No. of Recommendations: 2
Jerryab asked: The big question I do not see being answered is *why* they went bust.

Jerryab, recall the times pre credit crash when this deal went through. Money was flowing like water. Just when you thought you had seen the craziest deal ever go through, something came out and topped it. There were several deals done that I EXPECTED to go BK after the fact. This is why I would NOT and did NOT buy any of the LBO bonds at the time. The BK lawsuit against shareholders has a lot of detail that alleges this particularly LBO was doomed from day one. They claim that the investment banks and management ignored any analysis that questioned the deal. Apparently they kept upping the share price which meant they had to take on more debt. IIRC correctly, the claim is that the debt could not be serviced, even up “nominal” circumstances. Stated differently, they claim is that Lyondell would have survived the downturn and NOT gone BK if they had not taken on the additional debt burden.

I have no problem suing the officers and directors that approved the deal, plus the investment banks. All of those folks have “D&O insurance” (Directors and Officers) which was paid for by the company. The insurance will cover all legal fees up to the limits of the policy. And if the officers lose, the policy will pay damages up to the policy limits. (Certain caveats apply, like not covering criminal activity.) Unfortunately, private investors do NOT have any insurance that covers this. Umbrella liability policies do NOT cover it.

TMFHockeypop: In your opinion, would this have been avoided if, like Berkshire, there were A and B (non-voting) shares.

Hockeypop, I don’t know the answer to this question. I think the main advantage of two share classes is to PREVENT any hostile takeovers or LBO’s in the first place. You would hope that any shareholders that did NOT vote for approval would not be sued. My guess is that they would still be sued. The logic is that the investors should reasonably have been expected to know that the company was not worth the buyout price. This is kind of similar to the Bernie Madoff case where they have “clawed back” monies that were paid out along the way.

‘Fradulent conveyance” is a well established part of bankruptcy law. A simple example is that I know I am going to file for bankruptcy next month, so I sell my house/car/boat to a friend for $1 when its fair market value is $1 million. The BK court can and will undo that transaction on a fraudulent conveyance principal. This case is the first one where arms length shareholders were sued. In my particular case, I owned the stock for ~30 days! I was doing some merger arbitrage investing at the time. I was pleased with the return in 2007 on this stock. It continued to look good until the legal bills arrived in 2012. The legal bills are many times higher than the gain I had. And they are still growing every month.


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