| Programming note: Money Stuff will be off next week, back on Monday, June 17. Oxydarko One of my favorite genres of literature is the "Background of the Merger" section of merger proxy statements. It is like what you'd get if "Barbarians at the Gate" was summarized by lawyers in a dozen pages. All of the drama is stripped away, but not really; it is still there, latent and elided, if you can apply a bit of your own imagination to bring it back to life. At its best there is a certain Carveresque brevity, a way of infusing simple matter-of-fact statements with a sense of vast human suffering. Today Occidental Petroleum Corp. filed the proxy for its proposed acquisition of Anadarko Petroleum Corp., and these two paragraphs of the background made my blood run cold: In the evening of April 11th, Cravath [Swaine & Moore LLP, Occidental's lawyers] sent a revised draft merger agreement to Wachtell Lipton [Rosen & Katz, Anadarko's lawyers]. In addition, Ms. Hollub [Occidental Chief Executive Officer Vicki Hollub] indicated to Mr. Walker [Anadarko CEO R.A. Walker] Occidental's belief that the parties could sign the merger agreement as soon as that night. However, in Anadarko's view, there was a meaningful risk that the Occidental transaction would require additional time to be finalized given the material issues that remained open between the parties at that time, including the fact that the parties had not exchanged draft disclosure schedules associated with the draft merger agreement. Ms. Hollub's communications did not alleviate the concerns which the Anadarko Board had articulated at its meeting earlier that day regarding the relative risks and benefits of continuing to explore Occidental's latest proposal versus entering into a definitive agreement with Chevron at that time. In the evening of April 11th, Anadarko and Chevron executed the Chevron merger agreement. Two points here gave me flashbacks (to working at Wachtell, by the way, disclosure). One, imagine being one of Oxy's junior bankers or lawyers, tasked with managing due diligence and preparing the disclosure schedules—which often run to hundreds of pages—listing all of the exceptions to the representations in the merger agreement. You've got a draft of your side's disclosure schedules, but these are highly negotiated things, and you haven't seen the other side's and they haven't seen yours. But this is all on the back burner; for now, the urgent thing is to send out the revised draft merger agreement. And you get that out, one Thursday evening, and you are shocked to see your client's CEO add "we can sign this tonight." Tonight! You have so much work to do, and she's just promised that you'll do it all that night. It's not like you slept any last night either. Two, um, yeah, never mind, Anadarko signed with Chevron that night instead. All their work was for nothing. At least they didn't have to do the disclosure schedules that night! Of course their work wasn't really for nothing. Two weeks later Occidental topped Chevron's bid; eventually Anadarko abandoned Chevron and signed with Oxy. The Oxy bankers and lawyers probably got a few quiet days after the Chevron deal was signed, but then they were right back at it. We have talked a few times about the Oxy/Anadarko deal. Specifically we have talked about one aspect of its financing: Oxy raised $10 billion of financing for the deal from Warren Buffett's Berkshire Hathaway Inc. on terms that look quite lucrative for Berkshire. This financing has some obvious benefits for Oxy, too, but a big one is that it allows Oxy to do the deal without a shareholder vote. Oxy's original plan was to issue a lot of stock to pay for Anadarko, because it would have had trouble raising enough debt for an all-cash deal; if you issue more than 20% of your outstanding stock to do a merger, New York Stock Exchange rules require you to get a shareholder vote. In fact Oxy's original original plan, back before the Chevron deal was signed, was to issue more stock than its corporate charter actually allowed; it would need to ask shareholders to vote to amend the charter to issue more stock. But by raising a bunch of cash from Buffett, Oxy was able to increase the cash portion of the merger consideration and reduce the stock portion to (just) below 20%, avoiding the shareholder vote. This looks a bit suspicious: Many Oxy shareholders do not love the deal, and structuring it to avoid a vote seems like cheating. I called it "a confession that (1) your shareholders don't like the deal and (2) you don't care." Carl Icahn didn't like it, and sued, and is talking about a proxy fight. But when you read the "Background of the Merger," you get a more sympathetic picture of this structure. (Naturally, since Oxy's lawyers wrote it.) The actual story is that Oxy's proposal was always higher than Chevron's: In January, and again in March, Oxy had offered to pay Anadarko $76 per share in cash and stock; Chevron consistently offered $65 in cash, and that's the price that Anadarko accepted. Anadarko didn't take Oxy's deal because it was too worried about the shareholder vote. In fact, when it got Oxy's proposal, Anadarko replied with a weird demand to put the risk of that vote on Oxy: On April 2, 2019, Wachtell Lipton sent a revised draft merger agreement to Cravath. Among other things, the revised draft contemplated a mechanism to protect the value of the stock portion of the merger consideration, noted that the financing-related provisions of the draft would be subject to Anadarko's review of Occidental's commitment letters, and included several provisions which attempted to address the concerns of Anadarko and its advisors regarding the ability of Occidental to successfully close a transaction given the higher stockholder approval threshold