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Tuesday, June 4, 2013

The Compucredit Antitrust Litigation Ends, but Some Supposedly Smart People Do Not Understand What A Corporation Is or Corporate Finance

Recently, the Supreme Court denied a petition for review of the Eleventh Circuit's decisions in Compucredit Holdings Corp v. Akanthos Capital Management LLC, et al.  Initially, a three-judge panel had correctly affirmed the U.S. District Court's dismissal of Compucredit's antitrust claims that 21 hedge funds who had bought up its convertible debt violated the Sherman Act by acting "collusively" when they refused to tender the debt back to Compucredit at a substantial discount to par, merely because the market price was depressed.  The panel correctly affirmed that the creditors' demand to be paid back the amount loaned several years earlier was not a collusive attempt to set a non-market price.  The amount owed on a pre-existing debt is not a "market price" at all; it is simply the size of the legal obligation incurred the instant the money is borrowed.   From that point forward, the market price and the amount owed may differ from each other, but the size of the obligation does not move in response to the market price (indeed, the reverse is true: the market price depends on the size of the legal obligation being fixed and immutable).  And the borrower's decision to make an offer to "the market" on some other terms does not change the repayment obligation into a market-determined one.  If a borrower wants to impose an obligation on its creditors to compromise debt, it has a right of recourse to bankruptcy, where its desires are subject to certain standards such as the best interests test, the fair and equitable test and so forth.  Finally, there is no "market" that consistes of just one debt issue, anymore than that there is a market of one employee or one building, etc.

Although all of that seems incredibly clear, inexplicably, the circuit granted en banc review of the panel opinion.  The court as a whole deadlocked 5-5 on what to do, prompting the cert petition, I suppose.   The Supreme Court's denial of cert leaves the District Court's (correct) decision in place.

Although the en banc phase did not generate any opinions, it seems likely that the judges willing to overturn the district court ruling must have found some merit in Compucredit's claims that the hege funds' collective rejection of the below-par tender offer was an impermissible "boycott" to "restrain trade" in relation to Compucredit's efforts to buy back its debt (below par).  Such credulity is really, really hard to understand.

Compucredit issued its bonds under an indenture that imposed common terms on all holders of the issue..  The Trust Indenture Act of 1939, in fact, requires that in a public debt offering.  So the organization of the debt holders into a single group subject to common terms was done by the issuer at the time the debt was offered and was, in fact, required by federal law. For the debt holders merely to continue to act in the organized manner that the law and the issuer had set up ab initio is not a wrong of any kind. 

But beyond the nature of public debt offerings, which are after all just a subset of debts a business can have, the claims show a basic lack of understanding of what a corporation like Compucredit is.  A corporation is an organization of people.  Some of the people provide labor, others equity capital to pay the workers and buy equipment and so on.  But the corporation is just a tool to organize what people want to exchange with each other in a more efficient manner, as contrasted, say, to if each provider of capital had to enter into a bilateral contract with each provider of labor for a portion of the worker's compensation, and with each supplier, each lender and so on.  Yet, no one thinks that, by organizing a corporation and hiring a single set of managers to represent their interests in negotiating with workers, suppliers and creditors, the owners are improperly restraining trade and colluding to set the price of each input.  It's recognized that enterprises owned by more than one person would not even come into being in the first place if each owner had to individually bargain with each worker, supplier, etc.  The corporation, like an indenture, is a tool for organizing - legally - disparate individuals into a larger group to facilitate economic activity in a multiparty context where pure contract is not a sufficient tool for the task. 

So, when creditors organize to deal with a corporation or other economic organization, they are merely matching the level of organization that the owners of the organization have already done.  Certainly, as the district court and panel decisions recognize, a group facing the corporation can organize in truly anti-cometitive ways -- for instance, to restrain the terms on which future credit will be offered, or to block a refinancing from someone else that might carry lower the corporation's interest rates for the owners' benefit.  But the mere fact of organizing to interact with a corporation is not an antitrust violation.  And where the organization leads to nothing more than insisting that the corporation honor the contract it negotiated pre-creditor-organization, there is no restraint of trade flowing from the creditors' organization.  The theory behind Compucredit's lawsuit was absurd and those judges who found anything meritorious in it need to refresh their understanding of the basics of what a corporation is and how it finances itself.