General Motors filed paperwork last week to launch its much-anticipated initial public offering. It could be the biggest IPO in U.S. history, raising up to $20 billion, Reuters reports.
But as Reuters and other have noted, that still won’t approach the $50 billion that U.S. taxpayers have shelled out for the GM bailout. And while the government is reducing its ownership in GM, the company will remain “Government Motors” for the time being as the U.S. Treasury, according to press accounts, is expected to retain a controlling interest even after the IPO is completed.
And buyer beware. Government ownership poses unique dangers for new shareholders, according to GM’s own preliminary prospectus filed with the SEC.
Among the very last items in 16 pages of “risk factors” is a small disclaimer containing a bombshell. This IPO is largely exempt from from federal and state anti-fraud laws and corresponding lawsuits.
“Your ability bring a claim … under the federal securities laws may be limited,” says the prospectus on page 27. The document explains that because the main “selling stockholder is a federal agency,” the “sovereign immunity” doctrine “provides that claims may not be brought against the United States of America or any agency or instrumentality thereof unless specifically permitted by act of Congress.”
The GM prospectus notes that “at least one federal court, in a case involving a federal agency, has held that the United States may assert its sovereign immunity to claims brought under the federal securities laws.” GM concludes, “Thus, any attempt to assert a claim … resulting from an alleged material misstatement in or material omission from this prospectus or the registration statement of which this prospectus is a part, or any other act or omission in connection with this offering, likely would be barred. ”
And “thus,” GM’s new private shareholders, in contrast to shareholders who buy into almost any other IPO, will have virtually no recourse against fraudulent claims. To borrow a much-overused cliché with its genesis in a commercial for old GM’s Oldsmobile, this is not your father’s IPO. Nor that of your grandfather, though it may slightly resemble a stock offering your great-grandfather participated in before federal securities fraud statutes were enacted in the 1930s. But then again, even he would have been able to bring fraud suits under state law, something federal sovereign immunity expressly prohibits.
For IPOs with selling shareholders in the private sector, the federal Securities Act “creates liability for any person who offers or sells a security through a prospectus or an oral communication containing a material misstatement or omission,” notes Cornell University’s Legal Information Institute. GM and other IPOs pose risks, and shareholders assume those risks. But this may be the only IPO since the creation of the Securities and Exchange Commission in which the lead sellers are exempt from anti-fraud laws as well as lawsuits in general.
The Competitive Enterprise Institute has criticized frivolous litigation in securities and other areas of law. However, if selling shareholders did not face any liability whatsoever for fraud in statements regarding IPOs they were offering, the market wouldn’t function. Sellers would be free to create a firm that was deliberately undercapitalized, lie about its finances to new shareholders, and pocket the money from the offering. Buying shareholders would have no recourse as the new firm would likely go bankrupt.
Punishing fraud, along with the unjustified use of force, is what libertarians believe is among the few key government functions. And rules preventing fraud should certainly apply to the government itself. This is especially true in cases involving government ownership of the auto companies, in which the Obama administration jettisoned bankruptcy precedent to give its constituency of labor unions a bigger stake in GM and Chrysler than the firms’ bondholders and secured lenders.
And under the government’s aegis, GM does not exactly have a pristine record for accurate statements to the public about its operations. Earlier this year, CEI asked the Federal Trade Commission to open a fraud investigation regarding GM’s assertion in advertisements that it had paid back the government’s loan “in full.” CEI’s complaint noted that “GM has only repaid a fraction of those funds—barely ten percent,” and that GM “repaid its loan by using other federal funds.” The complaint argued that such claims could give consumers a false sens of confidence in the companies and induce them into buying decisions they wouldn’t make if they had the facts.
J.W. Verret, assistant professor of law at George Mason University and senior scholar at the Mercatus Center Working Group on Financial Markets, notes that many shareholder issues are affected in GM and other companies in which the government has a stake because of sovereign immunity. “All of the central theories of the corporation, from director and shareholder primacy to team production or even ‘progressive corporate law’ break down with the presence of an immune control shareholder,” he writes. “I don’t know about you, but as a shareholder I would never buy into a company with a control shareholder that enjoyed sovereign immunity from the federal securities laws and state corporate law.”
If President Obama and the congressional leadership are as concerned about investor protection as they purport to be when pushing burdensome vehicles like Dodd-Frank, they should push for a law limiting sovereign immunity and allowing for lawsuits in cases in which the government is a controlling shareholder in a private company. When it is “partnering” with the private sector, the government shouldn’t be exempt from the rules it showers on private actors.