This goes to yesterday’s post on the Appellate Court’s Order
Chapman nails this. The Appellate Court in his (and mine) opinion is sending this question to the Delaware Court for an opinion as to the very legality of the Net Worth Sweep under Delaware law. Sure, $FNMA is a federally chartered institution, but they are incorporated under the laws of Delaware. Rather than spend the time and resources deciding where Lamberth may or may not have erred and the arguments on whether or not the NWS is legal under HERA or what HERA actually enables the government to do, the Appeals court may want to simply know if it is legal under Delaware law. If it isn’t, game over
Anyone want to take odds that the court places serious weight on its former Chief Justice’s already filed opinion?
Peter Chapman opines:
Here’s my wild theory about a possible reason the U.S. Court of Appeals for the D.C. Circuit entered its single-sentence order yesterday suspending briefing in Perry v. Lew:
The Amicus Brief filed in Perry v. Lew that’s authored by Judge Myron Steele on behalf of the Center for Individual Freedom contends that the Net Worth Sweep in inconsistent with Sec. 151 of the Delaware General Corporation Law and is unenforceable on its face. The answer to whether the Net Worth Sweep is proper or improper under Delaware law may be a threshold question the U.S. Court of Appeals of the D.C. Circuit wants answered before it spends time, effort and energy examining the other issues raised by the shareholder-plaintiffs in their appeals from Judge Lamberth’s Sept. 30, 2014, decision dismissing the lawsuits filed in the U.S. District Court.
Certifying this narrow question of law to the Delaware Supreme Court would help the shareholders, the Government and the Federal Courts immeasurably. If the Net Worth Sweep is void — as Judge Steele contends it is — Fannie and Freddie shareholders will cheer. If the Delaware Supreme Court gives the Net Worth Sweep a favorable nod — which Judge Steele says would be incorrect — that would benefit the Government greatly.
The D.C. Circuit entered a similar single-sentence order — see https://goo.gl/qFJSph — suspending briefing in Weinstein v. Iran, No. 14-7193 (D.C. Cir.), earlier this year. In that appellate proceeding, there was a threshold question about the foundation on which that litigation rested that needed to be answered by a lower court. When the answer from the lower court came, that helped guide the parties in their continued briefing and helped the court in its decision-making process.
So what did Former Chief Justice Steele say in his brief?
If the Net Worth Sweep was illegal under the charter of the Companies, it exceeds FHFA’s statutory authority as conservator by definition. Standing in the shoes of the board and the stockholders, FHFA cannot exercise a corporate power that the board and the stockholders could not themselves have exercised. See 12 U.S.C. § 4617(b)(2)(B) (granting the conservator the power to “operate the regulated entity with all the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of the regulated entity”).
Similarly, if the Net Worth Sweep is an illegal term for preferred stock, the amendment cannot possibly be regarded under Delaware law as Treasury’s exercise of a “right received in connection with” preferred stock purchased by Treasury before December 31, 2009. Preferred stockholders cannot have a perpetual claim on all the residual earnings of the Companies to the exclusion of common stockholders under Delaware law.
Section 151 of the DGCL allows preferred stockholders to receive dividends “at such rates, on such conditions and at such times as shall be stated in the certificate of incorporation or in the [board] resolution . . . .” 8 Del. C. § 151(c) (emphasis added). Preferred stock dividends must be made “payable in preference to, or in . . . relation to, the dividends payable on any other class or classes or of any other series of stock[.]” Id. (emphasis added). Section 151 does not permit a provision requiring that a series of preferred stock receive a quarterly dividend equal to the entire net worth of a corporation to the necessary exclusion (in perpetuity) of any dividends ever being paid on junior stock.
In fact, Section 151(c) specifically contemplates that, after payment of preferential dividends on senior preferred stock, “a dividend on the remaining class or classes or series of stock may then be paid out of the remaining assets of the corporation available for dividends . . . .” Id.
Because the Net Worth Sweep diverts, in perpetuity, all of the net worth of the Companies (assets minus liabilities) to Treasury, it neither is paid at a “rate” nor is it payable “in preference to” or “in relation to” the dividends payable to other classes or series of stock. The Net Worth Sweep is not paid at a “rate” because Treasury’s participation in corporate earnings growth is unlimited, absolute, and perpetual. The Net Worth Sweep is not payable “in preference to” or “in relation to” the dividends payable to other classes or series of stock because it is payable to the absolute, permanent exclusion of dividends to other stockholders.
Once the Net Worth Sweep is paid each quarter, there necessarily will be no assets remaining in the Companies that would ever be available for the payment of dividends on any other classes or series of stock regardless of how valuable the Companies may become in the future. Accordingly, the Net Worth Sweep is invalid under Section 151(c) of the DGCL and is void ab initio and unenforceable.
Does Delaware law matter in Federal cases? Sure does…..
The focus of this amicus brief is Delaware law as applied to the Net Worth Sweep entered into by Fannie Mae, as Delaware law is not only the rule of decision for Fannie Mae but also has been considered persuasive authority on corporate law matters associated with federal statutes generally. See, e.g., United Artists Theatre Co. v. Walton, 315 F.3d 217, 230 & n.13 (3d Cir. 2003) (referring to Delaware corporate law “as a useful analogue” in interpreting Section 328(a) of federal Bankruptcy Code; stating that: “We look to Delaware corporate law as a guide primarily because it offers time-tested insights on how courts should best evaluate an issue similar to the one before us. Additionally, Delaware’s law often cues the market.”).