It is always interesting to read The Wall Street Journal (“WSJ”) on days when the NYSE is closed and mainstream business is snoozing. Memorial Day 2017’s edition contained opinions you never read when the markets are open. While the mainstream bias of WSJ is still squarely in favor of groups who pay them, it was nice to see the other side of the story on a day when few advertisers would be reading.
Illinois Privilege Tax on PE Firms
Illinois is insolvent. It hasn’t passed a budget in two years. It needs revenue to pay for the mismanaged state pension plans and entitlement programs. As Kristina Rasmussen reported in a WSJ article on Memorial Day, May 29 the Illinois mess is as follows:
“Illinois hasn’t had a budget in two years, since the Democrats in Springfield continue to insist on more taxes. The state has $267 billion in unfunded retirement liabilities, a $14 billion backlog of unpaid bills, and a $7 billion projected deficit this fiscal year.”
To address this train wreck The Illinois Senate passed a 20% privilege tax on financial advisors that would apply to hedge fund and private equity managers. That legislation is now in the House of Representatives. If passed, the tax would certainly apply to portfolio company realizations. I am not sure whether it would also be a sur-tax on compensation and whether it would apply to stock brokers and investment managers as well?
Ms. Rasmussen suggests hunting productive people like PE firms will end poorly for Illinois. While it is a great political sport to impose a sur-tax on a small group of high earners, it is usually a fool’s errand. Ms. Rasmussen says PE managers can and will move to tax friendlier states and the multiplier effect will be greater than the legislature ever figured. There are many service jobs that support PE including law, accounting, due diligence, consulting, insurance, and recruiting.
Trump Will Prevail in Travel Ban
Until Memorial Day I had never read anywhere (including law school commentary) that President Trump will win if the US Supreme Court agrees to review the recent Fourth Circuit Court of Appeals legal decision declaring the President’s revised travel ban is illegal. According to the WSJ authors, David B. Rivkin, Jr. and Lee A. Casey a reversal is a sure thing:
“In ruling against the order last week, the Fourth U.S. Circuit Court of Appeals defied Supreme Court precedent and engaged the judicial branch in areas of policy that the Constitution plainly reserves to the president and Congress. The high court should reverse the decision.”
The story reviews legal precedent and concludes that the Circuit Court has clearly politicized its decision:
“It is therefore difficult to avoid the conclusion that the Fourth Circuit and the other courts that have stayed Mr. Trump’s executive orders on immigration are engaged in the judicial equivalent of the “resistance” to his presidency. Judges are, in effect, punishing the American electorate for having chosen the wrong president. That is not the judiciary’s role.”
Greedy CEO Stock Options
The Monday Memorial Day edition also slammed Patrick Drahi, CEO of Altice, for rearranging his compensation plan to provide more upside after his shareholders complained. You never read an article in the WSJ that slams executive compensation. In this case it was neither an American CEO nor an American company. The target was an Amsterdam based company’s leader about which the WSJ reported on the stock options as follows:
“Such a payout is a powerful incentive, but it is doubtful Mr. Drahi needs it. Never mind his outstanding stock options under separate agreements, which are collectively worth €55 million at the current share price; he already owns 59% of Altice—a stake worth about €19 billion today. If the share price triples, his stake is worth another €38 billion ($43 billion). This is surely incentive enough.”
The article incorrectly states that stock options are a way to give executives “skin in the game”. As I have written before, stock options are a one way bet with the shareholders money and do nothing to align manager and owner. The article finally corrects itself and concludes that some managers like Mark Zuckerberg and John Malone do not need options because they are already aligned to shareholders through massive personal holdings.
In the PE world incentive options are typically granted only to managers who have already invested side by side and at the same price as the PE fund and share downside risk. The point about stock options is they have no downside. If you miss a plan, you don’t lose your own money.
Get Ready for the Next Holiday
Make Sure You Read the July 4th edition of The Wall Street Journal for all the news you can’t see on a real news day.