查理·芒格文稿/演讲实录：1984年储蓄贷款听证会证词

STATEMENT OF CHARLES T.

MUNGER

To the Subcommittee on Telecommunications, Consumer Protection and Finance of the Committee on Energy and Commerce U. S. House of Representatives May 23, 198* lawyer, generally familiar with the securities laws, I am a former practicing having been active in law and public-corporation for over 35 years. I business have no connection, except as a paying client, with the Munger , Tolles £ Rickershauser law firm in Los Angeles, from which I retired many years ago. I am now affiliated, as shareholder and Vice Chairman, with Berkshire Hathaway Inc., a Publ i cl y- t raded conglomerate with particularly large interests in casualty insur ance companies owning large portfolios of securities held as a passive investor. I am also a shareholder and director of a publ i cl y- traded registered investment company, New America Fund, Inc. In those capacities I participate in investment where results depend in part on the legislative rules governing security invest ment and security trading and the duties of corporate managements. The companies with which I am affiliated have not engaged in unfriendly take-overs and are not unwanted an by threatened take-over because absolute majority of their stock is owned by a few people. So far as I know I have no commercial axe to grind in giv ing testimony. I believe that the legislative changes 1 recommend, if they had any effect at all on me, would impair my economic interests. My opinions are my own and not those of corporations with which 1 am affiliated.

Politically, I am a right-wing favor of unregulated

Republican, with a strong general prejudice in markets.

But even from my right-wing perspective, I have come to the opinion that the current legislative rules have been demonstrated to be inadequate to prevent a lot of social.ly undesirable activity, ultimately posing some risk to the very existence of free I think the country would be improved by some fairly simple changes in the markets. 1aws . I- believe that the condition now facing Congress is a huge and increasing mass of: hostile take-overs of pub 1i c 1y- 1raded corporations, plus (a) actual and threatened of (b) various actions by corporate managers in response to and in anticipation the take-over threats. The reactive corporate actions include: (l) "golden-para power (including power of chute" contracts for executives; shareholder (2) reducing in three classes, "superlong-term investor shareholders) by creating directorships majority" provisions applicable to mergers, and generally more difficult procedures for exercise of shareholder will; private" "going transactions under which encum (3) assets, mostly bent managements join financial promoters in buying their employer's with loans based on those assets, injecting enormous financial leverage into the con tinuing business; forced mergers between corporations and "white CO essentially knights," that is corporations perceived as less undesirable than "dark knights," particular aggressors who, by first threatening take-over, put the corporations "into play," and often profit in the "white knight" mergers from stock positions accumulated in anticipation of the aggressor's own take-over threats, and (5) "greenmail" transac tions wherein corporations repurchase, at premi un-ovei market prices, shares owned by t ne "g reenma i 1er ," a person who has recently accumulated a cont ro 1- 1hreateni ng block of stock in the repurchasing corporation. Although there are probably some "good" hostile tender offers, creating some benefit as well as harm to the general public in the massive, recent activity related to hostile take-overs of corporations, I believe that, on balance, most of the activity

The "greenma i lers" and aggressive, host i le- take is not in the public interest. over operators who profit time after time, even when they fail to obtain control, b"y first buying stock then putting the corporation "into play" and selling to a They are now making a lot of easy "white knight," deserve particular attention. money without, on average, making any net social contributions, or even taking too-easy much risk. The money-making by "greenmai lers" and other hostile take over threateners is rightly perceived as the social equivalent of the trout fish erman who uses, dynami te , or gill nets, instead of a fly-rod. I think the success of these activities, with large rewards to unadmirable economic behaviour, endan gers the whole capitalistic system by tending to diminish its repute, thus threat I ening the cornucopia of goods and freedoms which only capitalism can provide. believe these activities tend to do for the reputation and prospects of capitalism in the United States what the court of Louis the XVI did for the reputation and prospects of monarchy in France. .1 suggest that there is almost nothing to lose, and much to gain for the Republic, if Congress changes the laws to eliminate or greatly reduce the worst of the abovementioned activities. I believe that a few simple changes in the laws would con structively diminish the present frenzy of threatened, hostile take-overs and re actions thereto by corporate managements: (1)

I agree with the general approach of Martin Lipton that no party or "group" should be allowed to acquire by purchase more than ten per cent' of the voting power of a corporation with publ i cl y- traded stock, excepi by tender offer under Williams Act rules. However, 1 would exempt purchases beyond ten per cent either from the corporation as a knowing issuer, or otherwise with the corporation's written consent. It should be noted that the Lipton approach is not radical. It para llels British law, passed wi th "establ ishment" support, although-the Lipton numbers are different.

