The discussions on the Vodafone judgment of the Supreme Court continue to raise questions regarding tax avoidance, and also aspects of corporate law (distinguishing the sale of shares and sale of assets). While Prashant Bhushan has raised questions regarding the judgment on several counts (here and here), Arvind Datar rationalizes the Supreme Court’s conclusion.
2. Airline Companies and Corporate Governance
In the context of the grave financial issues airline companies are facing, a piece in the Business Line looks at the impact of corporate governance. The author argues that while it is possible to change bad management, it is more difficult (if not impossible) to replace ownership, and that affects all stakeholders in the business.
Although one of the key criticisms of corporate governance in India has been the lack of shareholder activism, there are signs that this might change. For example, India has witnessed the emergence of proxy-advisory firms that take an active role in advising investors on how to vote at shareholders’ meetings. This is meant to energize otherwise passive shareholders, particularly the retail ones.
Shareholder activism sometimes also takes on a more direct and adversarial form, as witnessed in the Western markets, where investors or groups of them directly engage with the company to protect shareholder interest and value. That type of activism too appears to be surfacing as this report in the Business Standard suggests. However, as Mobis Phillipose analyzes in the Mint, while this denotes a healthy move toward protection of minority shareholders, the ability of investors to successfully obtain legal remedies against errant companies or their directors is altogether a different matter.
4. Advisors’ Conflicts in M&A Transactions
A recent decision of the Delaware Chancery Court deals with a conflict of interest of Goldman Sachs, who, as an advisor to the target company El Paso, had a significant interest in the bidder, being Kinder Morgan. Although the court came down on the role of the investment bank, it did not prevent the offer from proceeding. A summary of the decision set out at the beginning of the Court’s opinion is extracted below:
The chief executive officer of El Paso, a public company, undertook sole responsibility for negotiating the sale of El Paso to Kinder Morgan in the Merger. Kinder Morgan intended to keep El Paso’s pipeline business and sell off El Paso’s exploration and production, or “E&P,” business to finance the purchase. The CEO did not disclose to the El Paso board of directors (the “Board”) his interest in working with other El Paso managers in making a bid to buy the E&P business from Kinder Morgan. He kept that motive secret, negotiated the Merger, and then approached Kinder Morgan’s CEO on two occasions to try to interest him in the idea. In other words, when El Paso’s CEO was supposed to be getting the maximum price from Kinder Morgan, he actually had an interest in not doing that.
This undisclosed conflict of interest compounded the reality that the Board and management of El Paso relied in part on advice given by a financial advisor, Goldman, Sachs & Co., which owned 19% of Kinder Morgan (a $4 billion investment) and controlled two Kinder Morgan board seats. Although Goldman’s conflict was known, inadequate efforts to cabin its role were made. When a second investment bank was brought in to address Goldman’s economic incentive for a deal with, and on terms that favored, Kinder Morgan, Goldman continued to intervene and advise El Paso on strategic alternatives, and with its friends in El Paso management, was able to achieve a remarkable feat: giving the new investment bank an incentive to favor the Merger by making sure that this bank only got paid if El Paso adopted the strategic option of selling to Kinder Morgan. In other words, the conflict-cleansing bank only got paid if the option Goldman’s financial incentives gave it a reason to prefer was the one chosen. On top of this, the lead Goldman banker advising El Paso did not disclose that he personally owned approximately $340,000 of stock in Kinder Morgan.
The record is filled with debatable negotiating and tactical choices made by El Paso fiduciaries and advisors. … In the case of Goldman, it claimed to step out of the process while failing to do so completely and while playing a key role in distorting the economic incentives of the bank that came in to ensure that Goldman’s conflict did not taint the Board’s deliberations. This behavior makes it difficult to conclude that the Board’s less than aggressive negotiating strategy and its failure to test Kinder Morgan’s bid actively in the market through even a quiet, soft market check were not compromised by the conflicting financial incentives of these key players.
The record thus persuades me that the plaintiffs have a reasonable likelihood of success in proving that the Merger was tainted by disloyalty. Because, however, there is no other bid on the table and the stockholders of El Paso, as the seller, have a choice whether to turn down the Merger themselves, the balance of harms counsels against a preliminary injunction. Although the pursuit of a monetary damages award may not be likely to promise full relief, the record does not instill in me the confidence to deny, by grant of an injunction, El Paso’s stockholders from accepting a transaction that they may find desirable in current market conditions, despite the disturbing behavior that led to its final terms.
The Deal Professor has an analysis of the decision.