Investors have another worry: Fed intervention

PHILADELPHIA/NEW YORK (Reuters) - Investors in U.S. financial institutions have another risk factor to worry about -- intervention by the Federal Reserve.

While observers say the United States isn't approaching Russian standards yet, JPMorgan Chase & Co's (JPM.N) planned takeover of Bear Stearns BSC.N at $10 a share -- with Bear shareholders having little to say about it -- is a dissuader against investing in similar stocks.

"It's another of those watershed events which makes it clear to shareholders that their power is very limited," said Duke University Law School Professor James Cox. "It's somewhat fanciful, but it's also farcical, to have the perspective that shareholders have any sort of meaningful rights when the board of directors decides what to do."

JPMorgan side-stepped many customary merger practices in its revised offer for Bear Stearns, and the deal pushes the limit on some merger laws, according to some investment bankers and merger attorneys.

"As a basic investor in public companies, it makes us have to think about whether or not the companies we invest in will be subject to some sort of punitive action by the Fed, which creates uncertainty, which means risk, which means lower value," said an activist investor who asked to remain anonymous.

Although JPMorgan can say the Fed supports the deal and that Bear Stearns would have faced bankruptcy without a bailout, several lawsuits have already been filed and others are expected.

"Our whole system has folded in order to allow this deal to speed through," said one arbitrageur who declined to be named. "I also believe there is very little chance this gets overturned."

The deal arguably makes a shareholder vote moot.

JPMorgan carefully structured the deal to gain only an initial 39.5 percent stake in Bear Stearns, staying below the 40 percent threshold tested in other deals.

A New York Stock Exchange rule requires shareholders to approve any issuance of stock in excess of 20 percent. JPMorgan, however, relied on an exception to that rule that kicks in if "the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise."

"This is certainly not an investor-friendly move, and it adds to the discounting that's already taking place of the stock of financial institutions," said Cox.

REPERCUSSIONS AHEAD?

The deal immediately prompted several lawsuits.

Two Michigan pension funds on Wednesday sought emergency court action to stop the transaction.

Other lawsuits seeking class-action status have been filed, including one by a Bear Stearns investor who contends the company hid its true financial condition from shareholders.

"The lawsuits that result from this transaction will set a precedent in future deals," said Allen Michel, professor of finance and economics at Boston University's School of Management.

"Inevitably, those that feel harmed by the transaction will bring actions. Those entities closed out of the deal because of the strong arm of the Fed may well litigate," Michel said. "This will take some time to play itself out, but the results will have an effect on future transactions."

The unusual circumstances surrounding the Bear Stearns takeover and the intervention by the Fed could prompt other companies to seek the same help to bail out other ailing firms. In an interview with the San Francisco Business Times last week, Wells Fargo Chief Executive John Stumpf said, "I would not be averse to a Fed-assisted transaction."

Besides the argument of potential bankruptcy, Bear Stearns may have a tough time justifying why all the defensive measures were needed, said one M&A lawyer who declined to be named.

"As for making precedent, to the extent that a company creates systemic risk to the system, I would expect the same steps to be taken to save the system," said the arbitrageur , who specializes in takeover stocks.

Still, the courts historically have given great leeway to boards of directors and could allow the Bear Stearns deal to close due to the dire financial circumstances, lawyers said.

"It becomes a fairly simple question: Would you rather go bankrupt and potentially have your shareholders get nothing, or would you rather strike a deal and your shareholders get something?" said Morton Pierce, chairman of Dewey & LeBoeuf's mergers and acquisitions group.

"And if the choice is nothing or something, then generally people will pick something," Pierce said.

(Additional reporting by Paritosh Bansal; editing by John Wallace)

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