Investors have another worry: Fed intervention

By Jessica Hall and Megan Davies

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.