Commentary: Crony Capitalism at the State Capitol
The people who own a Michigan insurance company have been effectively deprived of their power to sell their own investment under a new law hurriedly introduced and overwhelmingly approved by the Legislature this spring. Fearing that they could not stop the owner-investors of Fremont Insurance from selling it to another company, the politically well-connected board of directors has decided to keep control in their hands by changing state law. Frank Kavanaugh, a stockholder with over $3 million invested in Fremont, says this decision by his own employees is akin to "investing in protection and influence instead of the success and growth of the business."
Another term for it is "crony capitalism" — when business and politicians gang up to thwart the marketplace and the rule of law.
Originally Senate Bill 1174 — and now Public Act 61 of 2010 — the law boosts from a simple majority of more than 50 percent to a supermajority of 66.7 percent the number of shares necessary to approve a merger or sale of a publicly traded Michigan-based insurance company with fewer than 200 employees when the board of that company does not want the deal. Fremont currently has about 70 employees, and the law sunsets in 2012.
The law was requested by Fremont's current leadership and is targeted specifically at one of their largest owners: Sardar Biglari, who owns a $3.8 million share of Fremont that represents 9.9 percent of the company's stock. Biglari wants to own all of Fremont and is willing to pay for it: In December, his Biglari Holdings made a buyout offer to his fellow share-owners more than 10 percent above the most recent closing price of their investment.
At this point, under the rule of law that existed until two weeks ago, Fremont shareholders would have voted whether to sell to Biglari or not. If a majority of all shareholders accepted the deal, then each of them could opt to receive cash per share at the offered price, or shares of equal value in what would be Fremont's new parent company, Biglari Holdings, which is a more widely traded stock on the New York Stock Exchange.
It is rare that all of the shares are voted at any one time, so in practical terms, Biglari would have needed much more than 50 percent of those that were voting in order to gain support from a bare majority of all the shares that exist.The challenge for the current CEO and board of directors was to convince just a minority of the total ownership that the current management could make the company more valuable over the long haul than the price that Biglari was offering in the here and now.
And they had people who believed in them. Frank Kavanaugh of Fort Ashford Funds, the large shareholder quoted above, stated that he does not support the Biglari buyout and that he has favored the current management's "stated plan for conservative growth."
Biglari had a lot of convincing to do, but the management of Fremont wasn't interested in debating his offer in front of the other people who provide the paychecks. Instead, they asked Sen. Gerald Van Woerkom, R-Muskegon, to introduce the bill requiring the two-thirds supermajority.
They also hired Government Consulting Services, Inc. to help advance the Van Woerkom bill quickly through the Legislature. GCSI is arguably the most powerful and effective multi-client lobbying firm in Michigan. It bears noting that the chairman of the board of Fremont, Don VanSingle, is himself a former GCSI lobbyist.
And Fremont hired a Lansing public relations firm owned by former lawmaker Dianne Byrum, mother of current Rep. Barb Byrum, D-Onandaga. Rep. Byrum is the chair of the insurance regulatory committee in the Michigan House that would decide what to do with the bill creating the supermajority.
So, while the Fremont leadership was worried about their chances of retaining power if forced to fight it out in a marketplace full of their own employers, they clearly knew that Lansing politics was a place where they could gain a decided home-field advantage.
And they knew what button to push to get lawmakers to listen to their plea: Jobs.
In particular, they alleged — based on no evidence — that Biglari was plotting to move Fremont out of state and take its 70 jobs with it. Biglari denies a desire to go anywhere or get rid of any employees (with the specific exception of the Fremont CEO, who is trying to ward off their takeover).
Biglari is also well-invested in Michigan already, and one might say as much or more than Fremont Insurance. Steak and Shake, a company already within the Biglari Holdings orbit, employs 900 people at its Michigan restaurant locations.
The Michigan Retailers Association came out strongly in favor of pushing the special bill for the special insurance company, and their comments are representative of the concern over lost jobs that Fremont was ginning up. MRA CEO James Hallan sent a letter to Byrum's committee, stating that the supermajority requirement would "help retain Michigan jobs."
Hallan is also a board member at Fremont Insurance.
Additionally, while the Van Woerkom legislation was zipping through the Legislature, a warm letter of praise from Travel Michigan was sent to Fremont, noting the insurance company's help in promoting the "Pure Michigan" tourism brand and sponsoring programs for it.
Pure Michigan is a taxpayer-financed government program that is a frequent target of budget-conscious lawmakers. Its supporters claim it creates jobs, its critics say no. The letter of support from the government agency for Fremont was submitted by Rep. Mary Valentine, D-Muskegon, as evidence in favor of the Van Woerkom bill when it was being heard before the House Insurance Committee, chaired by Rep. Byrum.
Neutral parties offered a more confused opinion of both the bill and the hustle to get it passed.
According to the MIRS newsletter (www.MIRSnews.com), Ken Ross, Insurance Commissioner with the Michigan Office of Financial and Insurance Regulation, testified before the Michigan Senate regarding the bill and said that his regulatory department was a "strong neutral" toward the change.
