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)
Debit
Credit
Investment
29.9
Cash

5. Kamin v. American Express
Option 1: Dividend distribution (BH)
Debit
Credit
Dividend paid
4.0
Retained earnings
25.9
Investment
29.9

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)
Debit
Credit
Cash
4.0
Other income (loss)
25.9
Investment
29.9

9. Kamin v. American Express
Option 2: Sell DLJ stock (BH)
Debit
Credit
Income tax payable
8.0
Income tax expense

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%)
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”

16. Kamin v. American Express

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?

20. Kamin v. American Express

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?