associated with the Occidental Charter Amendment. These provisions included an Acquiror Vote-Down Payment equal to 7.5% of Occidental's pre-transaction equity value and a requirement that, if Occidental failed to obtain stockholder approval for the Occidental Charter Amendment, the cash portion of the merger consideration would be increased such that the Occidental Charter Amendment would no longer be necessary to complete the transaction .... Basically, if Oxy couldn't get a majority of its shareholders to agree to issue more shares to pay for Anadarko, it would be required to go out and raise billions of dollars of cash to do the deal anyway, after its shareholders had rejected it. You can't do that! That's a terrible look! You can't ask your shareholders to vote on a merger and say "by the way if you say no we'll be forced to do it anyway by raising cash on absolutely punitive terms." Oxy sensibly said no, and Anadarko went with Chevron's lower but more certain offer. And then Oxy went out and got Anadarko the certainty it wanted, in the form of the Buffett financing for a transaction with more cash and no shareholder vote.[1] And so Anadarko said yes. Getting the cash to avoid a shareholder vote is awkward, but it's much better than getting it after losing a shareholder vote because you're required to do the deal anyway. And getting the cash to avoid the shareholder vote was an essential part of getting Anadarko to do the deal. So there was no way for Oxy to let its shareholders vote on buying Anadarko: If Oxy insisted on a vote, Anadarko would stick with Chevron and there'd be no deal to vote on; if Oxy got the deal, it would be by avoiding a vote. Oxy's board and managers had to decided to do the deal, or to skip it, either way without a shareholder vote. They thought the deal was a good idea, so they did it. Clearly a lot of shareholders disagree! But the board really couldn't leave it up to the shareholders either way; it was the board's decision to make, and their job was to do what they thought was right for long-term shareholder value, not what shareholders actually wanted. Of course the shareholders can still throw them out if they think it was the wrong decision (and if Carl Icahn really does run a proxy fight), but it was a defensible one. Reg BI What would it mean for your stockbroker to put your interests first? There is a legalistic answer, which goes something like: It means that, when she tells you to buy a mutual fund, the mutual fund is not paying her to make that recommendation, or if it is, at least she tells you about those payments, or if she doesn't tell you per se, at least she mentions the possibility of those payments somewhere in a disclosure form that she handed to you at some point. This is sort of a weird answer? I mean, it is what it is, and it is not necessarily a terrible standard for, like, commerce. But it is not what you would describe, in everyday life, as putting your interests first. If you were going through a tough time, and your best friend blew you off and never returned your calls, and you eventually confronted him and he was like "what, no, I have been an excellent friend to you; I never even accepted any bribes from third parties in exchange for recommending their products to you," you would not be all that mollified. No, in colloquial everyday usage, putting your interests first would mean something like: Your broker would wake up every morning thinking about you, and would come into work each day trying to make your portfolio better. Each time she called you to recommend a transaction, you'd know that it was because she thought that transaction was the best possible thing for you to do. Each time she didn't call you to recommend a transaction, you'd know that it was because she'd given it a lot of thought and decided that sitting tight was the best possible thing for you to do. You just wouldn't have to think about your investments, because you'd know she was doing the thinking for you, and applying the highest possible rigor and effort and honesty to that thinking. This is a very high standard. It is what we might call a "fiduciary standard," a duty of loyalty and care: The broker would feel obligated to put your interests ahead of her own, and to put in the effort to understand what your interests are and make sure she's protecting them. There is no particular reason to apply this standard to stockbrokers! A broker is an investments store; you come into the store to browse for investments to buy, and the friendly helpful salesperson steers you to some good investments. If it turns out that the friendly helpful salesperson was just steering you to the investments that paid her the highest commissions, knowing full well that they were terrible for you, then you'd have some reason to feel aggrieved. But you cannot expect her to be your full partner in investing, your trusted adviser who always looks out for you. Her job is to sell you investments, and she gets paid each time you buy an investment. There are people who are supposed to be trusted advisers! They are called "investment advisers," and they are different from brokers, and they are held to a higher and more fiduciary-like standard, and they generally get paid on some sort of fee basis for giving you advice rather than on a commission basis for selling you investments. And lots of people are dissatisfied with this system and want the brokers to be regulated more like advisers. And I suppose that there is some case for just banning retail brokers and requiring anyone who sells investments to retail customers to be a fiduciary adviser, but there are some good arguments against that too—it might make investing more expensive for small investors, for one thing—and the Securities and Exchange Commission has never been all that into it. This week the SEC adopted new rules on a "best interests" standard for brokers who deal with retail customers. The rules are called Regulation Best Interest, and we talked about them in April when they were first proposed, and not too much has changed from what I wrote then so I will refer you to it.