(2)

A 9- 9% But I do not believe the Lipton proposal goes far enough. managements ownership position is quite threatening to. many corporate as evidenced by the recent transaction in which Texaco repurchased a position of this size from the Bass interests. In addition, I think the recovery-of- i ns ider-trad i ng-prof i t rules of Section 16 of the Securities Act of 193*t should be revised so as to define as non-retaina- ble "insider" profits:

(i)

(ii)

any profit on any of its stockholdings made by a party or "group" owning more than five per cent of a corpora tion's stock, unless the stock sold has been owned at least five years; and any profit on any stock, owned for less than five years and not originally purchased from or with the written by a party or "group" consent of the corporation concerned, which first puts a corporation "into play" by in any way making or encouraging a take-over transaction.

The law revision proposed in subparagraph (i) above would be likely to deter almost all stock positions except those below five per cent of positions total shares outstanding. per Five cent are large enough to meet almost all needs of pension fund trustees and other institutional investors and are inherently much less threatening to control than the ten-per-cent positions permitted under the Lipton proposal with no

Essentially, the revision of Section 16 of adverse effects at all. the Securities Act of 1934 which 1 propose in subparagraph (i) mod estly changes the numbers and concepts in the present rules of a long-established statute, which now forces disgorgement of profit, after a ten-per-cent-of-shares-outstandi ng position is reached, on any sales of stock where the holding period is under six months. law revision proposed in subparagraph (i.i) above would go fur ther and would be designed to take the virtually sure profit out of the common practice of first buying, on a totally secret basis, less stock, then making or encourag than five per cent of a corporation's ing a take-over proposal which is outbid by some "white knight," creating a profit realized as a direct result of threats posed by the investor, as distinguished from the normal profit rea 1i zed' pas sively by the ordinary successful investor in stock.

The

(3)

In addition, there should be an absolute bar against any hos properly financed offers for all outstanding shares on an all-cash basis. [As the current law allows, any form of tender offer by or with the consent of the target corporation should be permitted With so long as all shareholders were treated alike.] respect to the hostile-tender-offer situation, I join Martin Lipton in believing that the front-end- 1oaded , two-tier cash offer is inherently I unfair to ordinary shareholders and tends to create excessive debt. also believe that tender offers involving new.ly- i ssued securities are properly under appraise both (i) almost always inherently difficult to pressure, (ii) under certain conditions are likely to cause enormous undesirable concentrations of power in "chain letter" promotional opera tions 1'ike those of many conglomerates in the I960's, and (iii) gener ally assist book strap aggressiveness of a paper-shuffling type, which effect, is negative in average socio-economic and a tendency toward undesirable diminishment of pluralism in American business. I think tile tender offers except

If no changes in law are made as outlined above, I do not agree with the SEC's proposal bar to corporate payment of "greenmail," that is a bar to stock repurchases which are not made either at or below market prices or under registered tender offer would available to all shareholders. alone the SEC "ant i-greenmai 1" proposal Standing tend to create even more successful hostile corporate take-overs and forced mergers with "white knights" than we see now, which, in turn, would tend to attract even more people into trying to make hostile take-overs, a result I think Congress should conclude i s undes i rab 1e.

for a total

In short, under appear, I think current law, the as many "greenmail" transactions they avoid would be worse.

