Devaluation of Bonds and Preferential Treatment towards the Board

One of the more common problems investors face in today's market is the chance that the board of directors might not be acting in the best interests of investors. In such situations it may be necessary for shareholders to initiate legal action against those who are running the company they have invested in. Companies who are publicly bought and sold have an obligation to strive for profitability and maximize returns for investors any way they are able without committing an act that violates the law.

In the case of Rogers v. Guaranty Trust CO. of New York the complainant alleges that the respondent did modify the value of their bonds without informing/compensating shareholders. Subsequently the shareholder (plaintiff) lost money due to a devaluation of the bonds they were currently holding. While the American Tobacco company was a New Jersey company, their headquarters resided in New York, and as a result the suit was brought before the New York district court. The plaintiff alleged that the respondent issued stock at a price of $25.00 per to its directors while it was trading at $112.00 per share on the New York Stock Exchange. Due to this discrepancy the plaintiff demanded the issuance of stock to directors be halted immediately, but the issuance continued. It was further alleged that the directors of the company had received money from the company in addition to large blocks of stock from within the corporation (American Tobacco Company) itself. The defense asserted that the matter did not fall within New York jurisdiction since the company was headquartered in New Jersey. The presiding Judge in the case dismissed it as a result of the defense challenging jurisdiction on the grounds that the entity being sued was a foreign (out of state) company.

The transparency of the American Tobacco Company needs to have with its shareholders One of the questions in this particular case is whether or not the company was obligated to inform shareholders about the price at which it was issuing stock to its board of directors. This information needs to be made available to shareholders so that they are confident in the fact that their stock is not being devalued, and also that the directors are not receiving preferential shares of the profits. While it is well known that companies need to adequately compensate their management teams, it is very important that they not treat themselves any better than their shareholders. The money of shareholders is what allows a company to grow, and as a result continue to thrive. If word breaks that the management team are paying themselves huge bonuses while depriving the shareholders of money, there is a good chance that investors could find the company undesirable in the long term. This type of white-collar financial theft is unscrupulous and leads to a downward spiral discouraging profitability, future investors and of course causes a negative impact on share values.

When stock is issued to directors it should be at the same price it is issued to shareholders when more of the stock is being created. If this is not done there is a chance that the company could be dishonest and collect more value they are entitled to while taking value away from shareholders. Such practices are one of the many reasons that actions like this are traditionally made available for investors to examine at their leisure.

Every jurisdiction will have laws that are slightly different to meet the needs of their constituents, and the realm of corporate law is no different. What might be punishable by law in one state is not in another, which is why this case was dismissed by the state of New York. There are many instances in which both plaintiffs and defendants will challenge jurisdiction in order to receive a favorable ruling in their venue of choice.

The huge theme in this case was the need to establish jurisdiction properly before entering into a legal action. The failure to properly identify which jurisdiction was correct in this particular instance meant that the case had to brought before the court in another state. No matter how valid a given case might be, even if the two jurisdictions agree legally, it can still be a very difficult wall to climb. Sometimes staying diligent regarding the actions of a company one is invested in does not seem to be enough. It would seem that (at times) in order to avoid costly litigation that could (potentially) bear no fruit, it is important to consider walking away from the investment. Without controlling interest being owned in a company, it would seem to be very difficult to bring about legal action against a company as an investor absent a 'clear cut' incident that is against the law.

The Irresponsible Sale of Company Assets

In the case of Kebis v. Azzuro Capital Inc., the plaintiff asserts that the company sold off many of its assets without utilizing the 'go-shop' period in which it could have received higher bids for the sale. The management of the company admitted to being willing to terminate the sale early if a qualified bidder made a superior offer during the time of the sale. The complaint alleges that Travelzoo did not disclose any other offers it might have received. The plaintiff claims that the sale of assets for 3.6 million dollars was grossly undervalued. It is further alleged that the necessary financial and legal professionals typically involved with a deal of this magnitude were not involved in the process.

The plaintiff admits that no demands were brought before the board of Travelzoo prior to initiating the lawsuit. The defendant asserts that the plaintiff has no grounds for the lawsuit because they did not exercise their ability to challenge the deal during or before it being carried out. The plaintiff had every right to challenge the legitimacy of the deal if it was not going to bode well for shareholders, but neither they nor anyone else who held interest in the company came forward.

