We have noted numerous times that the for profit status of the NYSE (and Nasdaq) creates an disincentive to rigorously enforce its rules, including listing standards. It is not a phenomena limited to the US, as we noted in a post about the Nordic Stock Exchange.
With JP Morgan Chase raising its offering price for Bear Stearns from $2 to $10, it received the right to buy 39.5% of Bear Stearn's shares, effectively locking up the deal. It so happens that the NYSE has a rule requiring shareholder approval anytime the company issues more than 20% of its shares. As Rule 312.03 of the NYSE Manual provides:
- (c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:
(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.
But JP Morgan is acquiring 39.5% without shareholder approval. The acquisition, therefore, would seem to violate the listing standards of the exchange. Buried in theJournal article was how the bank planned to avoid the requirement -- ignore it.
- The New York Stock Exchange, where shares of J.P. Morgan and Bear Stearns are listed, generally requires shareholders to approve an issue of new shares that are convertible into more than 20% of a listed company. Bear Stearns and J.P. Morgan said that approval isn't necessary, citing an exception for cases where "delay...would seriously jeopardize the financial viability of the listed company."
But in fact while one could argue that the JP Morgan and Bear Stearns acquisition was important to the stability of the financial markets and perhaps even the solvency of Bear Stearns, a lock up purchase of almost 40% was another matter. Particularly with the Fed spigot open and the JP Morgan guarantee, the public case for a cash infusion involving more than 20% of Bear Stearn's shares has not been made. Moreover, the purchases are in stark contrast to the original deal where JP Morgan obtained the right to buy 29 million shares but in no case more than 19.9% of the outstanding stock of Bear Stearns. As theoptions agreement noted:
- Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 29,000,000 fully paid and nonassessable shares of Issuer's Common Stock, par value $1.00
per share ("Common Stock"), at a price of $2.00 per share (the "Option Price"); provided, however, that in no event shall the number of shares of Common Stock for which this Option is exercisable exceed 19.9% of the Issuer's issued and outstanding shares of Common Stock without giving effect to any shares subject to or issued pursuant to the Option. The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth.
In other words, at a time when the financial health of Bear Stearns was even more precarious, JP Morgan found a way to live with the 20% cap on new shares.
At the same time, the 39% could have had a purpose unrelated to a necessary financial infusion. The size of the purchase all but makes the agreement a sure thing. In other words, with 39% plus any votes by Bear Stearns management, JP Morgan doesn't have to worry about an interloper coming in and making a counter offer.
It is possible that the 39% is necessary for the financial safety of Bear Stearns. It is also possible it is not, a point made by others. Eyes will by on the NYSE to see if in fact the SRO takes this requirement seriously and engages in the type of due diligence necessary to determine whether in fact the rule is being violated. To the extent it has already approved the exception, it makes a mockery out of the notion that listing standards are meaningful devices to protect the rights of shareholders, creating an argument that alternative enforcement mechanisms for these requirements should exist.