inelegant and unfair hostile take-over attempts

However, assuming that the L i pton-amp 1i f i ed- by-Munger proposals were adopted into law, which I think would reduce "greenmail" transactions by about 95$, the question pre sented by the SEC proposal I see no clear preference, under becomes more difficult. such circumstances, for or against a total bar to corporate payment of "greenmail" in the few instances of "greenmai 1" possibilities which would remain (for instance, on stock positions held for more than five years or of a size under five per cent of total shares outstanding). In favor of the SEC proposal for a general have lived with similar law for many years bar to "greenmail," I point out that I as a corporate manager with no serious inconvenience. This has happened at New America Fund, Inc., which as a registered investment company, governed by the Investment Company Act, is barred by present law from repurchasing stock except at market prices or under tender offer avai lable to all shareholders. A last matter of concern is the SEC proposal, in the face of dispute about the meaning of law now in effect, that new legislation explicitly prevent all corporate repurchases of stock in defensive response to a pending registered tender offer. This SEC proposal also would tend to the balance of probabilities in favor of success for host i 1e- take-over attempts and would ultimately encourage more hostiletake-over activity. Under such circumstances, despite some good aspects, it, too, should probably not be favored except by those who consider the current level of host i 1e-take-over-rea 1ted activity undesirably low.

tilt if

Moreover, the SEC proposal, I understand it right, would appear not to take into account some difficult income tax problems. Take the case of a corporation with one founder, owning h0% of corporate shares outstanding, with the balance of the stock scattered. If an acquisition-minded aggressor tenders for 100% of the stock, by repur the corporation could retain control for its founder through responding chasing 20% of shares outstanding, from individual shareholders desiring to sell all their holdings, without imposing on tendering stockholders any income tax con sequences except those normal upon sale of stock. In contrast, if the corporation repurchases by registered the same 20% of shares outstanding pro-rata, as required tender offer rules, then each tendering shareholder would reduce his percentage ownership of the corporation from his former share of 60/100ths to this same share of 50/100ths, or by less than 20%. In such case, the entire proceeds from tender ing shares to the corporation are likely to be subject to federal income tax as ordinary corporate dividends, instead of stock sale proceeds' 60% exempt -from taxa tion when the holding period is at least one year. If the SEC proposal is to be changes enacted it needs complex coordination with income tax law, or concurrent in income tax law. Otherwise the equality among shareholders sought by the SEC ' will in many cases not be achieved. , may Indeed, equality, i effects cons dered tax actually be lessened in many cases by the SEC proposal. I think it can not be emphasized These income tax questions are, of course, secondary. too strongly that the main problem is that, however nobly motivated, the SEC proposal for a total bar to corporate repurchases of stock during pendency of hostile tender As matters offers has a vast potential for increasing hostile take-over attempts. now stand, where some large, permanent, pro-management block of stock exists, a cor poration is virtually immune from hostile take-over. When a hostile tender offer is made, the corporation can simply buy enough stock in a few private transactions or (possibly, depending on one's interpretation of existing law) in the market, so that the large, permanent, pro-management block becomes an absolutely controlling block of stock. from Knowing this, potential hostile tender offerors are ordinarily deterred attempting take-overs where large, permanent blocks of pro-management stock exist. If the law were changed to make it clear that a hostile tender offer creates a bar to all corporate stock repurchases until the take-over struggle is over, the single most likely competitive buyer would be removed from the aggressor's arena. Under such circumstances, a corporation's only choices might be take-over by a "dark knight" or take-over by a "white knight," even when active founders have large owner ship positions. This result strikes this observer as preposterous. For instance, do we real ly want to add Hewlett Packard, where both founders are large shareholders, to the list of likely host i 1e- take-ove r targets?

still

To some extent,

I think sentiment in favor of rules which allow easy hostile corpo rate take-overs is caused by resentment of perceived perpetual power and rationaliza tion of self-serving conduct in managers of many large corporations. 3ut , paradoxical as it may sound, I think that even people with this ant i -management attitude should be in favor of making hostile take-overs harder to accomplish, rather than easier. If Congress makes hostile take-overs easier, we will end up with industry as a larger corporations. And, Lord Acton being roughly right that whole in fewer, power corrupts, these people who wanted to limit the. power and prerogative of corporate managements by facilitating hostile take-overs, would, after more concen tration of corporate power, perceive even more of what originally caused them to resent corporate managers and seek to facilitate their removal from office.

