Kamin v. American Express

1. Kamin v. American Express • Corporate decision-making: shareholder value • Board decision in Kamin • Accounting treatment of DLJ disposition • Accounting value vs. economic value • Judicial response • Business judgment rule • Deference to market irrationality

2. Kamin v. American Express What had happened at AmEx? What were the options? What did the AmEx board decide? Why?

3. Kamin v. American Express Option 1: Declare special dividend of DLJ stock to AmEx shareholders. Option 2: Sell DLJ stock at corporate level, sustaining capital loss but realizing tax savings. How account?

4. Kamin v. American Express AmEx 1972 purchase of DLJ stock (BH)

5. Kamin v. American Express Option 1: Dividend distribution (BH)

6. Kamin v. American Express Option 1: Dividend distribution (VJG/JM) Balance Sheet Investment (29.9) Retained Earnings (29.9)

7. Kamin v. American Express Option 1: Dividend distribution (VJG) Income Statement Revenue -- Expense -- Gain / Loss -- Tax -- Net income --

8. Kamin v. American Express Option 2: Sell DLJ stock (BH)

9. Kamin v. American Express Option 2: Sell DLJ stock (BH)

10. Kamin v. American Express Option 2: Sell DLJ stock (VJG) Balance Sheet Cash (4.0) Investment (29.9) Tax liability (8.0) Retained Earnings (17.9)

11. Kamin v. American Express Option 2: Sell DLJ stock (VJG / FG) Income Statement Revenue -- Expense -- Gain / Loss (25.9) Tax (31%) 8.0 Net income (17.9)

12. Kamin v. American Express Option 2: Sell DLJ stock (FG) “Cash flows would have increased by approximately $12 million”

13. Kamin v. American Express Compare Option 1 and Option 2 Option 1: Distribute DLJ stock and avoid $17.9 million reduction in net income Option 2: Sell DLJ stock and reduce taxes by $8.0 million

14. Kamin v. American Express Why did board choose Option 1 – the economically inefficient, but market-friendly distribution of DLJ stock?

15. Kamin v. American Express JM: “New York statute – no interference unless farud, oppression, arbitrary action, breach of trust” VJG: “Board’s decision revolved around accounting and how market values earnings … analysts hate volatile earnings (Graham)” BH: “The board felt overriding responsibility to guard the stability of AmEx’s share price” NB: “Board concluded that EPS was more important … managers often ‘adjust’ accounting figures to reflect constant growing EPS” FG: “Four of twenty directors were insiders, members of executive incentive compensation plan”

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17. Kamin v. American Express Did the reviewing court, which deferred to the board, make the right decision?

18. Kamin v. American Express VJG (and BH): “New York court properly deferred to board’s business judgment … public markets value companies based on accounting choices” NB: “All in call, what investor consider in valuing a company’s stock continues to be amorphous and inexact determination.” JM: “As shareholders, we do not agree with directors’ decision … plaintiffs should vote out board.” FG: “Judge should have given executive incentive plan more thought … greater interest in pleasing CEO than looking out for shareholders”

19. Kamin v. American Express Any suggestions to make markets more rational, efficient?

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21. Kamin v. American Express VJG: “… maybe regulation by the SEC or federal law could replicate institutional investors valuing companies not based on accounting tricks” BH: “AmEx could have avoided dispute had accountants properly “marked to market” DLJ stock .. Loss can’t be changed by magic in accounting” FG: “ We would have sent case to trial, not decide on SJ, to get more information on board decision” NB: “Buffet has lost confidence in EPS: “primary test of managerial performance is high earnings rate on equity capital employed … and not EPS.” JM: “Shareholders pay the board … and must life with the decisions … or take action”

22. Kamin v. American Express In the end, who should decide value?