Questions about Corporate Wheeling and Dealing

Captcha said:

I'm not sure if this is better here or in the Sandbox, but there's some pretty specific knowledge required, so I'll try here.

I'm in over my head with a Romance I'm writing. The financial wheelings and dealings aren't the core of the story, but I'd like them to be authentic. Essentially, I'm trying to engineer a reconciliation between a father and son, and I think I'd like to do it through introducing a common enemy. But it's a contemporary story and the principal drama is elsewhere, so I don't want a kidnapping or a murder or anything!

Both men are successful in business. The father runs the family company (toy manufacturing, with a factory on some prime Seattle real estate). I've had the son secretly buying up stock for years (with numbered companies, etc. so the father didn't know who was buying - is this possible/legal?. I think he has to file a 13 D at five percent ownership. The son still doesn't have more than about 20% of the shares, but he has a fairly compelling case that the father has been managing the company poorly (he was head of the board of directors and CEO). So the son, with support of the other shareholders, takes over the headship of the board and installs his own minion as CEO. The son would have to nominate and get elected a "slate of directors." Check out Carl Icahn's history for details.

I want the son and father to continue fighting, and then realize that they have to stop in order to save themselves/the company from a hostile outsider. This is where I need help.

My current scenario has the son arranging to move the factory to cheaper land, modernizing as they go, and selling the land to a company in which he holds significant stock. He'll recuse himself from decisions in which he would have a conflict of interest and be otherwise careful, but it's still a bit fishy. Is it REALLY fishy? Like, illegal? Or is he okay as long as he's above board about it all and doesn't vote on the issue? It would be legal and ethical if everything about the land purchase was in the best interest of the shareholders. If it is not clear that it is in the best interest of the shareholders, I think it could be unethical but legal if the board approves it and there is nothing in the bylaws. See the current situation with Chesepeake Energy for an example.

Assuming that's okay, I want the father to get mad and make an offer on the land himself. I want this to somehow make him financially vulnerable - like he's over-leveraged himself, or something. And then I want the bad guy to swoop in and demand repayment or else... something bad happens to the father. Essentially, I guess, I want Shylock to demand his pound of flesh. Then I can have the son overcome his childish bitterness with his father and swoop in to fight Shylock together. But what mechanisms might the father have used that would result in this kind of vulnerability? Have the father go on margin (borrow money using his stock as collateral). He'd do this through his brokerage firm. But now he needs more money and he goes to Shylock to leverage his stock holdings even more (this is a bit more farfetched but I think plausible). The word gets out of the "issues" at the company. The stock price falls. The father gets a margin call, he has to sell more stock, price goes down, another margin call, etc. Disaster Again, see Chesapeake Energy stock, this time in the 2008ish time period.

So:

Is my scenario too far fetched, up to the point where the father outbids the son for the land?

and How the hell can I get the father into trouble? Ideally, I'd like it to happen pretty fast, too (forgot to mention that part) - not like he committed to high interest rates and three years later can't make the payments - I need something quick and dramatic, if at all possible.

Thanks for any help with this, and sorry if it's long AND vague - a bad combination, I know.

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Hi,
I'm not an expert, but here are some suggestions that might help. Good luck.

Some manners the father can get into financial trouble relatively quickly: a) his financier friend betrays him and he's suddenly facing a financial hardship (either unable to repay loans or get new loans); b) his other investment is collapsing leaving him with insufficient cash or collateral to secure the finance he needs; c) his long time trustworthy partner dies and the administrator/trustee/heir sells the father out. Oh, d) Janet Napolitano considers him a terrorist or some of his overseas business partners terrorist organizations. Ohx2 e) he loses a class law suit (thousands of parents have swallowed kid toys too big to be swallowed by kids and these dumb parents got poisoned.)

I don't think your scenario is too far fetched but you need to work on the details somehow. Also, unless the father has no lawyers, he'll have some turn-around time to deal with the matter. I don't think it's going to be a "Give me 200 million bucks tomorrow or your daughter will be sold to DR Congo" scenario. I hope Jim and others will provide more insight.

I don't think you should make it a publicly traded company. I can't envisage such an entity with a factory in prime Seattle land. The outside investors, especially funds and corporate bounty hunters, would have ousted the father long ago (see note) and the factory site would now be a shinny glassy 98-story building. In fact I'm inclined to say the same for a private company with substantial interests held in the hands of hedge funds, angel investors, and leveraged buyout houses. These are sharks, eek.