The final disposition of this case was dismissal, noting that the plaintiff should have taken advantage of their right to challenge the decision made by Travelzoo. It was further ordered that the plaintiff's motion to replead the case is denied, due to a lack of any additional factual evidence.

The defendant sold large amounts of assets at a loss, according to the plaintiff. This action seemed to suggest to the plaintiff that the company was willfully 'giving away' company assets to those who were buying them. There was no specific connection suggested which would reveal that the leaders within the company personally profited from the sale.

The defendant did not seem to take advantage of other offers that might have come in during the sale of its Asian assets. No such offers were ever published publicly or made available to shareholders prior to the final deal taking place. If offers would have came in that yielded more profit to the company (and therefore to shareholders) it would have been mandated by law that the company accept the highest offer possible. In essence the shareholders are the ones conducting the sale, because it will be their assets that either appreciate or depreciate depending on the outcome. For this reason it is extremely important that all aspects of a publicly owned company selling assets be made public.

This case seems to suggest that the company in question had something to gain by liquidating certain assets at a loss to the company. It is important to take note of the fact that once a company goes public, those who are running it become stewards. There have been many instances in which assets a company owned were sold off by management at a discount only to be claimed by management later on in private. This is one of the reasons that the pay given to those who run companies has grown substantially over the years, as has the amount of accountability that is demanded of management.

The transparency of Travelzoo would seem to be the biggest issue here for the plaintiff and for other shareholders in the future. There needs to be an effort made on the part of Travelzoo, in order to justify the significant decisions they make that involve investor holdings. The potential for abuse has been proven time and again with regard to the sale of company assets at a loss, and absent a catastrophe this should not be a viable course of action for a company to take. Publishing and then justifying any plans to sell off major portions of a company's assets needs to be followed by a very public sale that ends with the highest buyer being taken up on their offer.

Shareholders Being Used in Interesting Ways

In the case of Irving Bank v. Bank of N.Y. there was a dispute which arose from shareholders not having had a two-thirds vote on the issue of a merger that would bring Irvin Bank into the Bank of N.Y.. According to the laws in New York pertaining to mergers, a vote of two-thirds approval from shareholders must be received prior to the merger going through. The law in New York also affords shareholders the right to be compensated for the shares they hold upon any merger occurring at their behest. The case was not decided and was referred to a higher court.

What is particularly interesting about this issue is that the plaintiff, Irving Bank was utilizing a lack of shareholder vote for the bank's acquisition on the part of Bank of N.Y. shareholders. The move was clearly an attempt to the delay the acquisition, and not truly being made to serve the interests of shareholders. The fact that shareholders rights could be invoked by a company being acquired by the company they have stake in is quite perplexing. It would seem to be (overall) a move that was employed as a necessary legal maneuver on the part of the plaintiff to delay the acquisition of their company, and not their genuine concern for the shareholders of the Bank of N.Y.

Is it appropriate for a company resisting acquisition to then utilize the rights of shareholders of the acquiring company in order to satisfy their own shareholders better? While it might not be very difficult to decide legally, it would seem that there are some complex ethical issues that are raised. Perhaps the rights of shareholders should only be able to be exercised by those who possess them directly, as opposed to the mechanisms attached to shareholder's rights being something that can automatically be triggered by anyone as a matter of law. If the rights of Bank of N.Y. shareholders being exercised by the Bank of Irving in an effort to block their acquisition could have resulted in a financial loss, does that not mean if the Bank of N.Y. could have foreseen this consequence and moved ahead anyway that they were then liable to their shareholders in the event of financial damages?

Mergers and acquisitions has always been known to be somewhat controversial when it comes to the 'hostile takeover', but in these instances where unforeseen and costly results can occur, and in some instances the board may be accountable to shareholders. While much of business is always going to be mired in risk, at a certain point it is irresponsible to fail to anticipate the consequences of a hostile takeover.

Works Cited

Irving Bank v. Bank of N.Y., 140 Misc. 2d 363(1988) http://www.leagle.com/decision/1988503140Misc2d363_1439.xml/IRVING%20BANK%20v.%20BANK%20OF%20N.%20Y.

Kebis v. Azzuro Capital Inc. Docket No. 650253/12, NOS. 001, 002 and 003. http://www.leagle.com/decision/In%20NYCO%2020140127339

Rogers v. Guaranty Trust Co. of New York 60 F.2d 106 (1932) http://www.leagle.com/decision