September 12, 2014
After the Deal Summarized
Posted by David Zaring

Steven Davidoff Solomon and I have, as you may recall, been working on a Fannie and Freddie litigation paper - the question is what to do with the newly profitable firms, Treasury says: we'll take the money, the still extant shareholders say: we want a dividend.  We say an entire fairness remedy.  We've got an overview of the paper up over at the Harvard Law School Forum on Corporate Governance and Financial Regulation.  You can find the paper here.  Here's an excerpt, see the rest over there:

    Our legal analysis [] suggests that

  • The equitable nature of the entire fairness remedy is consistent with administrative procedure’s commitment to equitable, as opposed to damages, remedies.
  • The conflict of interest faced by the government in deciding whether to keep or share the firms’ profits provides an exception to many of the administrative law hurdles faced by shareholders seeking to subject the action of a government conservator to administrative law.
  • The fact that two government agencies were involved in the decision about what to do with the profits from the firms does not authorize the dividend decision, as the agencies did not act at arm’s length.
  • The firms were not in a zone of insolvency that might relax the fiduciary obligations of a controlling shareholder at the time the dividend decision was made, as some have suggested, and, even if they were, the government gave nothing of value to senior creditors in exchange for its decision to take all of the profits of the firm, to the detriment of shareholders.
  • The Takings Clause offers another doctrinal remedy to the plaintiffs, and it is also plausible, in part because the government’s conflict of interest overcomes many of the doctrinal hurdles posed by the government’s usual defenses against takings claims.


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