Note: unless the father holds controlling interest, either directly or indirectly or maybe (read: not sure) through some sort of corporate article that gives the father or his part of shares a special say. But if the father has controlling interest the son can't cheat/kick the father out.

Captcha said:

Great information so far, guys - thanks! I have some reading to do, but before I go do that...

I looked up the 13D, and you're right, it kicks in at 5%. I'm assuming it would be against the rules to have the stock actually owned by a corporation owned by a corporation owned by my character - that's how I'm interpreting "any person who directly or indirectly shares voting power or investment power (the power to sell the security)." And apparently the form has to be filed within ten days, so I can't just say that he delayed filing or something...

Is there any way for stocks that are publicly traded to ALSO be privately traded? Like, if my guy had friends buy stock for him, would there be any way to transfer this stock to him without putting it on the market? I'm wondering if he could accumulate a lot of stock and then buy it all at the last minute, file the 13D, and pounce. But a lot of the 'pounce' would be lost if the stock was openly traded, I would think, since the company would have seen it happening?

Are there any other ways around this that you guys know about? I'm not trying to get him to own 50% of the company or anything, but I'd like him to have a big chunk, mostly to show that he's been nibbling away at this for years, plotting his attack.

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One possible way is to have the son negotiate a private transaction (away from the exchange) for a block of public shares. Later, they find out that he's been negotiating with these shareholders for years for more and more shares.

Starting point is usually a family business is owned by the family. They may have sold off some shares, but not enough so that they have control issues. But we can use this and also get around your 13D problem.

What Junior needs is a voting block of 51% to take control of the company. He doesn't need to own any part of the company.

Let's start with Gramps. When he died, he left his 100% ownership in the company divided as follows:

• 40% to Junior's dad
• 40% to Uncle Earl, who has no interest in running the company, just collects the dividends, if any
• 10% to Junior's dad's kids, Junior and Junior sister (Junior has a 5% interest)
• 10% to Uncle Earl's three kids, or a 3.33% interest

And while we're at it, let's look at the Board of Directors. The Board consists of five people, Dad, Uncle Earl, grandchildren's representative, and two outside directors. CEO is elected by a majority vote of the Board.

Most likely, Dad picks one of the outside directors and Uncle Earl the other. So if Junior can convince Uncle Earl to get rid of his brother as CEO, and Uncle Earl brings along his outside director, Junior can control the Board. No 13D problem, no complicated financial games, just a brother who's become disillusioned with how well his brother is doing.

Buying the land requires full disclosure by Junior to the Board and other stockholders. But let the lawyer sweat the details.

Dad can borrow the money for the land from Shylock, putting up as collateral his stock in some corporation. Stock goes down in value, maybe because the company does a lot of business with Greece, but whatever. That reduces the value of the collateral Shylock has, causing him to demand more, and basically threatening to call the loan.

To be honest, I'm not sure why Dad being called is going to be a big problem. He's either acquired the land, which he could then use as collateral with another lending institution, or he still has the money and can pay it back. Anybody with the money and skill to do this sort of transaction knows how to hedge.

Best of luck,

Jim Clark-Dawe

Captcha said:

Oh, and one more question - using some of the ideas from above...

Let's say I can figure out a way for son to own a good share of the company stock - say 10-15%? And say dad leverages the stock heavily, going on margin as suggested. And then son sells HIS stock, driving the price down, and that's when the margin call happens. Would that make sense? Yes, but I think he still has to report transactions if over 5 percent. Would it be legal for the son to do it? Artificially manipulating a stock price is usually illegal. (It's a bit more fun, plot wise, if I can make the son more responsible for the father's downfall, rather than just an anonymous fall in stock prices). But obviously once the father sells, the price would go down again, right? Yes. Could the son buy a bit back, then, at a lower price? See above. Keeping his profit, but not bringing the price up far enough for the dad to climb out of his hole and prevent another margin call?

(PS - thank you Sid Meier's Railroad Tycoon for teaching me about the brutal spiral of margin calls! Who says video games aren't educational?!?)

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A critical component of the answers to your questions revolve around how big the company is. The smaller the company the easier it is to manipulate to stock price. For a large company, it would be very difficult and there would be much more regulatory scrutiny. Also, for a larger, exchange traded company, the son would need at least 100's of millions of dollars for control.

