Corporate Blawg UK

Cool terms: Pump and Dump

Cadets in cyberspace, junior surfers and hatchling web-crawlers are all honking their horns in delight at being part of this blog's traffik.  The reason for this gloria is the perpetuar googling for "cool terms" "cool phrases" and "bullet-dodging".  Corporate Blawg is widdit, and able to carry his shiznit around here to spread out coolio on his blog of biznab. Accordingly, ol' cool terms is back, and its proud, and it's all about the pump and dump. Cowabunga dude.

Pumping and dumping is not about eating too many eggs before a work-out in the gym, nor is it a machoismatic mentality for dirty dating.  Below, Corporate Blueg (colourblind people should refer to the lighter text - this is an equal opportunities blog) has divulged what pump and dump should mean in corporate speak, wherefrom the inspiration was discovered in a creaky corner of the FSA's gigantium website.  Nevertheless, the probert encyclopedia shows us with true meaningful expression that:

Pump - Pump is slang for to break wind.
Pump the stump - is slang for "to shake hands".
Pumpers -Pumpers is slang for any anabolic steroid.
Pumpin' - Pumpin' is slang for lively, energetic, thrilling.
Pumpkin -is slang for "the moon", or "the sun".

Therefore, since Corporate Blawk is kooler than the Klingonz, Corporate Blawg will try to become evener groovier by using more slang, as he cruises town under the pumpkin whilst pumpin' pumpin' tunes up to the petrol pump to pump the stump with local hoods in pumps... from his rather large middle-class  saloon.

Corporate Blueg would like to ignore Corporate Blawg or Blawk, and explain that the graphic term "pump and dump" is a phrase for market manipulation where the price of security is artifically inflated through an exaggerated or fraudulent promotion.  Immediately following the rise in the price of the stock, the persons responsible for the promotion dump their shares. 

This is also known as "stock dump" or "hype and dump manipulation" but "pump and dump" wins for being the most pithy, the most seedy and the most easy to remember.

It's an issue that sooo relevant.  According to the Inquirer:

"The first "pump and dump" spam campaign has hit Europe this week, designed to manipulate the share price of a company listed on the German stock exchange,"

And in the middle of last month it was reported that three Indonesian hackers pumped online brokerage accounts to boost their profits - which was the "first case involving people arrested overseas in connection with an online brokerage intrusion scheme carried out in the US."

Basically, it's here and it's fear, it's mad and it's bad, it's illegal and a beagle, it's pumping and dumping and it's market manipulation which is a form of market abuse (and therefore can be penalised by the FSA with an unlimited fine, public humiliation and imprisonment) - so don't do it.

Corporate Blawg is a little disappointed that no one was able to provide any comedy case-names following from his last post.  This is clearly a matter of the river runeth dry, or else that in the ever-changing blogosphere Corporate Blawg is the only comedy / genius. 

Corporate Blawg is now off to Norway now for the Easter break. "No way", I hear you Northerners exclaim.  Yes way, and Norway!

Cool terms: bear hugs, golden handcuffs, lemons and plums

Cool terms is back and bad, I mean, good.  This favourite regular feature explores the cornicopia of inventive expressions used in the business and legal markets, which all good corporate lawyers should be aware of:

A "bear hug" is an exceedingly good offer for the shares of a target company made directly to its board of directors.  This offer, at a price much higher than the actual value of the shares, is aimed to encourage an unwilling board to sell their shares.  In fact, the  duty on directors to act in the best interests of the members of the company, means that the directors are effectively forced into accepting the offer.  The bear hug  squeezes an agreement out of reluctant directors wary of breaching their fiduciary duties.  This is not to be confused with the 'inverted bear hug'; where one wrestler locks his hands  behind his opponent's lower back and presses his forehead into their sternum.

Another cool term from the investment world is "golden handcuffs".  This is where an employee is incentivised to stay with the company on the basis of future reward, for example, an employee may be required to relinquish any unvested stock options if he terminates his employment early.

