Occasionally, the editors of The 10-Q are inspired to share their opinions with our readers, and today is one of those occasions. We’ve decided to make this a somewhat regular feature of The 10-Q, which we will call Opinion Practice.
Back to the 80s?
The current efforts in Washington under the new Administration to rapidly “unregulate” various sectors of the economy, along with proposals for massive tax cuts specifically targeted at capital accretion in the environment of a rapidly rising stock market and the reemergence of the activist investor is a Back to the Future moment.
Are we reentering the days of Ivan Boesky, Michael Milkin, the Bonfire of the Vanities and the Den of Thieves yet again? And if so, what does that portend for business lawyers?
During the 1980s, the Reagan Administration vigorously followed up on the early deregulation forays of the Carter Administration in various industry sectors: transportation, energy, and telecommunications, to name a few. Perhaps most significantly, the EPA under Anne Gorsuch and Interior Department under James Watt sought to cut back rapidly on environmental and public land preservation efforts from the 70s.
These efforts ultimately led to the Chevron decision which vested great authority and imprinted judicial deference with and towards administrative agencies in construing their statutes, even if their interpretations appeared to be different from the original purposes of the legislation under which these regulations were promulgated. Similarly, the Reagan Administration in 1986 augured in an era of massive tax cuts. In this milieu, the late 80s were marked by leveraged buyouts, junk bonds, constant threats of take overs, mass layoffs and industry consolidation in many areas.
Fast forward 30 years later and many of these themes appear to be repeating themselves in the early days of the Trump Administration. What can business lawyers learn from this history?
First, like the 1986 tax bill, the current tax bill in Congress promises a field day for clever lawyers and accountants, as a whole number of new potential loop holes have been opened up. In particular, the idea of “pass through” income for S, partnership and other types of corporate entities will certainly create opportunities to shield ever more otherwise taxable income.
Second, the financial windfall that corporations will receive under the proposed cut in rate is more likely to lead to stock buybacks and more consolidation. Some of the same characters from the 80s are back on the scene, like Carl Icahn and Wilbur Ross, who are well versed in this environment.
Back in the late ‘80s and early ‘90s, one response was that a number of states changed their corporation statutes and modified the definition of “fiduciary” duty in efforts to protect employees and jobs (“constituencies”) in their states. Using stock options to incentive “pay for performance” also took off in the 1980s. If anything, the practice is even more common now, and may grow as a result of current policy.
A good example is what’s going on with railroad CSX. An activist investor installed Hunter Harrison as CEO at a time when CSX is enjoying historic profitability. However, rather than invest in infrastructure and hire more people, Harrison—who passed away suddenly this weekend from undisclosed health issues—caused the company to buy back stock, cut investment and lay off mass numbers of employees. Meanwhile, the stock price continues to creep up. Top executives have substantial personal compensation tied to the price of the stock. Before his death, there were rumblings that he was looking to find a transcontinental merger partner.
The short term result has been some well-publicized train accidents, a substantial degradation in service to customers, and (until recently) greater regulatory scrutiny in Washington. New federal policy changes could potentially “supercharge” these efforts at CSX as well as in many other industries.
All of this is intended as food for thought for business practitioners to begin to plan for the enormous amount of work that may be generated as a result of these major changes in federal policy, along with the inevitable back lash that will come, creating even more issues and work. Regardless of your politics, it’s a good time to be a corporate lawyer right now.