Porsche-VW merger
January 3, 2011
A United States District Court has rejected claims by a group of hedge funds alleging market manipulation in Porsche's failed 2008 takeover bid for Volkswagen.
In a long-awaited decision, Judge Harold Baer ruled the 39 hedge funds, led by Elliot Associates and Black Diamond Offshore, could not claim the more than $2 billion (1.5 billion euros) in damages they sought from Porsche, which they accused of secretly cornering the market in Volkswagen shares.
Billions lost through short selling
Baer ruled that US securities law didn't apply in the case of because alleged market manipulation occurred outside the US.
In his ruling, the judge wrote that the "plaintiffs' swaps were the functional equivalent of trading the underlying VW shares on a German exchange." The economic reality, he added, is that the plaintiffs' swap agreements were essentially "transactions conducted upon foreign exchanges and markets" and were not "domestic transactions" warranting US court protection.
The hedge funds alleged they were misled when Porsche quietly secured access to the majority of Volkswagen's ordinary shares as part of a plan to take over the company – contrary to public statements that it had no plans to do so.
In late 2008, hedge fund managers began betting that the price of VW stock would fall. The financial crisis had caused a huge dip in US car sales, driving down the share prices of local manufacturers. They reckoned it was only a matter of time before German carmakers would suffer the same fate. Consequently, they began selling VW shares in the hope of buying them back later at a lower price – a speculative practice known as short selling.
Soaring price of VW stock
What none of the hedge funds knew, however, was that Porsche had acquired 42.6 percent of VW's common stock with options for another 31.5 percent, bringing its total stake in the company to 74.1 percent.
Under German financial regulations, Porsche was not required to disclose its ownership of VW stock and options. As a result, hedge fund managers had little idea of the value of the shares they were selling.
When news of Porsche's activities broke, VW's stock price shot up from 290 euros to 1,005 euros per share, making it the world's most valuable company for a short period of time.
Baer dismissed most of the plaintiffs' claims "with prejudice," meaning that they can't be brought again.
The claims were one of two obstacles posing a risk for VW, which seeks to integrate Porsche into its operations next year.
The other potential stumbling block is a multibillion-euro tax payment. German authorities have yet to rule on the issue, which could delay the merger by up to three years or even stop it altogether.
Author: John Blau (Reuters, AFP)
Editor: Sam Edmonds