Politics

GSEs: Hines and Jacobs Ask for VA & DE Supreme Court Opinion

Hines and Jacobs are asking the Delaware District Court to certify the following questions and send them to the Virginia and Delaware Supreme Courts for an answer. There is no debate needed as the questions are simple fact related to the law. It does not challenge HERA or the Conservatorship or actions under the conservatorship. They are simply asking if the Senior Preferred stock created by the NWS is legal under the law. If it isn’t, then case over in all courts.

They are not claiming HERA or the Conservatorship does not grant the parties the right to enter into an agreement. They are just claiming the security created violates the law.

I said when these cases were first filed this might be the big one that ends all this well before everyone thinks it will. Should the courts rule it is illegal, the government will of course appeal but the course of this litigation is then done as plaintiffs will then file for damages in every court.

1. Does Delaware law permit preferred stock of a corporation to have a cumulative dividend right equal to the entire net worth of the corporation, payable quarterly in perpetuity, as provided in Section 2 of Fannie Mae’s Amended and Restated Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, dated September 27, 2012 (which is attached hereto as Exhibit A)?

2. Does Virginia law permit preferred stock of a corporation to have a cumulative dividend right equal to the entire net worth of the corporation, payable quarterly in perpetuity, as provided in Section 2 of Freddie Mac’s Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions of Variable Liquidation Preference Senior Preferred Stock (Par Value $1.00 Per Share), dated September 27, 2012 (which is attached hereto as Exhibit B)?

Certification of these state law questions of first impression presents the opportunity to potentially resolve this litigation between Plaintiffs and Defendants Federal Housing Finance Agency (“FHFA”), in its capacity as conservator of the Companies, and the United States Department of the Treasury (“Treasury”), as well as decide important matters of Delaware and Virginia policy that broadly impact the corporations organized under the laws of those states.

The facts relevant to answering these questions are not capable of dispute.

Specifically they state the law says:

Under Delaware and Virginia corporate law, the “Net Worth Sweep” is invalid, void, and unenforceable. The corporate laws of those States do not permit preferred stock to have a dividend right equal to the entire net worth of the corporation, payable quarterly, forever, to the necessary exclusion of any dividends ever being paid on junior stock. Because the Net Worth Sweep purports to do this, it is invalid, void, and unenforceable.

Specifically, Section 151 of the General Corporation Law of the State of Delaware (“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 ofany 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.

Because the Net Worth Sweep diverts, in perpetuity, all of the net worth of Fannie Mae 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 Company that would ever be available for the payment of dividends on any other classes or series of stock regardless of how valuable the Company 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.

Similarly, the Virginia Stock Corporation Act (“VSCA”) provides that a corporation may authorize “one or more classes or series of shares that . . . have preference over any other class or series of shares with respect to distributions [such as dividends].” Va. Code § 13.1-638 (emphasis added). Virginia law does not permit corporations to establish a dividend preference that operates to preclude all other classes of stockholders from the potential to receive dividends in perpetuity. Accordingly, the Net Worth Sweep is invalid under the VSCA and is void ab initio and unenforceable.

Finally, and this has some serious implications (in bold) beyond these cases and may be the reason the Court rule for Hines/Jacobs

While Plaintiffs respectfully submit that the invalidity of the Net Worth Sweep under Delaware and Virginia law is clear, this issue has never before been decided by courts of those states. It therefore is a novel issue of Delaware and Virginia law appropriate for certification to those states’ highest courts. Furthermore, resolution of this issue is important and urgent, as the issue implicates important matters of Delaware and Virginia policy and will have a broad impact on the corporations organized under the laws of those states.

Were the Net Worth Sweep to be upheld as permissible under Delaware and Virginia law, a very troubling precedent would be set for those states’ corporate laws, for stockholders of corporations of those states, and for the mergers and acquisitions community as a whole, because such precedent would appear to extend equally to corporations not under conservatorship and without the federal government as their senior preferred stockholder, and thereby permit the directors of a Delaware or Virginia corporation unilaterally to contract away all of the net worth and profits of the corporation for all time to a single preferred stockholder.

Certifying the question now to the Delaware and Virginia Supreme Courts will allow those courts to provide guidance on this important issue of Delaware and Virginia corporate law, which is the central issue in this litigation, and provide needed certainty to corporations and their directors, officers, and stockholders.

Additionally, certification of this issue will serve the interests of judicial economy in this case, because the answer could resolve the dispute between Plaintiffs and Defendants at the threshold stage.

Full Filing

Housing Market Fannie Mae