Discouraging Negative Social Value Corporate Takeovers

Variants of Capitalism have proven to be the best wealth generating systems. We empower citizens and corporations to pursue their own interests and expect the result to be the provision of goods and services to society.

The point being is that the Capitalist system does not exist for the benefit of the small class of business owners. It exists for the benefit of the citizens.

Unfortunately, it does not always work out that way. Therefore, we have various laws to constrain what economic entities pursuing their own interests can do.

One situation that is still not addressed is when a corporation is bought with the intent of killing it and selling off the pieces. These are what I call Slaughter and Butcher Investors. These actions serve the investor at the expense of society.

It is at the expense of society because viable corporations provide services and employ citizens. The loss of that employment and those services is not outweighed by the benefit to the investor.

There are a few Slaughter and Butcher cases most people will recognize — Sears, Kmart, Toys R Us. They were bought, poorly managed, loaded with excess debt, under invested, valuable assets sold off and so forth. The end result is the effective or literal death of the company.

Those who ran the Slaughter and Butcher operations profited. Those who had careers working for the companies were laid off. The services those companies provided may be duplicated by other companies, but not necessarily in the same way with the same employees. Competition may suffer as well. Some will argue that this is “Creative Destruction”, a phrase to justify upending people’s lives for the profit of a few. If those companies really needed to be liquidated, the existing owners could have done so.

The above negative social value dysfunction requires a constraint.

A possible constraint is to require that for ten years from the date of purchase, any purchaser of a company, or any purchaser of a controlling interest in a company, be prevented from extracting more capital than the unborrowed capital that they invested.

This may discourage the Slaughter and Butcher operations that seek immediate or near term cash flow. Thus discouraged, they may decide to genuinely invest in an alternative.

During the constrained ten years, investors may still profit from the investment, if the stock goes up and they sell it. They could also raise capital by borrowing against the stock, as is frequently done.

It is extracting capital in other ways, such as direct payments to stockholders, that would restricted. Stock buybacks, another way of direct payments, may also need to be restricted.

The logic of the constraint is that a company is weakened when capital is extracted. Investors unconcerned with the longevity of the company will extract excessive amounts of capital and leave a poor indebted company that cannot respond to market conditions and which, therefore, eventually ceases to exist.

Genuine investors intent on increasing the value of the company would have little to fear from such a constraint.

The actual implementation of such a constraint would likely require many pages of legal boilerplate. This short essay is only to communicate the idea.

There are various implementation options that would need to be decided. For example, would money invested in a fund be considered money raised through debt or corporate equity? If it is considered debt, the constraint becomes far more rigorous.

The constraint is not a complete solution. Wealthy debt free investors would be less constrained. We should implement the suggested constraint and then reevaluate remaining issues.

In the Finance field, the key concept is value. The focus is always on identifying value — for the investor. The value to anyone else is ignored.

Social value is optional and not reflected in accounting statements. Some may consider social value but they are not everyone. Slaughter and Butcher operations, because they reduce social value, have negative social value.

There is value to society to have people working and to have cherished and widespread companies providing services and competition. There is value to society to have employment stability.

This is why we need a constraint on Slaughter and Butcher investors. Their activities have negative social value.

Finance people are smart and will likely find ways around the above constraint. Their concern is the letter of the law, not its intent. Thus it is likely the constraint will need periodic revision to remain effective or, even, to become effective.