The business world can be a cutthroat environment in itself, but no company wants to butt heads with the U.S. government. Unfortunately, Halliburton (HAL), Microsoft (MSFT) and Fannie Mae (FNMA) shareholders find themselves facing court battles against the most powerful federal government in the world.
HAL has until Saturday, April 30 to officially decide whether or not it will fight back against the Department of Justice’s lawsuit to block HAL’s proposed buyout of Baker Hughes (BHI). So far, HAL has talked a tough game when it comes to fighting the DOJ. CEO Dave Lesar sent out a letter to all of the company’s employees in response to the DOJ lawsuit, assuring them that the government “has reached the wrong conclusion in its assessment of the transaction.” Lesar went on to say that the antitrust suit is “counterproductive” and that HAL will “vigorously” fight the lawsuit in court.
The companies issued a joint statement claiming that they plan to stand their ground. But the prospect of a lengthy and costly court battle with the DOJ may change their minds before the April 30 deadline. If either party backs out of the deal, HAL must pay BHI a massive $3.5 billion termination fee.
HAL is not the only company potentially squaring off against the DOJ. Earlier this month, MSFT filed suit against the DOJ to challenge the legality of the Electronic Communications Privacy Act (ECPA). The ECPA allows courts to order MSFT not to disclose to customers when the government has sought access to email content and other private information. The statutory basis for the non-disclosure requirement is that notifying customers of an investigation could hinder the investigation.
According to MSFT’s court filing, the company believes that its customers have a legal right to know when the government gains access to private emails.
MSFT argues that the ECPA violates its customers’ First and Fourth Amendment rights. The company argues that it has a First Amendment right to talk to its customers about government investigations. In addition, its customers have a Fourth Amendment right to know when the government searches or seizes property.
While the outcome of the MSFT case may set important legal precedent on matters of principle, it will likely have little impact on the company’s bottom line or its share price.
Fannie Mae (FNMA)
If the outcome of the MSFT case has the least potential impact on share price, the outcome of the FNMA shareholder lawsuit definitely has the most. In fact, if FNMA shareholders lose their lawsuit against the U.S. Treasury, their shares will literally be worthless.
Following the Financial Crisis, FNMA and cousin Freddie Mac (FMCC) were place into government conservatorship. The two entities were required to issue $1 billion in preferred shares to the Treasury that pay 10% annual dividends.
However, once FNMA and FMCC returned to profitability by 2012, the terms of the deal with the Treasury were amended. A “net worth sweep” was subsequently put into place. Since the institution of the net worth sweep, every cent of profits that FNMA and FMCC have generated has gone to the Treasury, leaving nothing remaining for shareholders.
High-profile shareholders like Bill Ackman and Whitney Tilson believe that shareholder lawsuits will prove that the amended deal is illegal. The outcome of these lawsuits will ultimately make the difference between FNMA’s share price going to zero or surging to new multi-year highs.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.