"Typically, this is a discussion for the board, shareholders and the company, not a regulatory or legislative discussion normally," said Ross, according to MIRS.
Sen. Gilda Jacobs, D-Huntington Woods, initially opposed the bill when it first came to a vote in the Senate.
"I have some issues about free enterprise and government not getting involved in individual businesses," said Jacobs, often reliably one of the most economically liberal members of the Michigan Senate. "I do understand the arguments on either side about jobs, job retention and job creation. I have a lot of questions. I am very puzzled as to why we have the need to rush this through. I don't understand the urgency of doing this so quickly."
Others were not so confused about the motives.
Speaking of the Fremont management team whose "plan for conservative growth" he preferred to the Biglari offer, Kavanaugh of Fort Ashford Funds stated nonetheless that Fremont's decision to fight it out in the political arena was a "disquieting" attempt to "protect management from the people who purchased ownership in the business."
"Management is using company resources to limit our voices as investors," he noted. "They are using legislation to protect their jobs and create a 'too politically connected to answer' board of directors at the expense of accountability, growth and jobs."
"I understand Senate Bill 1174 applies to only one or two Michigan entities," he said, "but this bill certainly does not send a pro-investor message to those of us who support Michigan enterprises ..."
Biglari believes that a cozy set of perverse political relationships in Michigan government were used to change the rules and deny him fair access to the marketplace. An April 30 news release alleges that Rep. Byrum told Biglari representatives that she could push the bill through and change the rules on them because "government can do anything."
The Biglari news release replies that Rep. Byrum's alleged statement "smacks of not only small-time despotism but also a violation of individuals' and shareholders' rights."
A bipartisan majority of the Michigan House approved Senate Bill 1174 on a vote of 83-24; a bipartisan majority of the Michigan Senate approved it on a vote of 28-8; and Gov. Jennifer Granholm signed it into law on April 30 — just over two months after it was introduced.
Whether or not Rep. Byrum actually asserted the omnipotent power of government when speaking to the company, Biglari's characterization of "small-time despotism" succinctly defines the behavior of the majority of the Michigan Legislature and government in this affair.
The MichiganVotes.org roll call votes for Senate Bill 1174 are affixed below.
Contact information for all lawmakers is at www.MichCapCon.com/9313.
CRONY CAPITALISM: Lawmakers who voted TO RESTRICT THE RIGHT of shareholders to sell their own stock.
HOUSE REPUBLICANS (28)
~Ball ~Booher ~Calley ~Caul ~Crawford ~Daley ~Denby ~Green ~Haines ~Hansen ~Hildenbrand ~Horn ~Jones, Rick ~Kowall ~Lori ~Marleau ~Meekhof ~Meltzer ~Moore ~Opsommer ~Pavlov ~Pearce ~Rocca ~Schmidt, W. ~Schuitmaker ~Scott, P. ~Tyler ~Walsh
SENATE REPUBLICANS (16)
~Allen ~Birkholz ~Bishop ~Brown ~Cassis ~Cropsey ~Garcia ~George ~Gilbert ~Jelinek ~Kahn ~Kuipers ~McManus ~Patterson ~Richardville ~Van Woerkom
HOUSE DEMOCRATS (55)
~Angerer ~Barnett ~Bauer ~Bennett ~Brown, L. ~Brown, T. ~Byrnes ~Byrum ~Constan ~Corriveau ~Dean ~Dillon ~Donigan ~Durhal ~Ebli ~Espinoza ~Geiss ~Gonzales ~Gregory ~Haase ~Hammel ~Haugh ~Huckleberry ~Jackson ~Johnson ~Kandrevas ~Kennedy ~Lahti ~Leland ~Lemmons ~Lindberg ~Lipton ~Liss ~McDowell ~Meadows ~Melton ~Nathan ~Nerat ~Neumann ~Polidori ~Roberts ~Schmidt, R. ~Scott, B. ~Segal ~Sheltrown ~Slavens ~Smith ~Spade ~Stanley ~Switalski ~Tlaib ~Valentine ~Warren ~Womack ~Young
SENATE DEMCRATS (12)
~Anderson ~Barcia ~Cherry ~Clark-Coleman ~Clarke ~Gleason ~Hunter ~Jacobs ~Olshove ~Prusi ~Scott ~Whitmer
Lawmakers who voted to PROTECT shareholder rights.
HOUSE REPUBLICANS (15)
~Agema ~Amash ~Bolger ~DeShazor ~Elsenheimer ~Genetski ~Haveman ~Knollenberg ~Kurtz ~Lund ~McMillin ~Moss ~Proos ~Rogers ~Stamas
SENATE REPUBLICANS (6)
~Hardiman ~Jansen ~Nofs ~Pappageorge ~Sanborn ~Stamas
HOUSE DEMOCRATS (9)
~Bledsoe ~Clemente ~Griffin ~Jones, Robert ~LeBlanc ~Mayes ~Miller ~Scripps ~Slezak
SENATE DEMOCRATS (2)
Lawmakers who did not vote:
~Rep. Coulouris (D) ~Rep. Cushingberry (D)
~Sen. Basham (D) ~Sen. Thomas (D)
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.