Also found in investo-speak are the cool terms: "Lemon", which is an investment with a poor or negative rate of return (i.e. "lemons ripen before plums"); and "Plum", which is an investment with a healthy rate of return (i.e." plums ripen after lemons").  So if you hear an investor boasting about the size of his plums, don't turn away like a sour lemon.

Corporate Blawg would be interested to hear of any situations where directors have been placed in a bear hug with golden handcuffs made of plums.

Cool terms: "spring-loading" or "bullet-dodging"

The guns came out at dawn. The legal phrase was cocked and ready to blow.  At the start of September the U.S. marshalls declared they would clamp down on the cowboys that manipulate markets with news affecting the price of share options.  Corporate Blawg UK notes that two weeks later the same whirlwind was to hit our chalky shores.
            This week the FSA have warned in its Market Watch September newsletter (published on the 25th) that companies should not attempt to manipulate the market with spring-loading or bullet dodging, or they could face unlimited fines and public sanction.
            Corporate Blawg whistled towards these cool terms and explains that when options over shares are granted, a company may manipulate the market with good or bad news to make those options worth more or less. 
            Spring-loading is when a company brings forward an option allocation date so the holder can benefit from anticipated rises in the share price.
            Bullet-dodging is the opposite, when the company delays the grant of an option so the owner can benefit from an expected fall in share price.
            The facts of each case will determine whether spring loading and bullet dodging amounts to market abuse under the Financial Services and Markets Act 2000 (FSMA). Market abuse may be caused by an employee acquiring, or person granting, options on the basis of inside information.  Section.118(3) FSMA (improper disclosure) may apply where a director discloses information to the person responsible for granting options, in order to affect the timing of the grant of the option, and that information relates to a forthcoming announcement. Section 118(4) (misuse of information) might also be applicable for where information is used to decide the timing of grants.  Any decision by a company to give clearance for dealings during the run up to the release of inside information would be a breach of the Model Code. There are a number of other provisions under which the FSA could stir trouble for dodgy directors or corrupt CEOs.
            Although the widespread use of share options as executive remuneration is relatively new, this method of manipulation of the market has been recognised since at least 1997.  In this year, the US Journal of Finance published an article by Dr David Yermack on "Good Timing:  CEO stock option awards and company news announcements." 
           The irritiation of the financial regulators with this "good timing" reached a crescendo on 11 September 2006 with a speech by John W. White, Director, Division of Corporation Finance of the U.S. Securities and Exchange Commission ("SEC").  John highlighted the issue, and obfuscated it with interesting jargon including a name for the process in which companies should disclose their option strategies: nicknamed "CD&A" or Compensation Discussion & Analysis.  Inspiring.
            CD&A boils down to companies having a scheduled plan or strategy that is clear and transparent. Companies should disclose these plans and strategies to their audit firms, and fully address the issues of timing for options and for disclosing information.  Whether such strategies will hit the mark, and are adminstratively feasible is yet to be tested.  Corporate Blawg looks forward to reviewing option grant strategies in corporate due diligence in the future.
            The fact that this is not the first media-hitting declaration to come out of the FSA two weeks after a similar excitement in the U.S., suggests that the Anglo-speaking financial regulators are a bit like film distributors, and launch their new products in the US market before the rest of the world.  Accordingly, Corporate Blawg U.K. has decided to keep a closer eye on movements in the U.S. financial regulatory markets, in order to forecast the news-worthy motions of the FSA and be a fortnight ahead of the game.  Whether this will help Corporate Blawg's solicitous career or his salacious blog is anyone's guess.

Quite a white knight, right.