[2] The rules strike me as largely sensible, a tweaking and expansion of the traditional "suitability" standard in which retail brokers need to take some care to recommend suitable investments to retail customers. The focus is on conflicts of interest, on avoiding or at least disclosing situations where the broker sells products because she gets paid more for selling them rather than because they're better for the customer. It's fine, it's reasonable, but it is not "the broker will wake up every morning thinking about you." In fact the SEC's 771-page (!) explanation of the rule contains a disclaimer of the broker's obligation to think about you when you're not there[3]: We are also confirming that Regulation Best Interest does not impose a duty to monitor a retail customer's account. … Unless the broker-dealer has agreed to provide account monitoring services as described, Regulation Best Interest would only apply to explicit—and not to implicit—hold recommendations regarding security positions in an account. This is consistent with the fact that Regulation Best Interest would not impose a duty to monitor customer accounts. Your brokerage is still an investment store; it's a place where you walk in and they try to sell you investments to make money for themselves. It's commerce! It has to be fairly honest commerce; selling you bad products in exchange for secret kickbacks is bad and not allowed. But they don't have to put your interests first. It's a little weird to call the rule "Regulation Best Interests." You get a sense that the SEC is embarrassed by the name. Its press release from Wednesday doesn't really characterize the rule that way: The Securities and Exchange Commission today voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors' relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. Yeah! That bland legalese is about right: "Enhance the quality and transparency of retail investors' relationships," reasonable disclosure expectations, blah blah, sure. But "ensure that brokers will put your interests first"? Nah, that's not what this is about. By the way, the SEC simultaneously put out a new 41-page "Interpretation Regarding Standard of Conduct for Investment Advisers" that clarifies the fiduciary standard that is applicable to investment advisers, who, unlike brokers, really are fiduciary advisers (not an investment store), and who do owe customers a duty of care and loyalty. One fun fact about this interpretation—pointed out by SEC Commissioner Rob Jackson, who does not find this fact fun and who dissented from the rule changes this week—is that the draft interpretation in April said that "the duty of loyalty requires an investment adviser to put its client's interests first," while the final one this week says that "the duty of loyalty requires that an adviser not subordinate its clients' interests to its own." It doesn't sound quite as strong, does it?[4] Even for advisers who do have a fiduciary duty, the SEC doesn't want to go too overboard in saying that their clients' interests come first. Defend Crypto We have talked a couple of times about the Securities and Exchange Commission's lawsuit against Kik Interactive Inc. over its initial coin offering for a cryptocurrency called Kin, and about the "Defend Crypto" campaign to raise money to support Kik and stand up for the principle that cryptocurrency offerings should not be regulated like securities. Alex Davidov pointed out on Twitter one funny fact, which is that Defend Crypto's website has a little scoreboard tracking how much money has been donated in various cryptocurrencies, and the dollar numbers went down over time as some of those currencies dropped in value. Particularly stark is the drop in value of Kin, Kik's own token, which has fallen for fairly obvious reasons (viz. that the SEC is suing to declare it an illegally issued security). As of June 1, Defend Crypto had received $875,320 worth of Kin; as of 9:45 a.m. today that was $463,553. Oh well.[5] Really, though, it seems a little silly to donate Kin to Kik, just because Kik has so many Kin already. The way Kin works—and it is not alone in this among corporate cryptocurrencies—is that Kik did a "token distribution event" of 1 trillion Kin tokens to the public, but kept 3 trillion for itself in exchange for "startup resources, technology, and a covenant to integrate with the Kin cryptocurrency and brand." Another 6 trillion Kin were reserved for the Kin Foundation, an entity created by Kik. So at least 90% of Kin tokens are already under Kik's control; donating a few more seems like a weird form of charity. Also, however many Kin Kik has raised, what will it do with them? The obvious answer is "sell them for dollars and use the dollars to pay its lawyers,"[6] but that is problematic. Kin is, in the eyes of the SEC, a security, and Kik is the issuer of that security. If it sold more Kin (the ones that were donated) in unregistered transactions to pay for its legal defense, that would be a further violation of the securities laws that it is defending itself against in the first place. I suppose one move here would be to say "what, Kin is not a security, we are innocent, and to show how innocent we are we will keep selling Kin to the public to raise money for our corporate purposes," but … I am not sure … the lawyers … would recommend that? It seems unnecessarily confrontational. When you're accused of securities-law violations, you