There are smaller companies traded on the "pink sheets" that are hardly regulated and are often prone to manipulation -- this might be an option.

Captcha said:

In terms of the 'family company' - I was thinking more ex-family company, I guess. One that went public at some point. It'd be a lot better from a characterization perspective if there was no other family involved - one of the big arguments for the eventual reconciliation is that they're all each other have, in terms of blood relations. Do you know of any way to make the situation work if it WAS a publicly traded company?

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Uncle Earl has sold (with board's approval) his shares to crack lord John Doe 10 years ago. John Doe has been lusting after Junior . Doesn't have to go public and no uncle to mess with.

Captcha said:

In terms of the 'family company' - I was thinking more ex-family company, I guess. One that went public at some point. It'd be a lot better from a characterization perspective if there was no other family involved - one of the big arguments for the eventual reconciliation is that they're all each other have, in terms of blood relations. Do you know of any way to make the situation work if it WAS a publicly traded company?

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You're into hostile takeover territory. You can't imagine how complicated that becomes. Basically two or three investors will buy up to their 5% and then announce an offer to buy shares at a premium over market price.

Smaller companies, as Douglass says, can slide under the radar, but it's becoming harder and harder to succeed. Not only do you have regulatory issues, you have stockholder lawsuits.

I can't think of a good way from here to there, but I'll think about it.

Best of luck,

Jim Clark-Dawe

My starting problem here is that a family business only opens to the public for one of three reasons, or a combination of reasons.

• Nobody in the family wants to stay in the business and they want to get their money and get out.
• The business needs a large sum of money for expansion.
• The business is going belly-up and hopes additional money will change the equation.

Depending upon the scenario is how much ownership the family is willing to give up. And how likely it is that the family is going to remain in management. Because Dad is unlikely to put himself into a position where he can lose control over the business, unless he absolutely has to. And in that scenario, Dad is likely going to be gone in a couple of years.

And you need a family business originally, because otherwise there's no reason for Junior to become involved. Unless there are emotional ties to the business, Junior would go about this in a lot different fashion, and I'd be inclined to doubt it happening. There are other choices Junior could make that would provide a greater rate of return.

So Gramps ran the business, and Junior hung around it as a kid, and all was wonderful in the world. Then Gramps died, Dad and Uncle Earl take over. Then Uncle Earl and Dad get into a fight. Uncle Earl sells his 40% to Billy Bob, takes his money, and moves far, far away, effectively cutting his ties with the family. (When Gramps died, Uncle Earl and Dad each got 40% and Junior got 20%.)

Unfortunately, Uncle Earl was the brains in the operation, and after his departure, business goes downhill. And, oh by the way, Billy Bob wants to take over the business, but Junior is just hanging on until Dad dies, when he gets Dad's 40% and take over the business, bringing it back to his grandfather's time. (Realize at this point that no one is really in control of the company. Assuming a 5 person Board, Dad controls two votes, Billy Bob controls two votes, and Junior controls one. Nothing much is going to be able to happen with this dynamic.)

But Billy Bob is a devious son of a bitch. He approaches Junior with an offer to support him in voting out Dad as the CEO and voting in Junior. Junior jumps at the opportunity.

Now Dad, to get back in control of the company, needs to acquire either Junior's 20% (not going to happen) or Billy Bob's 40%. Dad approaches Billy Bob, and offers Billy Bob an inflated price of Billy Bob's shares. Billy Bob sells, but instead of an outright sale, Billy Bob finances the deal, secured by the shares Billy Bob owned and the shares Dad owned.

Billy Bob then files suit against the company using a dummy corporation in which his name doesn't appear, alleging the company is in breach of contract. Billy Bob receives a pre-trial attachment against the company, effectively tanking the value of the stock, and because Dad can't take money out of the company, Dad is in a tight spot financially.

Then Billy Bob calls the loan, claiming the stock has lost too much value, and demanding not only his 40% back, but Dad's 40%.

This avoids the real estate, but the real estate just provides complications that don't help you here and is hard to fiddle with the value. Billy Bob is breaking some serious laws, but we don't care what happens to him. Junior is not spending all of his time in his attorney's office trying to make this happen.

Best of luck,

Jim Clark-Dawe

Let me make a guess:

Dad: Billy, I'm offering to buy your shares at ten percent premium. What say you?

Billy: Show me the cash.

Dad: As you know, Bob. I don't have the cash. I'm getting a loan from Citicorp.

