The latest and presumably last installment in Christopher Nolan’s epic Dark Knight Trilogy, beginning with Batman Begins, continuing through The Dark Knight and now culminating in The Dark Knight Rises, came out on Friday. The reviews are generally positive, but as always, we’re more interested in how the film handles the legal side of things.
Unfortunately… there are some problems. Major spoilers follow.
Posted in Batman, corporations, movies, securities law
A couple of weeks ago we talked about the first Damage Control series and suits against foreign governments. The second Damage Control series begins with the news that Damage Control’s joint owners (Wilson Fisk and Tony Stark) have sold the company to Carlton Co. This leads to a somewhat complicated series of corporate financial maneuverings that deserve a closer look.
I. The Leveraged Buyout
Later, in issue 4 we learn the details of the buyout. It turns out that Carlton Co. didn’t buy Damage Control outright. Instead, it paid two-thirds of the price in cash and the other third via a loan from Wilson Fisk himself. Partially debt-financing the purchase of a company is called a leveraged buyout. Although the leveraged buyout originated in the 1950s, they became very popular among the ‘corporate raiders‘ of the 1980s, which probably inspired this storyline.
You may have noticed that it’s a little weird that Fisk would loan the money needed to buy out his own company. And sure enough, Fisk was up to no good. The loan was apparently at a high interest rate, and simply maintaining the payments was killing Carlton. It’s likely that Fisk’s plan was to reap profitable interest payments until Carlton defaulted, then take the rest of Carlton’s interest in Damage Control, which was likely used as collateral on the loan. Thus, Fisk would make a tidy sum and ends up with complete control of the company.
Luckily, the former Chief of Operations, Ms. Hoag, has hatched a plan with agents of SHIELD to save the company: a ‘hostile takeover.’
II. The ‘Hostile Takeover’
I put the term in quotes because it’s not really a hostile takeover, although that’s what the characters call it. A hostile takeover can really only happen to a publicly traded company, which can’t directly control whom its shares are sold to. In this case, Carlton Co. agreed to the sale of Damage Control to Hoag. So how did that work?
Basically it was a mirror of the original acquisition. Hoag apparently received a sum of money from the original sale, though news of the sale was a surprise to her, suggesting she may have been a non-voting shareholder. Anyway, Hoag uses the money as collateral for a loan from SHIELD for the entire buyout price, which SHIELD will hide in its helicarrier appropriation budget. So Hoag offered to buy Damage Control ‘at cost’ with SHIELD’s money, allowing Carlton Co. to pay off its debt to Fisk. Admittedly, that means effectively wasting $438 million in interest payments, but it’s better than facing the wrath of the Kingpin.
(Side note: assuming the story occurred in real time, Carlton owned Damage Control for 4 months in late 1989-early 1990, at which time high yield (aka ‘junk’) bond rates were in the upper teens. Assuming a rate of 17%, we can deduce that Fisk loaned Carlton about $7.7 billion, which would value Damage Control at $23 billion, or $37.8 billion adjusted for inflation. That’s not necessarily utterly ridiculous given the size and frequency of their repair projects, but just for comparison, KBR, one of the largest construction companies in the United States, has a market cap of ‘just’ $3.6 billion.)
There’s a couple of mentions of the SEC during all of these plans, but I’m not sure it’s relevant, since Carlton and Damage Control seem to be private companies. There’s no mention of shareholder meetings, stock prices, etc, throughout all of this. Furthermore, Damage Control is taken public during Civil War. It’s possible it was taken private in the interim, but I doubt it.
If the target company in either acquisition had been public, then the buyer would have had to file a Schedule 13D with the SEC within 10 days of a purchase of 5% or more of the target company. In order to get enough shareholders to sell a controlling stake in the company, the buyer would probably have had to make a tender offer at a significant premium. I’m not an expert on securities law, but I don’t think anything that went on here would have raised any eyebrows at the SEC. The biggest issue is probably SHIELD (at the time a US government UN agency) getting into the loan business in a big way. And just imagine how expensive the SHIELD helicarrier must be if a $23 billion loan could be hidden in the appropriations budget!
III. Conclusion
Although the writers play things a little fast and loose with the terminology, this series has a pretty good take on the leveraged buyout tactics used by private equity companies. By the way, if you want to pick up the older Damage Control comics, you might skip the third series (the one after this one) unless you like your comics seriously goofy.