The cool term "white knight" lends more to a shining vision galloping over the hills, than to the 12th move of the Immortal Game when White's knight protected the pawn which was attacking Black's queen.
          In law, the term "white knight" describes a friendly company arriving at the messy scene of a hostile takeover and acquiring the target company. The white knight  may slay the hostile bidder with a higher bid or a more favourable deal for the target board's management.
          The actions of a white knight may have untoward implications in the Takeover Code, as a white knight and target company may be perceived as parties "acting in concert". Persons are acting in concert where an agreement or understanding exists requiring the parties to actively co-operate with the acquisition of shares that enable oen or both of the parties to obtain control of the target company.  Although there is nothing in the Takeover Code to prevent parties acting in concert, it does place limitations on the parties, for example, in the transfer of target company shares (perhaps giving give rise to an obligation to make a mandatory Rule 9 general offer to all shareholders). The Takeover Directive amends the definition of “acting in concert” so that it will not require "active" co-operation between the parties, and it will apply to co-operation outside of simply the transfer of shares, and it will also involve "white squires".
          In the UK the term "white squire" describes a party which builds up a stake in the target in order to block any hostile takeover bid.  Unlike a white knight, the white squire does not purchase a majority stake, but a lesser stake which is equally effective in warding off the Black Knight (see below).
          The leading case concerning "white knights" is Morgan Crucible Co plc v Hill Samuel Bank Ltd and others [1991] 1 All ER 148, which suggests that a white night and hostile bidder may be distinguished in the run-up to a bid. This has implications on the duty of care owed to the white knight by the target. The reasoning is that when a white knight is approached by the target it is merely a member of an indeterminate class, and a lesser duty of care may be owed to it.  This view has not come before the courts again since Morgan Crucible, and has therefore not been properly tried, and tested.
          Corporate Blawg UK must pay homage to Investopedia, which inspired this posting.  Accordingly Corporate Blawg UK sets out a number of other relevant terms:

BLACK KNIGHT: The company that makes a hostile takeover offer on a target company.

GREY KNIGHT: A second, unsolicited bidder which enters the scene in order to take advantage of problems between the first bidder and the target.

YELLOW KNIGHT: A hostile bidder that ends up discussing a merger with the target company.

Corporate Blawg UK has a few of its own suggestions to add to the lingo:

BLUE KNIGHT: A third party intermediary that strictly requires open and fair play between all parties at the table.

GREEN KNIGHT: A company that is the preferred bidder for the target company, due to its social and environmental policies.

RED KNIGHT: A shepherd's delight

Phoenix companies

Founded in Egyptian mythology, the phoenix is a Garuda in sanskrit, a chariot of the Hindu God Vishnu, and had come to represent the Christian concept of resurrection.  This legendary bird that rises from the ashes is so widespread it appears in ancient Greek, Roman and Russian texts, on U.S. flags, and in company law textbooks.  It is this latter bird that interests us most...
           When a company enters into insolvent liquidation, its creditors (and anyone with a cause of action against the company) often lose out.  Since there is no money in the pot, all ties between creditor and debtor are burnt.  Following liquidation a phoenix company may arises and carry on the same business as had the insolvent company, often on the same premises and with the same or similar name (Re Linvale Ltd [1993] BCLC 654). 
           Stringent legislation and heavy penalties aim to protect creditors and the public from phoenix companies.  Where a company enters insolvent liquidation, any director of the company (who was a director in the 12 months prior to liquidation) will commit an offence if, within five years of liquidation, he or she becomes involved either directly or indirectly in the management of a company with the same or similar name (s.216, Insolvency Act 1986).  A director that is found to have committed an offence under s.216 will be personally liable for all the debts of the phoenix company (s.217).  Being a director of a phoenix company may amount to misconduct under the Company Directors Disqualification Act 1986, which provides for courts to disqualify directors for up to 15 years.  Contravention of a disqualification order may lead to a fine and/or imprisonment (s.13).
           On 10 June 2005, the Financial Services Authority (FSA) alerted financial advisers that it would be cracking down on phoenix companies, and not tolerate firms attempting to avoid their liabilities to customers by moving assets between companies. One year later, the FSA stated in its newsletter that it had had considerable success in stamping out phoenix companies over the previous year.  The FSA found that private warnings were an effective alternative to disciplinary action and that in order to keep the pressure on phoenix companies, it would further improve information sharing with the Financial Ombudsman Service and the Financial Services Compensation Scheme.  The FSA also issued a fact-sheet to assist firms to avoid being construed as phoenix companies when changing their legal status.