Billy: How about this? I'll give you a loan for the money to buy my shares. Interest rate is prime plus a quarter. But I need collateral. And I need more than the shares I'm selling you.

Dad: Wow that's way better than what Citicorp's been offering. Sure. What collateral do you want?

Billy: How about your own shares? As you know, if you mismanage the company and share value plunges, you may be left with nothing. Not my shares, not your own shares.

Dad: I'm a genius. No way I will mismanage the company. Deal.

Could a land value crash create the necessary conflict here?

Unrealistic, but just for illustration: Big sinkhole opens up next to the factory, and investigation reveals a major erosion issue that's crept under the plant, *requiring* that it be moved.

Something like that introduces a major financial burden, convinces the board to look for other land, and maybe it takes time for Dad to realize this all.

I thought up the sinkhole only because it can be a sudden occurrence. But I don't think the geology in Seattle would support this particular idea.

Bing Zabriskie said:

Let me make a guess:

Dad: Billy, I'm offering to buy your shares at ten percent premium. What say you?

Billy: Show me the cash.

Dad: As you know, Bob. I don't have the cash. I'm getting a loan from Citicorp.

Billy: How about this? I'll give you a loan for the money to buy my shares. Interest rate is prime plus a quarter. But I need collateral. And I need more than the shares I'm selling you.

Dad: Wow that's way better than what Citicorp's been offering. Sure. What collateral do you want?

Billy: How about your own shares? As you know, if you mismanage the company and share value plunges, you may be left with nothing. Not my shares, not your own shares.

Dad: I'm a genius. No way I will mismanage the company. Deal.

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Yep.

From a legal prospective, there are two transactions here. One is the sale of the stock. Once done (which takes a couple of seconds for the actual transfer) it's over. But you need a way to trip Dad up down the road. So Billy Bob has to have a loan to have leverage against Dad down the road.

I had a client who went bankrupt in a restaurant deal. Unfortunately he talked to me after he got into the deal rather then before. He bought this building for way too high a price, both on the absolute scale and also on the income stream needed to pay off the loan. But the land owner offered this ridiculous finance scheme where the initial five years were real cheap, then the payments went way up.

Result was the guy paid for five years more then the land owner could have gotten in rent. Then the payments went up, and my client's bad decisions in other areas started catching up with him. Combined, all the decisions got him into the wonderful world of bankruptcy court. Where the land owner got his property back.

Funny part of this was this was the fourth or fifth time the land owner had pulled this stunt. Worked out well for him. Anyway, Billy Bob is using the same sort of approach. If you know what you're doing, it can work out real nicely for you.

Best of luck,

Jim Clark-Dawe

You're planning this as a background to a romance, yes? Why get into such convoluted and potentially tricky (and boring) corporate skullduggery? Why not play on the human relationships.
Your scenario won't work with a publically quoted company. With a private company, shares will be provately owned. So why not merely have a bunch of shareholders (maybe Aunt Agatha, an ex-wife and a few assorted non-active relatives) and have your protagonist forge underhand alliances to accumulate a majority holding block? And this in itself could bring about dad's financial problems, as the bank might suddenly pull the rug on his planned property acquisition the moment he loses control of the company and can no longer pledge its assets as security on the deal.
It's simple, easy to explain and potentially lots of fun plotting Dallas-like alliances, backstabbings and Machievellian schemes.
Always keep things simple and concetrate on the human tensions rather than trying to construct complex business scenarios that undermine your credibility. Mark

Mark Thompson said:

You're planning this as a background to a romance, yes? Why get into such convoluted and potentially tricky (and boring) corporate skullduggery? Why not play on the human relationships.
Your scenario won't work with a publically quoted company. With a private company, shares will be provately owned. So why not merely have a bunch of shareholders (maybe Aunt Agatha, an ex-wife and a few assorted non-active relatives) and have your protagonist forge underhand alliances to accumulate a majority holding block? And this in itself could bring about dad's financial problems, as the bank might suddenly pull the rug on his planned property acquisition the moment he loses control of the company and can no longer pledge its assets as security on the deal.
It's simple, easy to explain and potentially lots of fun plotting Dallas-like alliances, backstabbings and Machievellian schemes.
Always keep things simple and concetrate on the human tensions rather than trying to construct complex business scenarios that undermine your credibility. Mark

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I agree with Mark. I really enjoy working in finance, but I find it boring to read about (in a novel).