should really stop doing them until a court sorts it out! Elsewhere, here is a good analysis from Timothy B. Lee on the issues and stakes in the Kin case: If the courts accept the SEC's loose interpretation of the common enterprise requirement, it could have broad-ranging consequences. For example, back in April, Tesla CEO Elon Musk predicted that rapid improvements in Tesla's self-driving technology would make Tesla vehicles an "appreciating asset." Does that mean that Tesla is marketing its cars as securities? The SEC's arguments in the Kin case seem to point in that direction. Musk is urging customers to invest money in an asset (a car) in the expectation that its value will rise over time thanks to Tesla's software development efforts. The "common enterprise" here would be Tesla's efforts to increase the value of Tesla cars on behalf of customers. My view is that the Kin sale just looks so much like a corporate financing transaction that the SEC couldn't resist calling it a securities offering, and that things that feel more product-y and less fundraising-y won't get the same treatment. But I can see why that would not satisfy a crypto lawyer, or perhaps even a court. Voatz I don't even think this is bad, I think it is good, this specific thing is a good idea, I just think it's weird that the world is outsourcing its politics and public spaces to private tech companies: The problem: Many Americans don't vote. … The (possible) solution: Mobile voting, which is the mission of a Boston-based startup called Voatz. Yesterday it raised $7 million in Series A funding co-led by Medici Ventures and Techstars. Voatz last year ran pilot tests in West Virginia, whereby overseas military could vote in real elections via smartphone rather than via paper mail. It also just completed a pilot in Denver's municipal elections, including both the regular election and a run-off. It also opened itself up to a "citizen's audit" for the Denver elections — an important step given widespread security concerns about such a system. "On the blockchain," it does not say, but give it time. I tweeted that in like five years a literal Nazi will run for office in a place that uses Voatz, and there will be a public pressure campaign to get Voatz to ban him from its platform and not count his votes, and Voatz will be torn between its neutral commitment to free voting and its community values. Who made YouTube or Twitter or Facebook an arbiter of what speech should be allowed? We did, collectively, unconsciously, unintentionally. Let's keep going? I guess? What? Things happen How France's Intrusive Demands Quashed the Fiat-Renault Deal. Goldman CEO: If Marcus were a Silicon Valley start-up, people would be 'throwing money at us.' JPMorgan Scraps New App Service for Young People. Casino affair raises tough questions for French regulator. Barnes & Noble Nearing Deal to Be Acquired by Elliott Management. Venezuela loses $1.4 billion of gold to banks for guarantees. JPMorgan's London Whale Saga Ends Quietly as Fed Drops Its Order. Wells Fargo Agrees to Pay $385 Million to Settle Insurance Scam. Trump's Tariffs Have Already Wiped Out Tax Bill Savings for Average Americans. The TurboTax Giveaway Is Dead. Mirror, Mirror: Who's the Most-Photographed NYSE Trader of All? Self-serving optimism in hedonic prediction: People believe in a bright future for themselves and their friends, but not for their enemies. "For years, treating Dad to bourbon on Father's Day amounted to feeding him a dram of racism, oppression, and silencing." Maze With Cheese In Center Enters Human Trials Following Decades Of Testing On Mice. "Of course, today's definition of 'real' is more expansive than ever." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Also helpful, though awkward, was the fact that Oxy's stock price had *dropped* in the intervening weeks, so the new $76-per-share proposal included Oxy stock at a lower valuation. One of Anadarko's concerns had been that Oxy's stock would drop after an Oxy/Anadarko deal was announced, lowering the consideration that Anadarko shareholders would receive. But once this all became a public fight, that drop more or less got baked in, so "$76 per share" was more likely to actually mean $76 per share. [2] One change is that the proposed rule seemed a bit more focused on getting rid of conflicts of interest; the final rule seems a bit more blasé about allowing conflicts as long as they are disclosed. [3] There is an exception if the broker explicitly *says* she will monitor your account and update her recommendations periodically: "For example, if a broker-dealer agrees to monitor the retail customer's account on a quarterly basis, the quarterly review and each resulting recommendation to purchase, sell, or hold, will be a recommendation subject to Regulation Best Interest. This is the case even in instances where the broker-dealer does not communicate any recommendation to the retail customer. We believe that such an 'implicit' recommendation to hold in this context should be covered under Regulation Best Interest in addition to 'explicit' recommendations to hold." [4] Jackson argues, based on evidence from investment advisers' brochures, that it means something different in practice too. [5] The bulk of contributions have been in Ethereum and Bitcoin, at around $2 million each. Kin is third, and there are 16 other tokens listed, mostly in very small amounts. Defend Crypto has gotten $3 of Civic, the weird journalism-on-the-blockchain token, which I sort of appreciate. [6] Or give the Kin to its lawyers, who can then sell it for dollars to pay their bills, which I think is functionally similar for securities-law purposes though that is debatable and not legal advice. | 
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