Governance Wars: Blowing Up Hertz's Stock Sale
"One in a million" shot to torpedo Hertz's bankrupt stock sale
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There’s already a lot of great coverage and analysis on Hertz (ticker: HTZ) and their recent approval to sell up to $1 billion in “potentially worthless” shares to capitalize on the market rally.
Instead of boring you with a redundant write-up, I say we rock the boat a bit. I’m going to discuss how (I think) the equity sale can be derailed. Spoiler alert, the NYSE can and should do more here.
It’s a “one in a million” shot this write-up accomplishes anything, but you never know unless you try! At the very least, you’ll learn another governance tactic.
Unprecedented Sale of “Potentially Worthless” Stock
The WSJ has great coverage on the Hertz bankruptcy proceedings so I’m not going to rehash the situation. That said, I think the following captures the key issues:
Hertz Global Holdings Inc. won a bankruptcy judge’s approval to raise up to $1 billion in new equity from a counterintuitive stock rally, a seemingly unprecedented move for a large bankrupt company eager to capitalize on market anomalies.
Hertz lawyer Thomas Lauria acknowledged in court the company’s shares “might ultimately be worthless, although it’s impossible to know this as a point of certainty.” As long as the public markets are informed of the risks, Hertz is in compliance with securities laws, he said.
Hertz has described the planned equity sale as a “unique opportunity” to raise capital on more favorable terms than the strings-attached loans that bankrupt companies more typically receive.
I have to admit this is some clever maneuvering by the lawyers and creditors to try and extract value from exuberant unsophisticated retail investors.
The company is essentially saying the market for Hertz equity is currently irrational and they have the right (arguably the fiduciary duty) to tap that exuberant capital.
So if Hertz is allowed to sell “worthless” equity, how do you stop them?
By putting pressure on the New York Stock Exchange (NYSE) to protect the integrity and rules of their exchange.
NYSE Can Stop Hertz’s Stock Sale
Exchanges play an important role in protecting investors. So while Hertz’s Board may have a fiduciary responsibility to its creditors, the NYSE has their own rules and duties to protect retail investors and ensure those investors have confidence in the exchange.
Hertz is attempting to capitalize on market exuberance made possible by its continued listing on the NYSE. If Hertz was delisted from the NYSE, they’d lose access to exuberant capital and the stock price tanks.
Delisting Hertz from NYSE likely stops the planned stock sale altogether. Hertz could still go through with the stock sale, but it’s a much different dynamic selling over-the-counter vs. the NYSE.
I’m a firm believer that if Hertz wants to sell stock through the NYSE, the company should be fully compliant with the NYSE’s listing requirements (i.e. don’t be bankrupt). If Hertz insists on doing a stock sale while in bankruptcy, it should be done over-the-counter.
Hertz is Taking Advantage of NYSE’s Discretion
Why hasn’t Hertz been delisted yet?
The NYSE has already notified Hertz of their intent to delist the company, but Hertz has appealed and will continue to be listed and trade on the NYSE pending resolution of the appeal:
On May 26, 2020, Hertz Global Holdings, Inc. (the “Company”) received a letter from the staff of NYSE Regulation, Inc. (“NYSE Regulation”) that it had determined to commence proceedings to delist the common stock of the Company from the New York Stock Exchange (“NYSE”). NYSE Regulation reached its decision that the Company is no longer suitable for listing pursuant to NYSE Listed Company Manual Section 802.01D after the Company’s disclosure on May 22, 2020 that it has commenced voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code. The Company appealed the determination in a timely manner and requested a hearing before the NYSE. At this time, the common stock of the Company will continue to be listed and trade on the NYSE pending resolution of such appeal. There can be no assurance that the NYSE will grant the Company’s request for continued listing at the hearing and whether there will be equity value in the Company’s common stock. (source)
According to NYSE Rules, the exchange can exercise its discretion and keep bankrupt companies listed on the exchange.
Normally, I’d say minimizing unnecessary disruptions and keeping companies listed is a good thing, but in this particular case I believe Hertz is taking advantage of NYSE’s discretion.
Hertz knows they need to move as fast as possible to capitalize on NYSE volumes and exuberance to maximize value:
Tom Lauria, the company’s attorney from firm White & Case, said Hertz may try to tap the market as soon as late Friday or Monday. (source)
Hertz has every incentive to sell as much stock as they can while they remain listed on the NYSE.
NYSE Must Protect Investors and Suspend Trading
While Hertz remains listed as they appeal the NYSE’s delisting determination, the NYSE has the discretion to immediately suspend trading if it’s in the public interest:
A request for review will ordinarily stay the suspension of the subject security pending the review, but the Exchange staff may immediately suspend from trading any security pending review should it determine that such immediate suspension is necessary or appropriate in the public interest, for the protection of investors, or to promote just and equitable principles of trade.
Selling stock while in bankruptcy is an unprecedented situation and I believe it is appropriate for the NYSE to immediately suspend trading of Hertz stock while they determine the appropriate policies and course of action.
Otherwise, Hertz is poised to flood the NYSE with ~250 million additional shares of “potentially worthless” stock and risk wiping out even more NYSE retail investors. The optics would look terrible, and goes against protecting investors by allowing it to happen.
The integrity of the exchange is at stake here, and inaction opens the door for other bankrupt companies to dump worthless shares onto retail investors.
All Eyes on Chief Regulatory Officer Anthony Albanese
NYSE Chief Regulatory Officer Anthony Albanese is officially on the clock to make a decision on this unprecedented situation. Given the NYSE is a self-regulatory organization, there’s going to be a lot of scrutiny on how the Hertz situation is handled and their contributing role to the fiasco (assuming the stock becomes worthless).
An argument can be made NYSE is actually a major contributor to the current situation by allowing Hertz to stay listed. I’d go as far as to say Hertz would not have requested court approval to sell stock if they were already delisted by NYSE and trading over-the-counter.
There’s a general belief that having an insource regulatory function is a core responsibility of the NYSE and allows for more effective and efficient regulation due to in-depth knowledge of the market:
The decision to insource our regulatory function was largely driven by our belief that a well regulated market is one of the core responsibilities of operating an exchange. More importantly, we believed that we could conduct this regulatory work in-house more effectively and efficiently than any third party given our in-depth knowledge of our markets and members. (source)
The NYSE must now demonstrate this in-house regulatory effectiveness and responsiveness by immediately suspending Hertz’s stock. Allowing Hertz to sell “potentially worthless” shares on the NYSE would be a setback to self-regulation, and likely cause the government to push for more stringent guidelines and oversight to “prevent another Hertz”.
It’s also a potential career killer for the regulators who allowed it to happen. If protecting the NYSE’s ability to self-regulate isn’t a motivator, self-preservation certainly is.
Stay tuned.