful/productive economy in the world long before WWII, in fact by the late 1800's we had surpased both England and Germany.
Citation? And it should be one that includes the entire British Empire, as that is the relevant number. Also let's not forget that was when the US benefited from geographical advantages in it's coal access.
Germany I believe, as Germany lagged behind the rest of Europe for most of it's history, the UK, nope.
And I disagree with you with regards to wealth, as consolidation of wealth necessarily either limits the amount of money flowing generally in the economy or leads to inflation, neither of which are positive.
Edit: I stand somewhat corrected about the US economy prior to WWII after looking up the numbers, although it is much closer than you characterized it and WWI had a major impact.
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Bella Sara Charter Superscriber
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Hmmm...yesterday must've been a bad day to continue sniffing glue given that I went off about VCs instead of private equity...
One point that is often glossed over is that these private companies can't be bought by a private equity firm unless the stockholders vote to approve such sale. Now, granted, as I outlined above regarding VCs, they have significant power to force a sale.
Given the above, the typical private equity transaction involves the (majority) owner(s) deciding they want to liquidate and live in the Bahamas or, they realize that the business is going down the drain, and want the value of the remaining assets. No one puts a gun to their head.
Just because the law allows you to screw people over doesn't mean you have to. Making tons of money isn't the be-all and end-all of life. People with actual moral integrity don't profit by destruction even if it is legal.
"Don't be a dick." If you're gaming the system and hurting people because of it, you're being a dick.
Are you kidding? We worship this behavior. Hell, not worshipping it is practically "unamerican."
Rob Reich is a lefty Shill.
One of the things I love about the RPG community is how it is made up in general of educated thoughtful people. I am therefore always surprised at just how many have bought into anti-capitalistic propaganda. "The invisible hand has never worked" ...please. There is a reason the U.S. is the richest most powerful country in the history of the world. There is also a reason why North Korea is not. Or hey lets be fair to North Korea and just compare it to South Korea. Ooops that just shows the superiority of capitalism as well.
Capitalism is the greatest creator of wealth and jobs that the world has ever seen. To dispute this is to simply be uninformed. What capitalism does not create is equality. No one ever said it does. What it does is create a society where everyone has more but not everyone has the same amount of more.
No system that has based itself on the goal of "equality" has every produced anything but poverty, tyranny, and (you guessed it) more inequality. There are enough reasons for this to fill books, and many have been written, but history is filled with examples of countries that strove for equality but ended up exploding in violence and creating at best mediocrity and at worst horrible desperation. For every French Revolution there is a reign of terror. For every Russian revolution there is a purge. For every Cambodian Revolution there is a Killing Fields.
Where is the communist paradise??? Where are the Utopian Societies of the 19th century? Where are the hippie communes of the 1960's? If these ideas are all so worthwile, why have they not succeeded? It is not like they have not been tried before.
Capitalism is not perfect but if you like being Free, stop striving for Equality. History has proven over and over that Equality must be enforced from the top because people are inherently different. Freedom and equal opportunity. That is what creates success.
So until the government kills me because I am a teacher, because I am educated...
Wow. That's quite a rant.
So here's the deal: I'm a "lefty." But unlike the straw man you've built yourself here, I (along with most other "lefties" I know) don't hate capitialism...I am simply aware of it's shortcomings, and think government can help ameliorate those shortcomings.
It's horribly destructive and it needs to change.
No argument there.
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Bella Sara Charter Superscriber
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Uh, except that's not the way it actually works in real life. I've outlined the typical private equity deal. I closed an acquisition by a private equity partnership last month, and I'm going to close one next month. The private equity partnership is acquiring a number of companies in the same space in order to package them together and resell them later. The owners were well paid, the employees still work there, and, generally, everything is hunky dory. This same client bought one business and kept it alive through the bankruptcy process.
Private equity firms are the bacteria and scavengers of capitalism. They break down resources that are not being used well and direct them to places where they are more productive. There are problems with the system, there are ways it could be better (in particular, as it impacts employees, who are viewed as a resource), but stating that they are all bad/evil/wrong is as ignorant and incorrect as saying everyone on welfare is a drug addict/parasite/etc - a straw man, not supported by the facts on the ground.
Edit: looks like there were a lot of posts between the time I started typing and the time I hit submit post...and looking back, I can't figure out what I was responding to. It wasn't bugleyman though...
Oh well.
Uh, except that's not the way it actually works in real life. I've outlined the typical private equity deal. I closed an acquisition by a private equity partnership last month, and I'm going to close one next month. The private equity partnership is acquiring a number of companies in the same space in order to package them together and resell them later. The owners were well paid, the employees still work there, and, generally, everything is hunky dory. This same client bought one business and kept it alive through the bankruptcy process.
Private equity firms are the bacteria and scavengers of capitalism. They break down resources that are not being used well and direct them to places where they are more productive. There are problems with the system, there are ways it could be better (in particular, as it impacts employees, who are viewed as a resource), but stating that they are all bad/evil/wrong is as ignorant and incorrect as saying everyone on welfare is a drug addict/parasite/etc - a straw man, not supported by the facts on the ground.
Edit: looks like there were a lot of posts between the time I started typing and the time I hit submit post...and looking back, I can't figure out what I was responding to. It wasn't bugleyman though...
Oh well.
Whatever, man! Screw you.
...freakin' lawyers.
;-)
Private equity firms are the bacteria and scavengers of capitalism. They break down resources that are not being used well and direct them to places where they are more productive. ...
Well said.
I wonder >what< else we can find in this giant pile of crap?
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>This< is awesome!
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Gas prices were rising and an oil company stopped paying a dividend on my Moms preferred stock. They sited expenses getting more oil. She had no trouble selling the stock.
Is this why people only buy stocks to sell later, and not for regular dividends?
What is a VC? Is it the original partner?
If it turns into a fight over each creditor's place in line, use the Solomon method. Determine the overall value and divide that by the number of creditors. They almost always agree to solving it another way.