- David Einhorn, the activist investor who has proposed that General Motors create two classes of stock, has accused the company of misleading credit rating agencies about the plan.
- Einhorn told Business Insider rating agencies are getting the analysis of his plan wrong.
- In a SEC filing to nominate three people to GM’s board, Einhorn’s Greenlight Capital detailed its back and forth with GM over the plan.
Most of the time on Wall Street, corporate filings are quite boring. And Greenlight Capital’s announcement that it will nominate three people to General Motors’ board could’ve been just that — boring.
But it was not. Very far from it.
In the filing, Greenlight, which owns 1% of GM, accuses the company of misleading credit rating agencies about his idea for how the company can boost returns to shareholders.
Greenlight’s idea, to create two classes of the company’s stock — “Dividend Shares” which would receive the cash per share the company has already promised to shareholders, and “Capital Appreciation Shares” which would benefit from the cash flow left over — was roundly panned by credit rating agencies as being too risky.
Now, Greenlight says this was because GM “substantially altered” its term sheet for the proposal:
“To Greenlight’s surprise, and in direct contradiction to statements made by GM during the March 16, 2017 telephone call that GM had provided Greenlight’s Two Class Common Stock Proposal term sheet to the rating agencies, the Company had actually substantially altered the term sheet. GM did not, in fact, present Greenlight’s actual Two Class Common Proposal to the ratings agencies.”
With the accusation, Einhorn is trying to ratchet up pressure on GM as he attempts to persuade it to adopt his very unconventional plan. GM — in part citing the rating agencies — has dismissed the proposal as too risky.
“For seven months, we’ve extensively reviewed the proposed dual-class structure, as well as other capital allocation strategies, and concluded that continuing to execute our strategy and adhering to our current disciplined capital allocation framework is the best path to deliver increased value,” GM CEO Mary Barra said in March when the company shot down Einhorn’s plan.
Taking it to the streets
Greenlight went public with its proposal and took it to Wall Street on March 28, after months of back and forth with the company. The plan faced immediate criticism. Moody’s, for one, put out a particularly negative statement saying that under Greenlight’s plan GM would be sidled with a more than $US2.2 billion cumulative dividend.
So we asked Einhorn about that, and he said that was false.
“The dividend is not cumulative,” he told Business Insider. “The dividend is flexible. There is no inflexible cash burden. Dividends would only be owed if and when declared by the Board each quarter. That’s the same as now. Undeclared dividends do not become a corporate obligation. The company has no contractual burden under our plan to pay a dividend ever.”
Moody’s and others also said that the creation of two share classes would force the company to make decisions benefitting one class over another. Einhorn acknowledged that there could be some conflict between classes, but insisted that his plan addresses those issues.
“There are three scenarios where the interests might conflict,” he said. “Our term sheet explicitly resolves two of those: bankruptcy (where they each get the same) and sale of the company (where each share class has to approve). The third is a business slowdown where the board has to consider cutting the dividend. And they would have the same problem with that as they do today.”
How you get there
Wednesday’s filing includes a blow by blow account of Greenlight’s efforts to persuade GM, starting in August. By Greenlight’s account, it’s clear that by December, GM and its advisers were no longer willing to entertain the proposal, or Greenlight’s founder, David Einhorn, even a little bit.
At a meeting on December 6th, GM said the proposal had a host of problems, including not being able to deal with industry disruption. This is something we heard about when the plan became public. As my colleague, Matt DeBord wrote,
GM “has its plate full bringing electric cars to market, continuing to refresh its trucks and SUVs, and facing down new competitors.”
It also made a number of what Greenlight calls “excessive and unjustifiable assumptions” regarding bond yields and GM’s stock price. GM said the status quo stock price to evaluate the proposal should be $US40 a share, a level the stock hasn’t hit since 2013.
It valued the “growth” stock with a price-to-earnings multiple that was so low that it was a “50% discount to the next lowest multiple stock in the entire S&P 500.”
The company’s financial advisors, bankers at Morgan Stanley and Goldman Sachs, didn’t even prepare an analysis of one of the two proposed structures, Greenlight says:
“Mr. Einhorn responded at the meeting by indicating that GM’s advisors’ analysis took a negative assumption at every turn and compounded the assumptions upon each other with the impact of reaching implausible conclusions. Mr. Einhorn compared the analysis to the efforts one might put forth in a debating society rather than a balanced approach designed to determine the truth of the question at hand. Mr. Einhorn again requested that the process becomes iterative and collaborative so as to best address the concerns raised.”
Rating agencies, you know how they do
After a few more unsuccessful meetings, Greenlight retained a financial adviser to address rating agency concerns. The adviser presented the proposal much like a blind application, removing Greenlight and GM’s names from the documents.
Greenlight says that in that circumstance, the agencies said that the proposal, as they saw it, would not make them inclined to downgrade the stock.
More meetings, more rejection. In January GM conceded that it had not shown rating agencies one of the two proposals Greenlight submitted, but would not allow Einhorn to speak with agencies about the presentation directly. GM was also unwilling to share its own valuation work with the company.
Things really got weird in March when a GM representative e-mailed Greenlight the materials it had shared with rating agencies. That’s when Greenlight realised that its term sheet had been altered.
Some of the gory details:
Among various misrepresentations in the altered term sheet presented to the ratings agencies, the Company eliminated the important clarifying point that Dividend Shares would not be preferred shares under the Two Class Common Stock Proposal and that both classes of common stock would share equally in a liquidation. In fact, the Company falsely added that the Dividend Shares “will rank equally amongst themselves in all respects and rank senior to the Capital Appreciation Shares with respect to dividend rights and rank pari passu with any class or series of stock or other equity securities that is not expressly made senior or subordinated to the Dividend Shares as to the payment of distributions” (emphasis added).
In addition, the Company’s altered term sheet misleadingly discusses “holders of the Dividend Shares receiving dividends in arrears (i.e. accrued but unpaid dividends on the Dividend Shares) in preference to the holders of the Capital Appreciation Shares,” which is an invention by the Company given that the Two Class Common Stock Proposal does not contemplate cumulative dividends.
Finally, the term sheet contained several new topics including Restrictions on Issuances of Other Share Classes, Conversion Rights, Redemption Rights, Preemptive Rights and Financial or Other Covenants. None of these topics would be typical of a common stock and Greenlight believes they were introduced to frame the Proposal as a debt or preferred stock or hybrid instrument.
In short, Greenlight believes that the altered term sheet that GM presented to the rating agencies wrongly gave the impression that the Two Class Common Stock Proposal resembled preferred stock or debt. The reality is that the Two Class Common Stock Proposal is exactly what its name denotes: two classes of common stock.
That was March 16th. On March 22nd Greenlight met with members of GM’s board and CEO Mary Barra to walk them through a presentation of their Two Class Common Stock proposal. Within that presentation, Greenlight included a red-lined version of their altered term sheet. Savage.
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