Addendum: a theory for the origin of the phoenix legend is that ravens and crows have been observed to sit on the fading embers of a fire and spread their wings.  As we enjoy a sauna or hot bath, so may crows enjoy standing on warm charcoal.  If a large raven on a fading fire were to flap its wings, it could bring the fire to life again. The new flames would almost certainly cause the bird to fly off, leaving a trail of flames and embers.

The Phantom Share Option Plan is here

Phantom stocks are the set number of shares in a phantom share option plan - not a topic to make a song or dance about, or a broadway musical.  Phantom share option plans are used by companies which cannot, or do not want to, offer employees options to acquire actual shares. 

          This type of plan is used to reward directors and executives for successful long-term performance.  The plan confers a right to receive a cash payment, where such payment is based on the increase in value of certain shares over a specified period. In many ways, a typical phantom share plan will reflect a real share option plan in terms and mechanism, yet without the right of participants to acquire shares.  If the director or executor does not meet the performance levels, their reward disappears in a puff of smoke.

          The accepted tax treatment of phantom share awards is equivalent to that of a share option.  In both plans, tax requirements are hidden at the grant of the award, but the action of payment of the cash reward unmasks the tax obligation. HMRC’s view is that participation in a standard phantom share plan does not mean that the employee has been granted an option, either under existing legislation or the proposed amendments.  However, HMRC's view is subject to the usual caveat of the need to consider variants on their own facts (on a case by case basis). 

          The 2006 the Budget expressly did not change the accepted tax treatment of normal phantom share awards.  Therefore phantoms will stay with us, lurking in executive offices and mysteriously disclosing themselves in annual accounts and remuneration reports.

         

Russian Roulette / Texas Shoot Out

The business world is highly inventive in its creative analogies and terms of violence to colour the black and white pages of corporate documents.  This week, Corporate Blawg UK has investigated a system for terminating joint ventures, where the two founding members of the joint venture are in deadlock over the vehicle's future ownership.

          The mechanism of "Russian roulette" is most commonly applied where each member owns 50% of shares and the primary purpose of the joint venture has been successfully completed. This mechanism commences with one member notifying the other member of its offer to sell to that member all its joint venture shares at a specific price.  This offer, in a deadlock resolution notice, must then be accepted; otherwise the declining member is obliged to sell all its own joint venture shares to the offeror at the same price.

          A variation of this mechanism may be described as " Texas shoot out" (or "Mexican shoot out", depending on whether your prefer mescal to mesquite).  A Texas shoot out is also most common in a 50:50 joint venture.  The process involves both parties submitting a secret and sealed bid to a third party.  The party with the lowest bid crumples in agony (and fills its pockets with cash) as it must sell its shares to the higher bidder at the higher price.  In the case of Banner Homes Group plc v Luff Developments Ltd and another [2000] 2 All ER 117 a "Texas shoot out" was understood to mean an arrangement under which either party could offer put and call options at a specified price or prices which the other could accept or refuse.  This would suggest a more flexible procedure, where negotiation would get the best price for the purchased shares.

          Naturally, the precise mechanism and procedure behind these terms should be clearly defined in the agreements in which they are used.  Corporate Blawg UK would not recommend using any complex terms in a contract without detailed explanation of how they work.  However, Corporate Blawg UK would like to see more cool terms creeping into contracts of the future.  Corporate Blawg UK is currently developing three corporate and commercial mechanisms of its own, in order to describe them as a: "Ferrari 600 clause", "A Golden Goal clause" and a "clause of Mass Destruction"