Posted in securities law
We’ve previously talked about how immortal beings might find it difficult to amass significant wealth simply by virtue of living a long time. This post marks the first in a series on how other common superpowers might be used to make money in the short term.
One way to make (or lose) a lot of money is via the stock market, and several superpowers lend themselves to taking advantage of the market: telepathy, enhanced senses, invisibility, and time travel, just to name a view. Each of these could be used to come across valuable information without necessarily breaking any other laws (e.g. without trespassing). For example, someone with Superman-level enhanced hearing could easily overhear a boardroom conversation, and an invisible person could similarly overhear sensitive conversations in public places. The question, then, is whether using any of this information would run afoul of insider trading laws.
(Note: do not try any of this at home, at least without consulting a competent attorney in your jurisdiction.)
I. Insider Trading
There are three major theories of insider trading liability. First, one cannot trade on material, nonpublic information if one owes a fiduciary duty to other traders in the marketplace. Chiarella v. United States, 445 U.S. 222 (1980). This covers the most common types of insider trading: corporate insiders who trade on confidential information or who give confidential information to an outsider in breach of a fiduciary duty. See also Dirks v. S.E.C., 463 U.S. 646 (1983).
The second theory is “misappropriation.” “The misappropriation theory holds that a person commits fraud “in connection with” a securities transaction, and thereby violates § 10(b) and Rule 10b–5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” United States v. O’Hagan, 521 U.S. 642, 652 (1997). This, then, covers the case in which the source of the information is a patsy rather than complicit. It still requires that the misappropriator owe the source a fiduciary duty, however.
The first two theories are based on applying common law theories of fraud to the SEC rule against fraudulent trading. The third theory is based on Rule 14e-3, which specifically forbids a certain type of insider trading. “Rule 14e-3 prohibits any person who is in possession of material nonpublic information relating to the commencement of a tender offer, acquired directly or indirectly from either the bidder or the target company, from trading in target company securities. It also makes unlawful passing on any such information where it is reasonably forseeable that the recipient will trade.” Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement, and Prevention § 1:10. On the one hand 14e-3 is broad because there is no requirement of a fiduciary duty, but on the other hand it is narrow because it only applies to tender offers (e.g. mergers and acquisitions).
So, now that we have a rough idea of what constitutes insider trading, let’s see if any common superpowers can allow someone to acquire material, nonpublic information without running afoul of any of these theories.
II. Superpowered Reconnaissance
The first thing to do is to forget about using insider information to take advantage of a potential merger or acquisition. Rule 14e-3 would almost certainly apply, so our hero (or villain) will have to stick to other kinds of valuable information (e.g. an R&D breakthrough or a pending product recall), and that’s the context we’ll assume for the rest of the post.
In general, merely overhearing something (e.g. a conversation between company employees) in a public space is not a violation under the first two theories because there is no fiduciary duty being broken: the recipient owes the company and its shareholders no duty, and the employees aren’t improperly tipping off the recipient. So enhanced senses and invisibility would seem to be a good fit.
Telepathy is more problematic. As we’ve discussed before, telepathy may run afoul of a person’s right to privacy. Would discovering information about a company be highly offensive to a reasonable person? Would it matter if the victim was a regular employee of a giant company or an emotionally-invested founder of a small business? It’s hard to say how a jury would react. It is not clear to me whether this kind of privacy violation would be sufficient to trigger insider trading laws, however. The law prohibits the use of deception to acquire insider information, and telepathy could qualify, though it seems a bit strained. S.E.C. v. Dorozhko, 574 F.3d 42 (2d Cir. 2009) (holding that computer hacking to obtain insider information may be “deceptive device or contrivance” prohibited by Rule 10(b) and Rule 10(b)-5).
Time travel seems to be the cleanest of all: the superpowered schemer could simply wait until the information was public, then travel back in time and use it profitably. This suggests the scheme in Primer might have been legal.
The previously mentioned prohibition against deception suggests that shapeshifting, psychic manipulation, and other forms of trickery wouldn’t work.
III. Conclusion
With the right superpowers and a little luck it may be possible to profit from the stock market without running afoul of insider trading laws. Has this ever been tried in the comics?
Posted in administrative law, criminal law, securities law, torts
