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Bear Stearns and its Shareholders--Skeel

Many of Bear Stearns’ biggest shareholders are screaming about its proposed sale to JPMorgan for $2/share. This is a good sign. It is important that shareholders bear the costs of the bank’s missteps in the subprime market. But their squawking also raises at least two questions: can they derail the deal?; and would Bear Stearns be better off in bankruptcy?

The most obvious way to derail the JPMorgan deal is to just say no. The deal requires a vote of Bear Stearns shareholders, and if things are looking up by the date of the vote, the shareholders could simply withhold their approval. This is likely to be a serious threat only if another bidder emerges, or is likely to emerge by then– a big “if,” given that the Fed has blessed and backed the agreement with JPMorgan. For the shareholders, the biggest benefit of threatening to vote no may be the possibility that this threat will pressure JPMorgan to sweeten its offer.

Shareholders’ other alternative is to sue, and to try to persuade a (most likely, Delaware) court to invalidate part or all of the agreement. Here, things get interesting. The agreement has several unusual features, including commitments not to accept another offer for the next year if shareholders reject the JPMorgan deal, and a promise to sell Bear Stearns’ headquarters building to JPMorgan if Bear Stearns is sold to another bidder. Both of these are rather problematic under Delaware corporate law, and my guess is that the Delaware courts would invalidate the one year waiting period (as an improper defense against unwanted takeovers, under Delaware’s Unocal case) under ordinary circumstances. Circumstances clearly aren’t ordinary, particularly given the urgency of Bear Stearns’ predicament and the Fed’s involvement. But I still think shareholders would have a decent chance of invalidating the waiting period.

What about bankruptcy? If the Fed had simply propped up Bear Stearns, without orchestrating a sale, there would be no reason for bankruptcy. But as long as Bear Stearns is being sold, there is strong argument that this is best done in bankruptcy. In the last decade or so, sales like this have become common in large bankruptcy cases, and a sale or auction could probably be achieved just as quickly in bankruptcy as outside. Bankruptcy also would offer several additional benefits. Because bankruptcy requires lots of disclosure, there would be much more transparency for creditors and everyone else who is affected by Bear Stearns’ collapse. It also would be more difficult for Bear Stearns’ shareholders to interfere.

No doubt the Fed was worried that a bankruptcy filing would further spook investors. This may be correct, but the fears would have been irrational ones, and the Fed could have assuaged them by emphasizing its commitment of $30 billion to stabilize Bear Stearns’s assets.

I don't think we’ve seen the last of the bankruptcy option. If Bear Stearns’ shareholders get serious about challenging the deal with JPMorgan, Bear Stearns may at least threaten to file for bankruptcy to beat back the challenge. Or it may file for bankruptcy in order to complete the sale.


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