Generally, the whole approach of trying to make American corporate managers behave better by making them more threatened by sudden removal from office by outside forces is suspect. The evidence, created by many "golden parachute" contracts, "scorched earth" defensive tactics, etc., is plainly that threatened managers behave worse. Benjamin Franklin correctly pointed out that "it is hard for an empty sack to stand upright," and his folk wisdom is still apposite. Desirable as it may be that Ameri can managers behave more than they do now in accord with the true long-term interests of shareholders, that objective won't, in practice, be achieved by making hostile corporate take-overs easier. I think that the result, instead, will be less mana gerial attention to real shareholder interests and more managerial attention to some how creating more security for management from the enhanced, threats of changes in corporate control which would be caused by new anti-management-abuse legislation.

if we protect corporate managers more, in Counter- i ntui t i ve as it may seem to some, stead of trying to limit their abuses by new legislation, I think corporate managers, on average, will act more in the long-term The job of the interests of shareholders. corporate manager has a big "balancing" or judicial aspect as difficult choices are presented. Not only among the Japanese do groups of managers act a lot like a panel of appellate court justices. And just as we improve our highest judges, on average, im by'making them secure from sudden' removal from office, we may well, on average, prove our highest corporate managers by making them more secure from hostile corporate take-overs.

Nor do I think the nation has much to fear, generally, from entrenched managerial power. Managers of big corporations have limited power and less in relationship to other forces over each decade. by instances I sympathize greatly with those, in the SEC and elsewhere, who are appalled during hosti le-take-over struggles of rationalized, extreme defensive tactics by some corporate managements, rightly perceived as breaches of trust in the relationship earth" defen Much has been done, of a "scorched between management and shareholders. sive nature, which I would not do as a corporate manager. But, none the less, I consider law. A brain surgeon it very unwise for Congress to intervene with responsive new faced with a small tunor which mildly impairs balance, removable only by causing gross Likewise, the legislative impairment of cognition, would wisely restrain his scalpel. correction of an abuse should be withheld when it has foreseeable, inevitable conse quences as by-products That is, I think, which are worse for the nation than the abuse. the" situation here.

I find my position awkward, in disagreeing in part with the SEC, because for many years I have regarded the SEC as the most intelligent, most honest, most efficient government department I know. I believe our different opinions now arise almost entirely from differing views on one major assumption. The SEC seems to feel it has neither the macro-economic, sociological expertise nor the governmental charter to be other than neutral as to whether a mass of host i 1e- corpora te- take-over-re I ated activity, averaged out, is a good or bad thing for the nation. Starting from this major assumption of neutrality, the SEC wants rules, attractive to it as umpire, which make hostile-corporate-take-over contests orderly and balanced.

Congress, with a broader charter than the SEC, should plainly be less reticent than the SEC and should develop an opinion on the major assumption if it wants to maxi And in my opinion Congress will be very mize the rationality of its lawmaking. wrong to be neutral regarding the present explosion of hos t i 1e- take-over- re I-ated activity, which I respectfully suggest is harmful to the country whether viewed from the point of view of right-wing Republicans, left-wing Democrats, or anything in between, except possibly aggressors in the take-over struggles and a small group of investment bankers, lawyers and arbitrageurs. power I think that, averaged out, the wrong sort of people are gaining corporate under the present rules. Under those rules the power of the Jay Gould types is increasing while the power of the Boss Kettering types is being diminished, while a host of Russell Sage types is being enriched without producing much of anything use ful to the' general citizenry. To the extent increased values are apparently being created in the current scene by gross increases in financial leverage, it largely represents a simple transfer of wealth from the taxpaying (or inflation suffering) general citizenry to a financiallyoriented group which is not very useful, if it is not absolutely harmful, in the production of goods and services. A large amount of talent is plainly being attracted by too-easy money into unproductive activities promising large amounts of quick wealth, I know the earned by skills not much greater than those of a good bridge player. subject well, being to some extent a fellow sinner, here in atonement. The present level of host i 1e- take-over- rel a ted activity in the stock market and elsewhere reminds me of Keynes' shrewd observation when he looked back at 1929 and of the activi "when the capital development of a country becomes a by-product wrote: ties of a casino, the job is likely to be done." It seems to me that the present frenzy ought to be dampened down by legislation designed to wring out the easy money and to divert talent and effort into "making money the old fashioned way."

ill

I hope Congress will share my appraisal of the "big picture" and my desire that legis If Congress shares my view it will not be lation address "big picture" problems. diverted by inherent complexity of detail into swatting flies when the leopards are loose. I think Congress should intervene promptly with legislative changes designed hostile corporate take-overs, and related stock speculation akin to catching with dynamite, a very much less attractive field of activity.

Charles

37-980

0-84-20

T.

Munger to make trout