Bear Stearns Shareholders Have Legal Options
Thursday, March 20, 2008
Not since the demise of Enron have investors in a blue chip stock seen their equity reduced so dramatically. Investors in speculative industries like biotechnology and alternative energy might be accustomed to this type of share price volatility, but investors in financial and oil services companies are not. While the precipitous declines in shareholder equity of Enron and Bear Stearns were similar, there are some very important differences which may help Bear Stearns shareholders recover some of their losses.
First of all, it is important to say that while the actions of Bear Stearns executives appear troubling, they have not been convicted, or even accused, of any violations of securities law. Obviously, we know this is not the case with the Enron executives who are currently imprisoned for the widespread fraud that destroyed the company. We do know that the SEC has begun an investigation into Bear Stearns share price, which will likely examine the positive comments made by the company’s CEO just days before they needed to be bailed out.
Even a cheap acquisition is better than bankruptcy for shareholders
The bailout and subsequent acquisition of Bear Stearns by JPMorgan for $2.00 per share, caused the company's stock price to sink, which understandably upset Bear Stearns investors. However, in a choice between bankruptcy, or a $2.00 per share take over, there is little doubt that shareholders are better off with the acquisition. Enron went bankrupt, as there was no one willing to buy the company, even for pennies on the dollar. As a result Enron shares became worthless, which is usually the case when a public company files for bankruptcy. Not only does bankruptcy leave shares with little or no value, but it also leaves shareholders without legal remedies against the company, because it is insolvent.
Shareholders have a right to be incredibly angry over the fall of Bear Stearns. Shareholders derive little comfort from being told that the outcome could have been worse. But the reality is that it could have been much worse. The bailout and acquisition of Bear Stearns has three main advantages to shareholders, than if the company simply was disolved or tried to reorganize under bankruptcy laws.
The first advantage is that the shares of stock are still worth something. In fact, since the acquisition announcement, Bear Stearns shares have traded at a signficant premium to the proposed acquisition price. If Bear Stearns announced they filing for bankruptcy the shares would likely trade under $1.00 and eventually become worthless.
The second advantage is that the bailout and acquisition allow Bear Stearns to continue to look for a "white night" to come in a purchase or bailout the company, for more favorable terms than the JPMorgan deal. In essence, shareholders know what the worst case scenario is, but a possibility exists that something better may come along. With the stock trading a significant premium over the acquisition price, it appears that many shareholders believe there might be a "white night" lurking.
The third advantage is that if Bear Stearns is acquired by JPMorgan or a “white knight”, shareholders will likely have legal remedies against the acquiring company. When a company acquires another company, they inherit that company's legal burnden. JPMorgan has already said they will set aside $6 billion for litigation expenses. Several class action lawsuits have already been announced, and our firm Mark & Associates, P.C. is representing shareholders in individual claims.
It is obviously difficult for a Bear Stearns investor to believe that anything could be worse than the company agreeing to be acquired for $2.00 per share. However, by looking back at the Enron debacle and other corporate scandals that resulted in bankruptcies, it is clear that Bear Stearns shareholders are left with more than shareholders of bankrupt companies were left with. The ability to pursue legal claims against a viable defendant is incredibly important, and Bear Stearns shareholders should speak with an attorney immediately.
Posted under: Corporate Fraud • Bear Stearns Investors