When and how does an asbestos trust own enough shares of the company for which it assumed “asbestos liabilities” ? And, should chapter 11 trusts be involved in transactions of a type that some say are sometimes tax dodges?
These questions are posed for several reasons. One is that under bankruptcy code section 524(g), a chapter 11 asbestos trust is required to own prescribed amounts of shares of stock of the company for which it assumed asbestos obligations. That rule, some say, is mainly honored in the breach.
Another reason for posing the questions is that it is interesting to watch the ways in which the trusts sometimes act much like, if not exactly like, the corporate financiers that plaintiff’s lawyers often trash in the course of jury trials. How so? Below are the facts and links regarding the AWI Trust recently using a prepaid variable forward sales contract to cause the more or less sale of shares of AWI.
What is a prepaid variable forward sales contract? It is one of the many exotic financial paper created by Wall Street to create new ways to own and sell shares of stock without, they say, selling shares. (One is reminded of Humpty Dumpty’s scornful proclamation ” When I use a word, it means just what I choose it to mean — neither more nor less.” )
The IRS has declared a war of at least strict scrutiny on these transactions as potentially or actually illegal tax shelter transactions, as described here by the TaxProfBlog and here by the NYT. This WSJ article explains that the transactions also have been attacked as tools used by executives to sell shares ahead of price drops without really selling shares, they say.
Call me naive, but doesn’t it seem odd that trusts operating under the aegis of federal courts would engage in transactions of a type the IRS deems dubious ? No doubt the trustees and the trust advisory committee would counter that they have a fiduciary duty to make money for claimants. Maybe true, but that sounds an awful lot like the corporate argument that we have a duty to our shareholders to make money. In personal injury jury trials involving risks and cost benefit analysis, plaintiffs love to attack the corporate duty to make money argument as putting profits ahead of people, or profits ahead of morals.
On the subject of the AWI Trustees and the Trust Advisory Committee (TAC ) wouldn’t you think the Trust’s website would identify them? If it does, I sure can’t find the names anywhere despite using the search box on the website to search for names including Kazan, Weitz and Cooney. I dropped the trust an email this morning asking for the names and whether I missed them on the website. We will see if an answer comes back.
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On August 11, Armstrong World Industries announced that its Asbestos Trust is raising $ 180 million in cash by selling some shares outright and more shares pursuant to a prepaid variable forward sale contract that is said to be part of reinvigorating AWI. According to the press release from Armstrong World Industries:
“Armstrong World Industries Comments on Sale of Asbestos Trust Shares to TPG LANCASTER, Pa., Aug. 11 /PRNewswire-FirstCall/ — TPG Capital (“TPG”) announced it has agreed to purchase seven million shares of Armstrong World Industries, Inc. (“Armstrong”) (NYSE: AWI), and economic interests in an additional 1,039,777 shares, from the Armstrong World Industries Inc. Asbestos Personal Injury Settlement Trust (“the Trust”). TPG’s purchase price per share of $22.31 is the 20-day trailing volume-weighted average price through Friday, August 7. The transaction is expected to be completed during the next several weeks, and will result in approximately $180 million of proceeds for the Trust. (emphasis added). “ A form 4 from the Trust explains the transaction as follows:
“Explanation of Responses: 1. On August 10, 2009, the reporting person entered into a prepaid variable forward sale contract with TPG Partners V, L.P. and TPG Partners VI, L.P. (collectively, “TPG”). The contract obligates the reporting person to deliver to TPG 1,039,777 shares of AWI common stock (or cash as provided in the contract) on the maturity date of the contract. The maturity date is the 20th trading day beginning on November 4, 2013. In exchange for assuming this obligation, the reporting person will receive $23,197,425 at closing of the contract. 2. The reporting person pledged 1,039,777 shares of AWI common stock (the “Pledged Shares”) to secure its obligations under the contract. While the reporting person retained dividend and voting rights in the Pledged shares during the term of the pledge, the reporting person is obligated to pay TPG dividends received on such shares and is party to a shareholders agreement with TPG relating to such shares. 3. The settlement price will be based on the 20 day AWI common stock price preceding the settlement transaction date, and the contract can be settled in cash or in the release of sufficient Pledge Shares to satisfy the settlement payment (as determined at the settlement price).”