LaRouche, and Court:
How To Stop LBOs
On Dec. 14, Lyndon LaRouche made an aggressive proposal to stop the "bonfire of buyouts" which is loading target firms with new debt, looting these targets and their workforces, and driving them toward default. LaRouche proposed that "any takeover that turns a viable firm into a junk-bond company is against the national interest.... Therefore, Congress should start to intervene to defend the national interest, and block the mergers, including any merger in which it can't be shown that the target companies will gain in capacity, productivity, and production from the merger. Congress has to draw that line, LaRouche said, and draw it now, in the face of the oncoming debt crash."
In November, the Republic of Korea Supreme Court made an extraordinary decision which reversed one apparently "successful" leveraged takeover, declared it illegal, and reinstated criminal prosecution against the CEO of the takeover company involved. The decision was made in the "leveraged" takeover of an engineering firm of the Shinhan Bank group. This takeover, using debt borrowed against the assets of the company targetted for takeover, and the subsequent "restructuring" of the target firm to lower operating costs, had allegedly led to an increase in profits, and no personal diversion of funds or assets was involved.
The Supreme Court ruled the takeover a breach of fiduciary duty by the takeover firm, because of its, and its CEO's, prior intent to indebt the target company without compensation or benefit, and to subject the target company to economic burden, risk of default and impaired credit, and risk of contraction. No post-takeover actions or results could be considered as disproving this criminal intent, the Court ruled: The elements of the crime were complete, under the law, before the takeover took place, and had not been compensated by any payments or economic benefits to the target firm which could be shown prior to the takeover. Thus, the Court ruled, the takeover was illegal—and by implication, the "leveraged takeover" method is illegal as practiced by the private equity pirates.
The decision impacts other takeover battles, and provides a principled method for legislatures, including the U.S. Congress, to stop the mad takeover wave—the method urgently proposed by LaRouche.